The Economy’s Weekly Recap

9/8/23 - 9/15/23

Raymond Lin

This Week’s Prominent Events

Google’s Antitrust Lawsuit

• While we wait for Amazon’s antitrust lawsuit, we can look at another major antitrust lawsuit against a massive tech giant: Google. Earlier this week, the trial between Google and the Department of Justice(DOJ) began. The DOJ alleges that Google purposefully maintains a monopoly in the search engine space.

• The DOJ has listed Google’s billion dollar deals to be the default search engine on Apple devices and Safari and the insertion of Google into its other properties like Chrome and Android as closing off competition. DOJ attorney Kenneth Dintzer has said that “Google’s contracts ensure that rivals cannot match the search quality ad monetization”. For reference’s sake, Google’s market share is about 90% of the internet search market.

• Google’s attorneys have responded that Google’s success is due to its superior product as anyone can easily access other search engines and make them the default search engine.

• The trial is scheduled to last 10 weeks and could have massive implications for the tech industry if Google loses.

Arm’s IPO

• Arm, the chip design company previously privately owned by SoftBank, went public this week. On its first day, Arm jumped 25%, making Arm worth about $63 per share and $60 billion in market cap. SoftBank, which still retains 90% of shares, took Arm private at just $32 billion. Arm’s IPO is the largest IPO of the year and provides a positive market sentiment for upcoming IPOs like Instantcart.

• SoftBank has been seemingly vindicated by Arm’s success and is expected to spend some of its $65 war chest on investing in AI.

• Arm designs chips that customers like Apple, Samsung, Nvidia, and Google use. Their chip designs are foundational to a lot of technology used today. In fact, much of Arm’s revenue comes from royalties from these chips. Half of Arm’s 2022 royalty revenue came from designs from 1990 and 2012, which demonstrates how Arm’s designs have persisted and remained in use and financially valuable for Arm. Arm’s role in AI has likely played a role in its meteoric stock performance.

Smucker’s Acquisition

• J.M. Smucker, the owner of Jif and Uncrustables, is acquiring fellow food company Hostess Brands, the owner of the iconic Twinkie and other food products like Ding Dongs, Zingers, and Snoballs, for $5.6 billion.

• Excluding debt, the deal is worth about $4.6 billion, which still comfortably exceeds the market cap of Hostess. This, along with a high adjusted earnings EBITDA ratio, has led to some analysts seeing the acquisition cost as unnecessarily high, which contributed to Smucker’s stock falling a few percentage points.

• Smuckers has highlighted how the companies will complement each other due to their strength in groceries and marketing expertise.

Howard Schultz Steps Down

• Howard Schultz has been an important figure in the growth of Starbucks over the last few decades. In his first stint in the position, Schultz was CEO of Starbucks from 1987 to 2000 as it grew rapidly from a local enterprise to a large business. He then retired before returning to the position in 2008. He would help reinvigorate the brand and served as CEO in this second stint until 2017. Besides handing off the position of CEO, he also stepped down as executive chairman and became just a member of the board of directors. Then, he returned in 2022 for 11 months as interim CEO while they were looking for a new one. They eventually found a suitable successor, Laxman Narasimhan, and Schultz once again retired.

• However, it looks like this one may be the final one. Howard Schultz has also decided to step down from the board of directors to focus on other endeavors. He has said that ““I look forward to supporting this next generation of leaders to steward Starbucks into the future as a customer, supporter and advocate in my role as chairman emeritus”.

• The chairman emeritus is a mostly honorary position that recognizes a former executive chairman for their role in a company.

Child Poverty Doubles

• According to 2022 Census data, child poverty more than doubled from a historic low in 2021 of 5.2% to 12.4% in 2022, a number comparable to 2019’s child poverty. A major cause for this is the end of the temporary boost of the child tax credit. The child tax credit increased the number of low income parents eligible for the full amount and the maximum amount people could get.

• This measure lifted 2.1 million children above the poverty line in 2021, but its end has seemingly reversed the improvements. Additionally, child poverty in 2023 may be even worse as other pandemic benefits ended this year, such as the end of expanded food benefits and potentially hundreds of thousands of children from Medicaid coverage.

• There is some political agitation to bring back the child tax credit, but congress is still at a stalemate. There is some support, but it is unlikely to be brought back soon. However, some state governments may pass some child tax credit related legislation in the future, which could help combat child poverty.

• The official poverty rate is still at 11.5% because it looks at income before taxes and benefits, whereas the Census looks at income after taxes and includes benefits like the child tax credit.

Future Events

August’s Inflation

• The Consumer Price Index(CPI) data for August was released this week and it reflects mixed conditions. CPI rose 0.6% from July to August, the biggest monthly gain of 2023. This means that, year over year, inflation is 3.7%. A large contributor to the monthly gain was the 10.6% increase in retail gas prices, which made up half of the 0.6% in the CPI.

• Meanwhile, core CPI, which is CPI but with the important but volatile food and energy markets removed, rose 0.3% monthly and 4.3% year over year.

• Although the CPI data doesn’t show a decrease in inflation. the Federal Reserve is unlikely to raise interest rates this month. Some reasons include lower future consumer demand, a cooler labor market, and potentially lower shelter inflation. However, while it is likely not to happen this month, an interest rate hike for November is very possible.

AI Regulation

• AI is a revolutionary tool that will have an immense impact on many people’s lives. Some of these impacts will be positive, but there will also be many negative ones. To combat these negative ones, lawmakers around the world have begun to introduce regulation to restrict AI’s impact.

• China has announced some key tenets they want AI to follow and has targeted specific usages of AI. Meanwhile, the EU has its AI act, a nascent set of regulations and processes to manage AI’s implementation and usage.

• Missing from the list, however, is the United States. The US has been slow to consider and start regulating AI. However, the US has begun to take some steps towards regulation recently.

• Senate Majority Leader Chuck Schumer organized a closed-door meeting where most senators and some of the top tech leaders gathered to discuss AI. 40 senators didn’t attend though, with Senator Josh Hawley calling it a “giant cocktail party for big tech”.

• Although few concrete details or frameworks were created, the meeting wasn’t completely useless. It shows a renewed and at least somewhat bipartisan vigor to regulate AI and control its effects.

• Hopefully, these kinds of meetings and their dogma continue and AI regulation is hammered out by law makers.

Renewed US Investment

• A little over a decade ago, China began the Belt and Road Initiative. It was a strategy of investing in infrastructure in poorer countries to court economic and political influence. It was a win-win for China and the countries it invested in. The countries could get infrastructure built to help their citizens and economy while China got political influence and economic returns on the loans they gave to build that infrastructure.

• However, this left the United States and its western allies with diminishing economic connections and political influence as China pushed them aside. The US has tried to turn this around recently with the announcement at the G20 of an India-Middle East-Europe Economic Corridor. This entails investment into infrastructure to facilitate economic activity and connectivity between many countries. Boosting trade, bettering energy infrastructure, and improving digital infrastructure will all be part of the Corridor.

• Complementing this Corridor is the development of another Corridor in Angola, Zambia and the Democratic Republic of the Congo to better connect the economies of those countries.

• These investments reflect the growing importance of countries in the Global South economically and politically as well as how our governments are approaching these countries.

• Although few specifics are known so far, more detailed plans and information will be announced in the future.

Weekly Question

Which of the following is not a real Coke collaboration?

• A: Coca‑Cola® Y3000 Zero Sugar

• B: Coca‑Cola® Zero Sugar Byte

• C: Coca-Cola® SipSmart

• D: Coca‑Cola® Dreamworld

Answer: C, courtesy of ChatGPT. All the other ones are real. The most recent one is A, which was created with AI and human collaboration.