The Economy’s Weekly Recap

3/22/24 - 3/29/24

Raymond Lin

This Week’s Prominent Events

Home Depot’s $18.25 Billion Acquisition

• Earlier this week, Home Depot announced it would be acquiring SRS Distribution for $18.25 billion in a deal using cash and debt, which would be Home Depot’s largest acquisition. SRS Distribution sells materials to contractors, serving as a major gateway for Home Depot to reach professional contractors. 

• This move will allow Home Depot to further develop its pro business, which will make up for Home Depot’s stagnant consumer oriented operations. This acquisition also builds upon Home Depot’s other efforts to grow in the professional contracting market, which include its acquisition of HD Supply and International Designs Group. 

• Home Depot CEO Ted Decker said the deal was a “complementary accelerator” that would increase Home Depot’s addressable market by $50 billion. 

A Sweet Collaboration

• Soon, one will be able to find Krispy Kreme doughnuts at McDonald’s as a nation wide partnership was agreed to between the companies. In the second half of this year, McDonald’s will begin rolling out these doughnuts and, by 2026, national availability is anticipated. The Original Glazed Doughnut, Chocolate Iced with Sprinkles Doughnut, and Chocolate Iced Kreme Filled Doughnut will be sold starting at breakfast until they run out.

• This is likely to enable Krispy Kreme’s expansion as it gains access to the almost 13,500 McDonald’s locations. It may also help McDonald’s retain customers as it faces pushback from customers regarding price hikes. This collaboration is of a similar nature to Wendy’s Cinnabon partnership in which Cinnabon is part of Wendy’s breakfast lineup.

• While McDonald’s stock barely moved following the announcement, Krispy Kreme’s stock shot up 28%. However, its stock is still below its 2021 IPO price and is down 21% from a year ago.

Boeing’s Leadership Shakeup

• For the last few years, Boeing has been combating a rampant quality and public image battle as it has faced fatal plane crashes, financially painful groundings of planes, and distaste from government agencies and the public. When paired with Boeing’s inability to fix its issues, its rival Airbus overtook it as the largest plane maker. 

• In 2024, this only got worse as an Alaska Airlines owned Boeing plane lost its door panel in January. This triggered a FAA review on Boeing that gave the company failing grades on almost 3 dozen aspects of production. Additionally, Boeing planes were grounded and the company suffered great economic losses and damage to its image. 

• Months later, it seems the company is trying to reform itself and its image as 3 senior leaders at Boeing had their retirements announced. These 3 are Boeing’s CEO Dave Calhoun, who will depart at the end of 2024, Boeing Chairman Larry Kellner, who will not stand for reelection, and Stan Deal, the head of the division that makes planes for airlines. 

• This change in leadership is seemingly intended to improve its practices and culture to prioritize safety and quality. This may allow Boeing to fix what FAA head Michael Whitaker aptly described as Boeing’s priorities being “on production and not on safety and quality”

A Major Credit Card Settlement 

• 19 years after the lawsuit began, Visa and Mastercard have agreed to a settlement with the merchants that sued them in a class action lawsuit in 2005. This lawsuit was over swipe fees, which are fees that merchants pay credit card companies. Often, these fees are around 2% but can exceed 4% and are perceived as damaging by merchants. 

• This settlement has mitigated some of these merchants’ concerns as it lowered fees by 0.04% for 3 years. Additionally, the settlement will permit small businesses to form groups to negotiate these fees, which large businesses already do. Businesses would also gain the ability to have more autonomy when it comes to credit cards, allowing them to push customers towards lower fee credit cards. As a result of these changes, the law firm that created the settlement estimated the value of the savings at around $30 billion. 

• However, many of these changes are only piecemeal and temporary. The decrease in swipe fees are minute and will only last 3-5 years, returning to their original rates afterwards. Many businesses remain encumbered by swipe fees, and it seems likely that this conflict over swipe fees has remained unresolved. 

Galderma IPO

• Last Friday, skin care company Galderma went public in Zurich at a value of $59.77 per share and a market cap of $13.97 billion, the largest IPO so far this year. The stock price would soon rise 15% and stabilize at that value, proving to be a success in a time of high interest rates. 

• However, Galderma wasn’t the only recent IPO to take note of. Technology companies Astera and Reddit also went public this month with similar successful IPOs, although Reddit’s success quickly turned into lukewarm performance after its stock dropped this week. 

• These recent IPOs are indicative of the fact that IPOs are once again growing, with Q1 2024 seeing 30 IPOs and $7.8 billion raised. In Q1 2023, 29 companies went public and only $2.3 billion was raised. In Q1 2022, 18 companies went public and $2.1 billion was raised.

Future Events

US-China Economic Conflict

• It’s a story that one has seen countless times in recent years, especially if one is a reader of Phi Fiscal, but the story of how the US and China have engaged in economic competition and then warfare with each other is a vital one to keep track of. 

• Recently, some developments include…

  • The US trying to force the sale or ban of TikTok, although this effort has been stalled in the Senate thanks to lobbying efforts and public pressure. 

  • The US planning to add more countries to its import ban list, which will block shipments to the US containing products or parts from banned companies.

  • China banning US chips like those from Intel or AMD from government PCs and servers, which is a similar move to China’s banning of government use of Apple phones

  • China sidelining Windows and other foreign operations systems in favor of domestic ones

• While there is some genuine merit to these moves, the US and China are increasingly using economic weapons to fight a political war, with companies and consumers caught in the crossfire. Furthermore, it seems this has become the status quo and that the time of hyper-globalization and globalized growth is winding down.

Amazon’s Investments

• The tech industry is always rapidly growing, and some recent Amazon investments highlight the magnitude and direction of the tech industry. 

• On Wednesday, Amazon announced that it would be investing an additional $2.75 billion in Anthropic, an AI company that competes with companies like OpenAI via its Claude AI. This will bring Amazon’s investment in the startup to $4 billion dollars, cementing it as Amazon’s primary AI partner. As a part of the recent $2.75 billion investment, Anthropic will use Amazon designed chips for AI and Amazon will use Anthropic’s AI in its cloud business. 

• In addition to investing in AI, Amazon plans to invest $150 billion in the next 15 years on data centers in a bid to cement its dominance in cloud computing and meet demand created by the growth of AI. Some of these massive investments have already occurred as Amazon announced in February it would be spending $10 billion on two data centers in Mississippi. 

• Interestingly, this high level of investment may have marked impacts beyond Amazon and the tech industry as Amazon invests in new places and plays a larger role in the local economy and politics of these places. This is especially poignant when it comes to energy, which will be discussed later in today’s newsletter.

Energy Crisis

• Power has been at the heart of industry for several centuries now, and the advent of generative AI and the immense data center growth AI has caused have not changed that. However, they have changed the status of power as the incredibly high energy demands of AI have led to increasingly high loads on America’s aging energy infrastructure.

• According to Boston Consulting Group, the share of data center electricity usage in the US was 2% in 2020. However, it is projected to reach between 6.5% and 7.5% by 2030. This is in part due to more data centers due to AI but also due to how AI requires more cooling than traditional data centers. 

• In addition to this massive energy demand, these data centers will stress regional energy providers. An example of this can be found with Georgia Power, the state’s major power company, which expected growth of 13,000 megawatts in 2023 but saw 18,000 megawatts thanks to data centers. Portland General Electric has faced a similar dilemma as it doubled its forecast for new energy demand in the next five years due to data centers and rapid industrial growth. 

• Efforts to alleviate this crisis have been piecemeal as building transmission lines and transfer stations requires huge land acquisitions, environmental reviews, regulation, and negotiations that prolong any federal efforts. In 2013, 4000 miles of new transmission lines were installed but now the US barely manages 1000. States are also seemingly unable to fix this issue as Maryland’s recent spat with Virginia regarding plans to build $5.2 billion of transmission lines in Maryland to power Virginia's data centers. 

• When considering that this energy crisis will only be compounded by cryptocurrency mining and American industry, such as in green energy. It is apparent that America faces a serious energy crisis in the near future. 

Weekly Question

So far this year, the S&P 500 has risen…

• A: 2.3%

• B: -0.4%

• C: 5.6%

• D: 10.2%

Answer: D. In its best Q1 performance since 2019, the S&P 500 has risen 10.2% in the first 3 months of 2024 amidst AI hype, inflation staying fairly low, and hopes of rate cuts.