The Economy’s Weekly Recap

6/14/24 - 6/21/24

Raymond Lin

This Week’s Prominent Events

Shocking Supreme Court Cases

• Usually, when the federal government appears in Phi Fiscal, it's usually the president, congress, or a federal agency. However, this week, the Supreme Court is being featured since the highest court in the land has ruled on 2 cases important to the business world. 

• The first case is  U.S. Securities and Exchange Commission v. Jarkesy, where the Supreme Court decided that the SEC, seemingly along with other federal agencies, have to give defendants that may receive civil penalties to a jury of their peers in federal court. Previously, the SEC could use in-house judges to determine civil penalties, but this decision means the Supreme Court has limited the SEC’s ability to target fraud and punish wrongdoers, stripping administrative power away from the SEC. 

• Additionally, this means that other federal agencies that can only use administrative courts, such as the Federal Energy Regulatory Commission, Department of Agriculture, or Federal Mine Safety and Health Review Commission, will be unable to penalize defendants, undermining their power. 

• The second and more impactful case is the paired appeals of Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce. In the ruling, the Supreme Court overturned the 40 year old precedent of Chevron v. Natural Resources Defense Council, which had been used in over 70 other Supreme Court cases and 17,000 lower court cases. 

• The Chevron case required courts to defer to federal agencies when the law was ambiguous and needed to be interpreted, which has allowed federal agencies to be powerful and operate successfully. However, its overturning means that courts can now decide whether federal agencies acted within their bounds, granting enormous power to the judicial system. 

• Additionally, even when judges may not be experts, they can rule on whether the expert federal agencies are acting in accordance with the law, undermining the ability of federal agencies to create and execute policies. As a result, federal agencies may see their powers increasingly challenged in the courts, preventing crucial agencies like the FTC, SEC, EPA, FDA, etc from operating optimally. 

Walgreens’ Disappearing Stores

• Soon, many Walgreens stores are likely to disappear as Walgreens announced on Thursday that a “significant” number of its 8,600 stores will be closed to improve Walgreens’ position. Among these, the 25% that are unprofitable will likely be first on the chopping block, which means several hundred or perhaps even over a thousand stores could be closed soon. On this news, Walgreens’ stock fell over 20%, down almost 55% year to date. 

• However, Walgreens isn’t alone in its ongoing struggle. Other pharmacy companies like CVS and Rite Aid have closed hundreds of stores in recent years, with Rite Aid even going bankrupt. Some reasons for this decline in the pharmacy industry are lower spending from consumers due to inflation and lower profits from pharmaceutical operations. 

• Walgreens CEO Tim Wentworth even went so far as to say “We are at a point where the current pharmacy model is not sustainable”. However, he remains positive about the future of Walgreens despite its and the industry’s ongoing issues.

An EV Partnership

• With the advent of EVs, many new automotive companies were created to capture market share in the highly competitive and innovative industry. However, many of these new companies failed, such as Fisker and Lordstown Motors. Among the new companies, there have only been a handful of successes like Tesla and BYD. Between the failures and successes lie a similarly smaller number of companies that are still struggling to achieve profitability and growth in the face of fierce competition from new and established players.  One of these struggling companies is Rivian. 

• Rivian, an EV startup founded in 2009, has been one of those struggling EV companies, losing tens of thousands per EV it sells and having lost $5.4 billion in 2023 and $6.8 billion in 2022. However, it has been given a recent lifeline as it announced a partnership with Volkswagen where Volkswagen will invest $1 billion initially and invest up to $5 billion by 2026, giving Rivian more time to cut costs and become cash flow positive.

• The partnership will also entail Volkswagen using Rivian’s electrical architecture and software, which will likely materialize in the second half of this decade in brands like Audi and Porsche. 

• This partnership is in a similar vein to Stellantis’s investment in the Chinese automaker Leap Motor, which gives Stellantis access to EV technology. In a time of increased EV competitiveness and importance, partnerships like Volkswagen’s may become more common as legacy automakers try to integrate innovative companies’ technologies and software into v their own. 

Apple Runs Afoul of Antitrust

• The European Union’s Digital Markets Act, a piece of legislation preventing major technology companies from cornering their markets passed in 2022, has found its first victim: Apple. The EU has said Apple is in violation of the DMA because Apple prevents app developers from steering consumers to alternative channels, allowing Apple to maintain control of the app marketplace. The EU added that Apple’s developer fees were “beyond what is strictly necessary”.

• Apple disputed the allegations, claiming it operates within the DMA’s guidelines because it allows developers to direct users to websites to purchase and download apps and requires fees to operate its large app platform. On top of it being regular corporate policy, Apple’s defensive disposition may also be due to the numerous changes Apple has already made to accommodate the DMA. It has allowed rival app stores to be downloaded and has lowered its fees from 30% to 17%. 

• If the EU finds that Apple is in violation of the DMA, which will be decided on March 25, 2025, then Apple may be fined up to 10% of its global revenue or around $40 billion. If this happens, then it will be a part of the larger tech regulation saga that has been growing for the last few years, especially in the EU. In this saga, Apple has already been forced to make changes and pay billions in fees. 

Amazon’s Low Cost Battle

• Amazon has traditionally been “the e-commerce giant”, but that position has been increasingly challenged in recent years by upstarts, mainly Shein and Temu. Those two Chinese companies have experienced massive growth by adopting a strategy of selling cheap products created in China and shipped directly to global consumers, particularly Americans. Their products are generally cheaper than Amazon’s because they don’t focus on delivering products quickly, saving money on fulfillment infrastructure. Additionally, they utilize a US statute that allows shipments of $800 or less to not face certain tariffs by shipping small orders to customers, avoiding the tariff and lowering costs.

• Amazon has seemingly had little to no response for the last 2 years, but it has now announced a plan to compete with Shein and Temu. Amazon plans to launch a service for low priced unbranded goods, many under $20, that will allow Chinese sellers to ship directly to US consumers. Also like Shein and Temu, Amazon will take longer, 9-11 days, to ship products, saving money related to fulfillment centers. 

• Although no date was given for this new service, it's clear that this service is intended to compete with Shein and Temu and provide another source of growth for Amazon. With Amazon’s advantage in scale and brand awareness, Amazon’s new service could displace Shein or Temu.

Future Events

A Positive Outlook

• Earlier in June, the CPI inflation figures were released, painting a positive picture of inflation slowing. Corroborating the CPI figures is the recent PCE report. PCE, which is another gauge of inflation that is actually preferred by the Federal Reserve over CPI, remained flat, not rising at all for the month. This meant a year over year rise of 2.6%, slower than April’s 2.7%. Additionally, core PCE, which excludes volatile food and energy prices, tells a similar story. It rose just 0.1% for the month and 2.6%, lower than April’s 2.8%. 

• However, while inflation has been trending down recently, the Federal Reserve likely wants to avoid the inflationary spike seen in early 2024. Thus, it is likely that interest rates will not be cut in the next FOMC meeting during July. 

• However, if the next few months of inflation data tell a similar story to May’s, then we may see an interest rate cut in September or later in the year. 

Waymo’s Driverless Taxis

• We’ve seen much usage of AI in various parts of our lives from social media to the workplace, but we may soon see AI on the streets as a major step towards such a possibility was taken earlier this week when Waymo’s driverless taxis were opened to all users in San Francisco, which will be Waymo’s second city that has access to its driverless taxis.

• This means that anyone can use one of Waymo’s 300 San Francisco taxis and trust AI with their lives, providing Waymo with more cash and training data in the process. This could help Waymo expand its operations and gain broader acceptance from the public, showcasing how it is safe across millions of miles driven. 

• However, this dream of driverless cars taking us places is likely to remain a dream as ample doubts about driverless taxis remain strong. Waymo is currently being investigated by the NHTSA for dozens of crashes and other incidents, with open doubts from news organizations and members of the public about the safety of driverless cars.

Fluctuating Valuation

• Generally, high growth companies face great volatility in their valuation, and we saw a very good example of this phenomenon this week as Nvidia’s stock entered a correction and then rebounded. 

• After briefly becoming the world’s most valuable company, Nvidia’s stock slid around 13% over the course of 3 days, losing $400 billion in market value. The cause for this? Nothing in particular. It seems that, after continual stock growth, investors sold to realize profit, which led to a correction and lower stock price. Additionally, some concerns about whether Nvidia’s growth would continue to be so momentous may have contributed to the selling and decline in share price. 

• Following this correction, the stock has risen again, increasing 6% from its low this week but still down around 9% from its peak in prior weeks. Additionally, remember that all of this volatility was the result of minute financial realities. Nvidia didn’t have disappointing earnings or lose ground in the AI race, but it still fell steeply in value, a lesson to keep in mind when investing and reflecting on the excitement of AI.

Weekly Question

Which of these countries had the highest monthly inflation in May?

• A: USA

• B: Germany

• C: China

• D: Turkey

Answer: D. Turkey’s May inflation was 3% MONTHLY. This means that Turkey is experiencing a year’s worth of inflation in a single month. Annually, Turkey has an inflation rate of 75%, a terrible situation for Turks.