The Economy’s Weekly Recap

3/8/24 - 3/15/24

Raymond Lin

This Week’s Prominent Events

The Possible End of TikTok

• Earlier this week, the House of Representatives voted 352-65 in a bipartisan effort to force TikTok owner Bytedance, which is a Chinese company, to sell TikTok within 6 months or face being banned from the US. However, the bill still needs to pass the senate, where senators are undecided and the bill’s fate is uncertain, as well as be signed by President Biden, although he has said he would sign the bill if it came to his desk.

• If the bill were to become law, which is still uncertain, it would likely be immediately challenged by Bytedance in the courts. If Bytedance failed though and were forced to sell TikTok or be banned, American tech companies stand to benefit immensely as an exodus of users occurs or one of them acquires TikTok. 

• This is not the first time the US has tried to ban TikTok though, with former President Trump tried and failed via an execution order. However, the primary concerns then and now remain the same: there is a fear that the Chinese government can use TikTok’s data and immense social reach to influence Americans and undermine national security, although some have casted doubts about this logic given that the US has offered no official evidence.

US Steel Acquisition

• Along similar lines as the TikTok ban, the $15 billion acquisition of US Steel by Japanese company Nippon Steel has been officially opposed by President Biden for fears of jeopardizing national security. Biden also said that “It is important that we maintain strong American steel companies powered by American steel workers”.

• However, Biden’s actions may be influenced by other factors, especially US Steel’s domestic importance. US Steel has a storied history, with it being a vital company that was once massive and helped American industry grow in the nineteenth and twentieth century. In addition to its reputation, US Steel employs many steel workers in key swing states, and President Biden may be opposing this deal to foster their support. In fact, Biden explicitly stated “I told our steel workers I have their backs, and I meant it” when speaking about the deal. 

• Some have commented how unusual this kind of direct political opposition is. To some, especially international companies, it is a sign that US politics are interrupting with financial investments that can be beneficial for both Americans and international companies. 

European AI Legislation

• While the Chinese and US government have gone about trying to restrain AI, there has been no comprehensive regulation of them yet. Earlier thai week though, the EU moved closer to enacting the world's first comprehensive set of AI regulations after the European Parliament endorsed a proposed AI law. With this endorsement, it is expected to be accepted by a council of ministers and to become law in just a few weeks. 

• A major focus of the legislation is separating AI into different tiers based on their risk to society and regulating these tiers of risk differently. For example, high risk AI will have risk assessments, human oversight, and have usage logged. Additionally, generative AI will need to comply with copyright law and describe how their models are trained. 

• These requirements, along with other changes in the bill, will not actually be enforced a while though as EU countries are only set to give approval in May and the actual provisions of the bill may only be enforced in 2025 or 2026 to provide time to companies to respond. 

EV Startup Struggles

• Fisker, an Electric Vehicle(EV) startup has, according to people familiar with the matter, hired restructuring advisers to assist with a bankruptcy filing. Upon this news, its stock fell 46%, although that may not be of significance given the stock has fallen 89% YTD. 

• In this way, Fisker is emblematic of EV startups. When they launched, many were seen as promising and investments in them were substantial. However, after years of questionable performance alongside high interest rates and the rise of AI, these companies are not looked at as favorable as they used to be. 

• This has only been compounded by the general slowdown in EV demand, and it is likely that we will only see struggles similar to Fisker from other EV startups in the near future, especially when considering that companies like Rivian and Lucid are not profitable and burning through cash.

Bitcoin’s Recent Success

• While Bitcoin is often still viewed as a volatile and speculative asset, there has been some recent embracement of it that has seemingly bolstered its performance. Since Bitcoin spot ETFs, which are ETFs that actually hold bitcoin rather than just tracking its value, were permitted by the SEC, several firms have launched their own Bitcoin spot ETFs. 

• This has fomented a belief among Cryptocurrency enthusiasts that Bitcoin is rising in prominence, contributing to Bitcoin’s record high of above $72,000 on Tuesday. 

• However, when observing Cryptocurrencies, it should never be forgotten how volatile  they are. Merely a few days after this record high was reached, Bitcoin’s price fell 10%. 

Future Events

February's Inflation

• In February, the Consumer Price Index(CPI), which measures inflation, rose 0.4% from January and 3.2% year over year. These figures are slightly higher than expectations of only 3.1% year over year. Core CPI, which excludes volatile items like food and energy, rose 0.4% and 3.8% year over year. 

• These figures, in comparison to January’’s CPI of 3.1% and core CPI of 3.9% highlight that inflation is an ongoing battle that, while far less of a threat than before, is still troublesome. 

• It is important to note what caused this inflation too as some parts of CPI, such as dairy products, hospital services, and vegetables, fell in price while other parts, like shelter, airline fares, and eggs, rose in price. Of particular interest is shelter prices, which rose 0.4% in February and rose 5.7% year over year. While 5.7% may seem like a dangerous increase, it is actually the lowest year over year shelter inflation since July 2022, highlighting that conditions are improving even if they aren’t good yet. 

• This February CPI compounds views already held by the Federal Reserve in that interest rates should not be cut yet. Jerome Powell, Chairman of the Federal Reserve, said that they need “good data” before interest rates are cut. This view has likely been solidified by February’s jobs report in which the BLS reported that 275,000 jobs were added. This was significantly above expectations of 200,000 and is the 38th consecutive month of jobs being added, showing that interest rate cuts could wait for later this year.

Private Fund Preeminence

• For much of financial history, banks have been the preeminent source of finance for corporate and consumer activities. However, in recent times, this has changed as private funds managers like Apollo, Ares, KKR, Blackstone, and many others have aggressively expanded into what was once the territory of banks.

• These private funds managers have done so in the wake of the 2008 financial crisis as banks become increasingly cautious. Private funds AUM rose from $726 billion in 2018 to around $1.5 trillion in 2022. 

• With these increased assets, private funds have loaned to corporations extensively, such as when the hedge fund Magnetar loaned $2.3 billion to AI cloud computing operator CoreWeave.

•  In addition to those loans, when some companies face troubles with repaying bank loans, they turn to private funds, such as when shoe retailer Cole Haan borrowed from BlackRock and Fortress Investments Group to pay a $290 million bank loan. In 2023, $12.2 billion of bank loans were converted into private funds loans. 

• These firms have expanded beyond corporate finance too as they focused on consumers via asset-based finance like auto loans, credit cards, real-estate mortgages, etc. Some examples of this include KKR purchasing $7.2 billion of vehicle backed loans and up to $44 billion of buy-now-pay-later loans from PayPal. Blackstone has purchased $1.1 billion of credit card debt from Barclays. Ares has bought $3.5 billion of specialty loans from the bank PacWest. Blackstone and Canada Pension Plan Investment Board have bought $17 million of mortgages from Signature Bank.

• The expansion of private funds into corporate and consumer finance has left some concerned as these funds can often be opaque and restrictive to investors. This has led to the SEC adopting new regulations in August regarding private funds, but private funds seem to be thriving the same even with these new regulations. 

Corporate Defaults

• So far this year, there have been 29 corporate defaults, the highest number of defaults at the start of the year since 2009. According to S&P, this has been due to weakened consumer demand, rising wages and costs due to inflation, and high interest rates. The last one, high interest rates, has been seen as especially crippling as highly leveraged companies experience great financial pressure due to them. 

• However, these defaults are more likely the result of bad decisions or poor circumstances at these companies rather than some sort of economic indication of crisis. Inflation and interest rates do remain an issue, but the former is subsiding and the latter is seemingly still tolerated by the US economy as the US economy continues to grow. 

• Considering the fairly positive current US economic outlook, negative news should be observed carefully and in the context of how the economy is actually doing. The news of corporate defaults should really be seen as a concerning trend but one that does not detract from the US economy’s strength and trajectory. 

Weekly Question

Approximately how many Americans use TikTok?

• A: 40 million 

• B: 91 million

• C:  105 million

• D: 170 million

Answer: D. Around 170 million Americans, more than half the population, use TikTok, which likely factors into how concerned lawmakers are about TikTok.