The Economy’s Weekly Recap

7/28/23 - 8/4/23

Raymond Lin

This Week’s Prominent Events

The First Nuclear Reactor in Years

• For the first time since Tennessee Valley Authority’s Watts Bar Unit 2 in 2016, a new nuclear reactor is operating commercially and sending energy to the grid.

• Plant Vogtle’s unit 3 reactor, the new nuclear reactor in question, has begun delivering energy to Georgia’s energy grid. It is generating about 1,110 megawatts of energy, which can power approximately 500,000 homes and businesses. Reactors like the ones in Plant Vogtle can help combat climate change and help achieve a clean energy future.

• However, Plant Vogtle also exposes some other problems of nuclear reactors. The third reactor was meant to start generating power in 2016, yet it will start in 2023. Furthermore, it was meant to originally cost $14 billion but is expected to cost $35 billion. These failures in planning and execution have exacerbated some critic’s harsh views on nuclear energy. Coupled with the stigma some have over past nuclear incidents, nuclear energy faces an uphill battle.

Amazon’s Food Endeavors

• Amid a strong second quarter where revenue and EPS expectations were solidly beat, Amazon still faces a dilemma with their grocery stores.

• Despite acquiring Wholefoods in 2017 for $13.7 billion and establishing brick and mortar high tech Amazon Fresh stores, Amazon’s grocery business has been lackluster compared to Amazon’s dominance in online retailing. Wholefoods is merely 1% of the national grocery market while Walmart is 19% and Kroger is 9%. Pure market share aside, Amazon has failed to integrate Wholefoods into Amazon’s ecosystem.

• In response to this, Amazon has launched a concerted effort to improve their grocery struggles. Amazon is allowing non-prime grocery delivery, combining the carts of Amazon Fresh, Amazon, and Wholefoods, and adding self checkout in Amazon’s stores instead of its futuristic and cashierless Just Walk Out technology.

Indian Restrictions

• India has restricted imports of technology by forcing importers to acquire licenses to bring laptops, tablets, PCs, and other electronic devices into the country. All of a sudden, companies like Apple or Samsung would be forced to acquire these licenses to continue their access to one of the world’s largest markets.

• Fortunately for those companies, India has delayed its implementation for now so a transition period can be provided for companies, but it seems India will still restrict these imports.

• This move appears to be an attempt to further boost local manufacturing. By forcing licenses on imports, India puts importers under greater stress and uncertainty. Additionally, India could take away these licenses someday and cut off access to an important market. Together, these force tech companies to plan ahead and begin production in India if they wish to sell to Indians, boosting India’s manufacturing capability and decreasing dependence on other markets.

• However, some problems still face manufacturing in India. Its infrastructure is significantly worse than China’s, for India has weaker and more fragile supply chains, poorer interconnectivity and logistics, and more red tape.

Fitch Downgrades the US

• Fitch, who also placed a negative watch on the US’ AAA rating a few months ago, has downgraded the US from AAA to just AA+. This means Fitch believes that the US is less financially strong and capable of paying its debts than before. Fitch is shared in this view by S&P, which has kept an AA+ rating for the US since 2011. Moody’s, the other member of the Big Three credit rating agencies, has kept its AAA rating.

• Fitch cites the fighting over the debt ceiling, increased Federal deficit, and a weaker economy in the near future as reasons for the downgrade. Doubling down, Fitch released a statement that said “In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years, including on fiscal and debt matters”.

• This downgrade spooked the markets a bit and several of the major stock indexes fell in value.

• However, Treasury Secretary Janet Yellen said “The change by Fitch Ratings announced today is arbitrary and based on outdated data”. It seems the Federal Government is staunchly opposed to this view and believes the US to still be financially solid.

Yellow’s Collapse

• Yellow, which is one of the largest transporters of goods in the US and has about 30,000 employees, is expected to file for bankruptcy after stopping operations this week. It would be the biggest collapse in terms of revenue and jobs in the vital yet fickle US trucking industry.

• The collapse will put logistical strain on supply chains with Yellow’s customers likely facing higher prices for new carriers and those new carriers needing to expand to fill the vacuum left by yellow. Perhaps those most impacted by the bankruptcy are the 30,000 employees who will be forced to seek new employment.

• Yellow has been in a precarious state for some time now and has only made an annual net profit 3 times in the last decade with losses always sharply exceeding any meager profits. Part of the reason for this is how Yellow’s earlier acquisitions were never properly integrated and the devastating effects of the 2008 recession. In essence, the collapse was a long time coming and was only delayed by things like the $700 million government loan during the pandemic.

Upcoming Events

A Room Temperature Superconductor

• Two papers by South Korean scientists have claimed that a superconductor, a material that allows electricity to flow with no resistance, can be made at room temperature. This superconductor that can operate at normal temperatures is called LK-99.

• Superconductors normally only display their qualities at extremely low temperatures, rendering them impractical for most ordinary uses. However, if these scientists are right and a room temperature one can be created, this means superconductors might bring about a number of innovations.

• It could heavily impact and advance electrical grids and computing chips. If one is even more optimistic, it could bring about new technologies to combat climate change and make levitating trains commonplace.

• However, there is much doubt about the validity and utility of the discoveries of the scientists. Firstly, the papers are not peer reviewed and have only been replicated to varying success. With one lab observing no zero resistance, a required trait of superconductors, it will take more time to determine if LK-99 even works at all. Even then, the ease of production and electrical capacity of the material is still uncertain, so their ultimate utility may not be that great.

ESG

• ESG investing, which is a strategy that takes environmental, social, and governance factors into account, is fairly prominent. ESG assets represent an estimated $4 trillion and are promoted by organizations like the World Economic Forum. This strategy can be used to manage risk as a criteria for stock selection or as a whole separate asset class.

• The rationale behind the strategy is that, if a business focuses on factors besides shareholder value and profits, it can lead to better risk management and outcomes for more people. This, in turn, should result in healthier and more sustainable companies.

• However, one should recognize that ESG assessments are an aggregate product that looks at a number of variables. As a result, they can sometimes be not customized and not meet investor expectations. For example, it was recently revealed that companies that are highly rated in terms of ESG pollute just as much as those with low ESG scores. A large cause for this is the existence of three factors that are kept in mind. Often, the environmental factor is supported by the social or governance factors, creating a potential misperception for investors.

• It may be better, in the future, for investors to use other metrics to focus on and find what they want in their portfolios.

America’s Decaying Infrastructure

• When compared to its peers, the US’ infrastructure can be seen as lacking. Not only do we lack some of the more advanced infrastructure like high speed rail, we are facing aging and worsening existing infrastructure.

• About a third of our bridges are in need of repair and a plethora of local infrastructure projects, such as dams, are also in critical conditions. Exacerbating the age and natural decline is the lack of funding for new infrastructure and repairing old infrastructure in the US.

• However, that began to shift under the Biden administration, which passed the Infrastructure Investment and Jobs Act in 2021. This act has provided funding to many infrastructure projects that have been languishing or otherwise needed for many years.

• Some examples are

  • Providing foundational funding for the $16 billion rail tunnel connecting New York and New Jersey

  • Repairing and strengthening rural infrastructure

  • Building floodwalls and protecting the coastline

  • 35,000 other projects worth, in total, $260 billion

• This concerted effort and reinvestment means the US’ infrastructure is improving, a critical underlying aspect of our economy. In fact, Maria Lehman, president of the American Society of Civil Engineers, has said the group’s infrastructure assessment of the US is likely to improve significantly. The next assessment will come out in 2025. The last assessment, which was in 2021, rated the US a C-, up from a D+ in 2017.

Weekly Question

Which of the following is the biggest delivery company?

• A: Deutsche Post(DHL)

• B: Japan Post Holdings

• C: UPS

• D: FedEx

Answer: C. UPS. It is the biggest by market cap and revenue