The Economy’s Weekly Recap

7/29/24 - 8/5/24

Raymond Lin

Hi. Apologies for the late release. Originally, I was a bit behind schedule on this week’s edition of Phi Fiscal because I was creating the brand new social media page and content for Phi Fiscal. But, as Monday unfolded, I was faced with the decision of whether to wait and cover the unfolding disaster was the right move or not. Ultimately, I decided against it, so you’ll see it covered next Monday. Until then, check out our YouTube, Instagram, X(Twitter), and TikTok!

This Week’s Prominent Events

Major AI Disappointment

• Since earnings season is upon us, many major companies have reported their earnings. Of particular prominence has been the earnings of the tech industry and how AI has seemingly inflated the value of some of these tech firms, some of which are featured below.

• Alphabet’s earnings narrowly beat expectations for revenue and net income, with revenue of $84.74 billion and a profit of $23.6 billion. These figures were up 13.6% and 28.6% respectively from last year, but investors seemed to be concerned as Alphabet’s stock nonetheless dropped 5% in response to earnings. Two major reasons for the drop are the high capital spending for AI and the weaker than expected YouTube revenue. Capital spending, which has grown due to AI, grew from $12 billion last quarter and $7 billion last year to $13.2 billion this quarter. This high level of spending caused concern for some investors, who were spooked by this high level of spending and the lack of apparent return so far. Additionally, the 18% growth in ad sales for YouTube was lower than anticipated, further unnerving investors. Overall though, Alphabet’s earnings show it’s in a good position, with growth across the globe and its industries despite investor anxieties.

• Microsoft had a similar story with revenue increasing 15% from a year to $64.7 billion and profit increasing 10% to reach $22 billion, with both of these figures just beating expectations by a hair. Of note was cloud revenue growth, up 21% from last year and reaching $36.8 billion. Despite this generally positive growth, the stock fell around 8% after the earnings report, largely due to concerns about high AI spending and disappointment Microsoft didn’t perform better.

• Amazon suffered an even worse earnings report though as it fell around 9% when its earnings were released due to a miss on revenue, where it grew 10% from last year to reach $148.0 billion but was short on expectations of $148.7 billion. However, Amazon’s net income significantly beat expectations of $13.4 billion, up around 100% from last year’s net income. Cloud and advertising revenue grew significantly at 19% and 20%, but the latter was still short of expectations. However, with slowing overall revenue growth and $16.4 billion spent on AI, up 58% from last year and above rivals like Microsoft and Alphabet, caution caused investors to sell Amazon’s stock. 

• Unlike its peers though, Meta’s earnings report went rather well. It beat expectations and saw revenue increase 22% year over year to reach $39.1 billion. Net income was up 73% at $13.5 billion. Meta also had similarly high amounts of investment in AI, spending $8.5 billion on AI, 33% higher than last year. Insightfully, CEO Mark Zuckerberg stated that “I’d rather build capacity before it is needed rather than too late”. Unlike the aforementioned companies though, Meta’s stock rose around 2% following its earnings call.

• Although a very different company than the ones mentioned before, Intel‘s earnings report is worth mentioning, partially because its stock slid 20% following the earnings. Intel missed expectations for revenue and net income, falling 1% annually in revenue and net income went from a $1.48 billion profit last year to a $1.61 billion loss. Additionally, Intel announced it would be laying off 15% of its workforce, compounding its stock’s decline.

TikTok Lawsuit

• The US government seemingly can’t leave TikTok alone as, on top of the ongoing dispute over TikTok’s ban, the DOJ has sued TikTok for illegally collecting children’s data. Specifically, the DOJ accuses TikTok of knowingly allowing minors under the age of 13 to create accounts and failing to delete the accounts. It cites examples of limited and circumvented age screening and the collection of data in TikTok “kids mode”, which were gathered from an FTC investigation. 

• TikTok has denied the allegations, saying that the claims refer to past practices that are now inaccurate or have been addressed. It also claims that much investment has gone into making the platform safe, with restricted features for those below 18. 

• However, from looking at prior cases in the EU and Britain regarding TikTok and child protection, it seems probable TikTok will be fined. However, while those cases resulted in $370 million and $16 million fines, it is anticipated that the US lawsuit could result in a 10 figure fine in the billions.  

Crowdstrike Faces Consequences

• Crowdstrike’s disastrous update 3 weeks ago caused an IT debacle for many companies, paralyzing operations. 8.5 million computers were disabled, with a myriad of industries disrupted. 

• While most soon recovered the following week, Delta Airlines’ platforms for matching flight crews to planes remained broken for several days, causing over 5000 flight cancellations and $500 million in losses. Although no lawsuit has been filed yet, Delta has hired a law firm to seek damages and is likely to file in the coming months.

• Unfortunately for Crowdstrike though, this isn’t the only lawsuit it will have to contend with as Crowdstrike is being sued by its shareholders for making false and misleading claims about software testing. Due to this, the shareholders claim that the company defrauded investors. 

• Whether either case succeeds or if any new lawsuits emerge is uncertain, but Crowdstrike is certainly facing a series of challenges between its reputational loss, its collapsing stock, and the lawsuits. 

Bill Ackman Embarrassment

• Bill Ackman, billionaire investor and founder of Pershing Square Capital, has spent the last few weeks garnering demand for his IPO of Pershing Square USA. Pershing Square USA, which is a closed end investment fund that would have enabled investors to gain access to a portfolio of Ackman’s choosing. Initially, he wanted to raise $25 billion in the IPO, using his social media influence of 1.3 million followers and pitching the idea in 150 meetings. Ackman had compared his fund to Berkshire Hathaway and believed he would be able to sway retail investors. 

• However, his endeavors have fallen apart in recent weeks as Pershing Square USA revealed IPO plans for just a more realistic $2 billion offering. However, the company failed to IPO because the SEC began reviewing a letter written by Ackman to some private investors. 

• With this failure to raise funds and then an SEC delay, Ackman has, perhaps wisely, chosen to withdraw Pershing Square USA’s IPO plans for now. He said that he would “report back once we are ready to launch a revised transaction”

A Sudden Turnabout

• Over the course of the last few years, cryptocurrencies have gradually become more accepted, even if they’re not quite mainstream yet. To see this, one only needs to look at the availability of Bitcoin. Where once it was actively combated, it can now be found in ETFs that directly purchase Bitcoin. One can only see this through the sentiment of leading figures, such as BlackRock CEO Larry Fink. 

• Another case of this turnabout regarding cryptocurrency can be observed in former President Donald Trump. Trump, who is running as a candidate in the 2024 election, recently appeared at the Bitcoin 2024 conference as a speaker. Despite once saying in 2019 that cryptocurrency  "is highly volatile and based on thin air” as well as being used for “drug trade and other illegal activity”, Trump now believes that the US should be a bitcoin mining powerhouse with a strategic bitcoin stockpile. 

• Furthermore, Trump has said that “On Day One, I will fire Gary Gensler”, who is the SEC chairman and who has said that digital assets should be regulated like financial securities. This suggests, on top of supporting cryptocurrencies generally, Trump would want to loosen regulation on them too. Trump also remarked that he would commute Ross Ulbricht’s life sentence in prison, who is an icon in the Bitcoin community for operating the first Bitcoin based marketplace that was used for money laundering and drug transactions among other things. 

• Although Trump’s statements may be inspired by his campaign more than his enthusiasm for Bitcoin, they nonetheless demonstrate the increasing acceptance of Bitcoin and a possible future if he wins the election.

Future Events

A Disastrous Combo

• Last Friday, the FOMC met to discuss cutting interest rates, but, as most expected, the FOMC kept interest rates still. As a reminder, decreasing interest rates, like what many investors currently want, leads to higher inflation but lower borrowing costs and higher Federal Reserve chair Jerome Powell said that “there was a real discussion”, but “we're not at the point [to dial back restriction] yet. We want to see more good data”. The result was hardly surprising, and the announcement was actually quite positive about a September rate cut. 

• However, some recent data has made some begin to question the decision to not cut interest rates. The most important of which came out last Friday, only a few days after the Fed’s decision to not lower interest rates. The data in question is the BLS’ jobs report for July. In July, the US economy added only 114,000 jobs, far below the estimate of 175,000 and June’s 206,000. Additionally, the unemployment rate surged from 4.1% to 4.3% and applications for jobless benefits rose to 249,000 filings, the highest since last August. US manufacturing also declined in July, the fourth month in a row.

• This weak economic data suggests that the Federal Reserve might have waited too long to cut interest rates and that the next few months of economic data could be similarly poor. At the very least, this sentiment permeated the markets, which saw the S&P 500 lose 1.8%, the Nasdaq down 2.4%, and the Dow Jones fall 1.5%. 

• On the other hand, some, like San Francisco Federal Reserve President Mary Daly, find that the jobs report is not very concerning. According to Daly, firms are not firing workers and are only slowing their pace of hiring. Additionally, the decline in government hiring played an outsized role in the decline in jobs added as it decreased from 43,000 in June to 17,000 in July. When also considering that the jobs report is likely to be revised, worries of recession are unlikely to materialize. However, whether the Federal Reserve made a mistake by not raising rates last week is something that cannot be judged conclusively yet. 

A New High

• Last week, the national debt reached an astronomical $35 trillion. It’s a figure that has been anticipated for a while given the consistent deficits of the last decade, but one that nonetheless highlights a growing issue in the US. 

• With higher national debt, the results of many years of deficit spending by both Democrat and Republican administrations, the government spends increasingly more money on paying interest and the debt off, also known as debt servicing. For example, the US is predicted to spend $892 billion this year on debt servicing, but that figure is expected to grow to $1.7 trillion by 2034. This growth in debt servicing will likely soon see it become the largest federal expense, even higher than Medicare or the military. This higher debt servicing means the government will find itself constrained fiscally, unable to take on projects like the CHIPS Act or major infrastructures. 

• While both the Harris and Trump campaigns have mentioned they will try reducing the deficit and the national debt, the failure of prior administrations and the lack of attention given to the issue suggests it may continue to go unresolved over the next few years. 

Texas Migration

• Seeing that title, you might think “Oh wow. Real Political of Phi Fiscal”, and you wouldn’t be completely wrong. However, the migration in question isn’t of the human kind but rather of the corporate kind. 

• Over the last decade, several major companies have moved their headquarters to Texas, such as Tesla, SpaceX, HP Enterprise, Oracle, etc. To look at some of the reasons these corporations have moved, we can look at one recent and somewhat quintessential case: Chevron

• Chevron was founded in 1879 in the Bay Area as Pacific Coast Oil Co and, although it did move its headquarters to San Ramon in 1999, stayed in California for 145 years. However, it has recently decided to move its headquarters to Houston, Texas. 

• The reasons are numerous, but some major reasons for the move were…

  • The growth of Texas and, particularly, its energy industry. For reference, Chevron has 7,000 employees in Houston already and just 2,000 in its former headquarters in San Ramon. Additionally, Houston places Chevron closer to its partners, suppliers, and workforce. 

  • The lower taxes. Texas is a more business friendly state than California, offering 0 corporate income tax compared to California’s 8.8%. 

  • California’s regulations and laws. California has more stringent regulations, particularly regarding the climate, which has led Chevron CEO Mike Wirth to remark “California has a number of policies that raise costs, that hurt consumers, that discourage investment”. 

• Chevron’s case serves as a good example to understand why some companies have begun to relocate their headquarters, and it’s likely we’ll see more relocations in the future. 

Weekly Question

Of the tech companies mentioned in the first story(Alphabet, Microsoft, Amazon, Meta, and Intel), which is the oldest?

• A: Alphabet

• B: Microsoft

• C: Amazon

• D: Meta

• E: Intel

Answer: E. Intel. Intel actually has quite the storied past, being founded in 1968 as a pioneer in the emerging technology of semiconductors.