The Economy’s Weekly Recap

5/17/24 - 5/24/24

Raymond Lin

This Week’s Prominent Events

Nvidia’s Stunning Earnings

• Since the start of the AI boom, Nvidia has seen tremendous growth since its products are at the epicenter of AI. This fact was reaffirmed earlier this week during Nvidia’s quarterly earnings, which had some stunning statistics like…

  • Quarterly revenue of $26 billion, 262% higher than its Q1 revenue in 2023 and also significantly higher than analyst expectations of $24.6 billion

  • Data center revenue increasing 427% from Q1 2023, reaching $22.6 billion

  • Quarterly net income of $14.9 billion, up 461% from Q1 last year and 19% from last quarter. This figure was also higher than expectations of  $13.1 billion.

  • This higher net income meant that EPS was $5.98 versus expectations of just $5.19

• In short, Nvidia had a spectacular Q1, astounding investors and assuring them that the AI boom is not just a bubble. Furthermore, Nvidia’s new Blackwell AI architecture, which Nvidia has said is 4 times faster than its current Hopper AI architecture, seems poised to spur even more growth in 2024, especially when considering the fact that demand for Nvidia’s products currently outstrips supply. 

• Investors have responded positively to all this news as Nvidia stock has risen 14% this week and is up 121% YTD. Investor excitement may have also been stoked by the announcement that Nvidia will be splitting its stock 10:1. There may also be more excitement because Nvidia said it bought back $7.7 billion of its stock and is increasing its dividend. 

Dreams of Ether

• Cryptocurrency enthusiasts may be having dreams of Ether soon, for the SEC recently approved rule changes that pave the way for spot Ether ETFs. This means that, shortly, ETFs that invest directly in Ether as opposed to merely the price of Ether could be allowed on the market. This would bring Ether to the same status as its larger brother Bitcoin, which got its spot Bitcoin ETFs approved a few months ago after years of fighting for it.

• However, these dreams of Ether may remain only dreams for now because the SEC is likely to take weeks or months before actually permitting companies to launch spot Ether ETF products. 

• Nevertheless, this seems to be another victory in a year where cryptocurrency enthusiasts seem to be doing quite well. So far this year, Bitcoin’s price is up 57% and Ether is up 59%, with Bitcoin reaching new all time highs and Ether almost reaching its previous highest price. However, the volatility of the cryptocurrency market should not be forgotten, even amongst its legitimization and popularization by products like spot ETFs. 

Live Nation’s Monopoly

• Live Nation, the company behind Ticketmaster that controls 70% of all ticket sales at large venues, has been under public ire for several years now for its anti competitive behavior and role in increasing ticket prices for consumers. 

• In response, the Justice Department and 29 state attorney generals have filed a lawsuit against Live Nation, asking the courts to break up what they consider an illegal monopoly. They accuse Live Nation of forcing venues into exclusive contracts, pressuring artists to use Live Nation’s services, and threatening rivals. According to the lawsuit, this has severely hampered innovation and competition while also raising prices for consumers. 

• Another aspect of the lawsuit’s claim that Live Nation is a monopoly is how expansive Live Nation is. Live Nation manages venues, concert promotion, ticketing, sponsors, and artists, leading to the Justice Department saying “Live Nation has its tentacles in virtually every aspect of the live entertainment industry”. 

• Furthermore, the lawsuit points to the many fees Ticketmaster has, also known as the “Ticketmaster Tax”, as an example of higher prices for consumers. In a similarly hostile manner, the lawsuit says Live Nation has threatened venues unless they used Ticketmaster.

• Live Nation has responded half-heartedly, saying that things like higher demand, higher production costs, and scalping were the causes for higher prices. It also disputed that it had a monopoly on the grounds that its market share has been declining for the last decade. 

Dupont’s Breakup

• Dupont, the American chemical company founded in 1802, has announced that it will be spinning off its electronics and water businesses into their own companies, splitting Dupont into 3 different more agile companies. The electronics company will focus on semiconductors and other advanced electronics while the water company will be a water solutions provider. 

• Dupont said that this move will enable better allocation of capital and value for shareholders as well as customers, with the separations expected to be completed in 18 to 24 months. 

• This kind of breakup isn’t too surprising though as Dupont underwent a similar separation in 2019. In that breakup, DowDuPont was split into Dupont, Dow Chemical, and the agriculture focused Corteva. 

• Additionally, this breakup is seemingly a part of a recent saga of conglomerate breakups. Johnson & Johnson, Kellogg, and  General Electric were also all conglomerates with divisions in numerous industries, but all have reduced their scale or broken up to better focus their efforts and increase shareholder value.

Samsung’s Woes

• Amid the recent AI boom, there have been many winners. Nvidia, as if it weren’t clear from the first story, has been the most obvious benefactor, but many other companies in the AI supply chain have benefited too. One example, among many, has been South Korean SK Hynix, which produces high-bandwidth memory(HBM) chips used in AI. In fact, SK Hynix is the exclusive provider of these HBM chips for Nvidia.

• However, at the same time, there have been companies that have failed to capitalize on the AI boom, such as Samsung. Although Samsung is the largest memory chip manufacturer by revenue, it has failed to develop HBM chips sufficient for AI, leaving Samsung isolated from a rapidly growing market. 

• At the same time, Samsung has also lost ground in semiconductor production. Between 2019 and 2023, its market share fell from 18% to 12% while its rival and largest player in the industry TSMC grew from 50% to 59%. 

• These failures have led Samsung to abruptly change leadership recently. While Samsung usually only announces major leadership changes at the end of the year, Samsung replaced its semiconductor chief Kyung Kye-hyun with Jun Young-hyun, placing Jun Young-hyun in charge of the division managing the semiconductor and memory chip parts of Samsung. Jun Young-hyun had previously led the memory chip division and was the CEO of Samsung’s battery unit. 

• There are some reasons for optimism besides this new leadership. Samsung has recently begun mass production of HBM chips, planning to triple its HBM production this year and capitalize on AI demand.

Future Events

Fed Minutes Info

• The Fed minutes for May 1, which are released by the Federal Reserve and give insight into the meetings of the Fed, was released on Wednesday, and it reaffirmed the unfortunate reality of the high interest rate environment we are in. 

• In the Fed minutes, the Fed confirmed that the current 23 year high interest rates were still needed, with some members of the Fed even suggesting the current 5.25% to 5.5% Fed interest rate wasn’t restrictive enough and that further tightening via higher interest rates may be needed. 

• However, Fed Chairman Jerome Powell has since said “We’ll need to be patient and let restrictive policy do its work” and that an interest rate hike was unlikely. This view was supported by April’s inflation data, which came out last week and which you can read about in last week’s Phi Fiscal. 

• It is quite remarkable to see the idea of higher interest rates or even hikes becoming normalized as, just a few months ago, some were predicting up to 6 interest rate cuts in 2024. Now, most people only predict 1 or 2 and even that is in the air as inflation has proved stubborn, although its growth did decrease in April. Until interest rate cuts happen, it will be vital to stay up to date on inflation, such as by reading Phi Fiscal diligently every Sunday.

AI Implementation In Tech

• While AI has been mentioned in this week’s Phi Fiscal more than I’d prefer, it’s simply the result of AI’s increasingly important role in the economy and our future. One way this has materialized is through the integration of AI into existing technology to, in the eyes of proponents, improve customer experiences and efficiency.

• Take, for example, Microsoft announced on Monday that it was launching a new line of laptops that have AI capabilities like helping users with questions about what’s on their computers, such as Microsoft’s demonstration with the video game Minecraft. This line of laptops will be known as Copilot+ PCs, with the designation being assigned if computers meet standards of processing power and performance and have Microsoft’s AI services like Copilot, which is an AI assistant. Microsoft anticipates that 50 million AI PCs will be purchased over the next year and that AI capabilities will be the most compelling reason for consumers to upgrade PCs. 

• Another example of this kind of implementation of AI is with smartphones. Companies like Google and Samsung have begun promoting the usage of AI on their products, with Google’s VP of product management for Android saying “This new era of AI is a profound opportunity to make smartphones truly smart”. Some of the features that give credence to this idea are better real time translation, phone cameras interpreting what they see, information being logged by the AI so the user can recall it, photo improvement and editing, solving user questions better, etc.

• However, the effectiveness of this AI implementation is yet to be proven, and it is possible that this rush of AI services and promotion could be more of an ineffectual fad than anything useful. 

Social Security Crisis

• Social Security, the almost century old program where workers pay a specific Social Security tax in return for Social Security payments when they retire, is a staple of many American lives. However, in recent years, the program has undergone severe stress and is now projected to run out of funds in 2035. 

• To explain how this came to be, it is important to understand how Social Security works. Spending on Social Security, which made up a whopping 5% of US GDP in 2023, comes from the tax people pay. This works well when the amount of money coming in exceeds the amount coming out, which is how Social Security has operated for the last few decades. When there is an excess, the money is kept in a fund that Social Security can redeem from the US government. 

• However, in recent years, the cost of Social Security has exceeded the amount coming in. This means that Social Security has had to draw on its reserves to pay for its benefits. If this trend continues, which it is projected to, then the funds will run out by 2035, leaving Social Security unable to fully pay its benefits. 

• Despite Biden‘s 2020 campaign mentioning he had a Social Security plan, he has done nothing to address it yet. President Trump has similarly lacked a concrete plan to target it, leaving the state of Social Security in the air.  This is not entirely their fault. Several solutions, like increasing the retirement age, raising taxes, or cutting the benefits of Social Security, have proved politically viable due to popular resistance. 

• While the government may continue funding Social Security even if the funds run out, the changing demographics of the US and the already high US deficit and debt burden underscore how Social Security is truly facing a crisis that seems to be continually kicked down the road.

Weekly Question

What company is most valuable by market capitalization?

• A: Amazon

• B: Alphabet

• C: Nvidia

• D: Tesla

Answer: C. Nvidia. Nvidia has a market cap of around $2.6 trillion, higher than Amazon’s $1.9 trillion, Alphabet’s $2.2 trillion, and Tesla’s measly $561.6 billion.