The Economy’s Weekly Recap

8/11/23 - 8/18/23

Raymond Lin

This Week’s Prominent Events

The State of Streaming

• For the last few years, a hodgepodge of companies have been competing to gain market share in the streaming space. In this pursuit, most of these companies have adopted very competitive tactics to secure customers: expensive broadcasting rights and low subscription costs. This was immensely successful and more than half of American households have 4 or more streaming services.

• However, this didn’t mean these companies were profiting. They lost billion of dollars, and, compounded with an increased awareness of the necessity for financial security and returns, many companies have begun increasing the cost of their subscriptions.

• Some notable examples include…

  • Disney+ going from $6.99 to $13.99 a month

  • Apple TV+ going from $4.99 to $6.99 a month

  • Netflix going from $8.00 to $15.49 a month, albeit this one is over a much longer period than the other two

• Besides increasing prices, these streaming services have also begun cracking down on password sharing and using lower cost subscriptions with ads and higher cost ones without ads, effectively squeezing more revenue from consumers.

• These changes were a long time coming though as the question of profitability was always going to force price increases and other profit seeking measures.

Hindenburg Research

• Hindenburg Research has been in the headlines numerous times in the recent past. They search for unethical practices, financial irregularities, or a plethora of other potential issues in a company and they expose these problems to lower the company’s stock price and make money from their shorts. Hindenburg Research has been very public with its findings and have exposed a number of high profile companies and their significant problems, leading to Hindenburg’s prominence in the headlines

• Just in 2023, Hindenburg Research has gone after massive tycoons like Carl Icahn and Gautam Adani for their structural issues and possibly unethical or even illegal practices, causing their companies to lose tens of billions in valuation and likely making Hindenburg Research a tidy profit.

• Recently, on August 15, Hindenburg Research released a report on Kazakhstan based Freedom Holdings accusing them of fraudulent and illegal activity.

• Hindenburg Research says that Freedom Holdings is helping Russians evade sanctions by continuing to offer services, fabricating revenue, manipulating its stock price, and commingling customer funds.

• Furthering these accusations is the existence of a Belizean entity owned by Freedom Holdings’ CEO. Freedom Holdings’ client money flows to this entity, and this entity somehow represents 60% of Freedom’s fee and commission income

• Despite these very serious allegations, the stock price has only declined a few percentage points. But this is most likely because the founder alone owns 70% of the company.

US Consumer Resilience

• Despite inflation and numerous interest rate hikes, US retail sales have remained strong and even beat economists’ expectations. Spending on clothes, sporting goods, hobbies, books, and groceries grew this quarter. Some spending declined, but retail sales gained significantly overall. The growth is the result of recent wage growth and increased sales from Prime Day and early back to school shopping.

• This suggests that the US economy is healthy and likely to continue growing for the time being. However, this is bad news for those concerned about more rate hikes. If the economy is growing, and inflation stays above the Federal Reserve's target, rate hikes are likely to follow.

• When considering this data alongside the uptick in inflation recently, rate hikes look very plausible in the near future.

VinFast’s IPO

• Vinfast, a burgeoning Vietnamese EV company, recently listed on the Nasdaq via SPAC, which is a shell company that raises capital on the stock market and then buys a private company to make it public.

• On its first day, the stock rose 270%. Following this debut, the Vietnamese company was worth $85 billion, greater than GM, BMW, Ford, and Volkswagen.

• This valuation is in spite of the fact that the company has only sold 24,000 cars globally in 2022. For reference, Volkswagen sold 8.3 million. Furthermore, it seems VinFast’s cars are not outstanding or particularly good as they received a poor critical reception.

• However, there are more factors beyond investor EV hype influencing the stock price. VinFast is a part of the larger VinGroup. VinGroup is a large Vietnamese conglomerate that has hospitals, a schooling system, a college, an amusement park, and an EV company now.

• VinFast’s factory in North Carolina appears to be a sign that they are serious about expansion, but how it will be done is up in the air. When asked about how VinFast plans to complete with more established competitors, their CEO said ″[With] the whole world and U.S. in particular moving from internal combustion engines to EVs, there’s room for everybody.”

Kroger’s Acquisition

• A few months ago, Kroger announced an acquisition of Albertsons for $24.6 billion. Kroger has 9.9% market share in the US Grocery space while Albertsons has 5.2%. Together, they would be able to better challenge the massive and still growing giant Walmart, which sits at 22.3% market share and experiences strong growth.

• However, Kroger has recently met some challenges in completing this acquisition. Seven states have urged the FTC to block the acquisition. They believe that “[t]his corporate merger will put an even larger strain on American families who are already struggling to pay the bills and keep food on the table” and “[the] [g]overnment must stand up to corporate greed”

• Kroger has retaliated that the deal will bring about lower prices, more choices in more communities, and high wages and benefits for workers.

• The acquisition is also being probed by California’s attorney general's office about whether it will make buying medicine harder for people in rural areas and poor areas of cities.

Upcoming Events

A Once in a Generation Investment

• Approximately one year ago, the Inflation Reduction Act(IRA) came into effect. It promised to be a once in a life investment into renewable energy and other pertinent areas. One year on, we have begun to see its successes and the rapid adoption of renewable energy.

• The IRA has provided many poorer communities with economic opportunities, helping revitalize economically destitute areas.

• It has also provided funding and incentives to a number of investments into EV and EV battery production that will strengthen domestic supply chains.

• The IRA has helped make renewable energy less partisan. Thanks to financial incentives stemming from the IRA, two-thirds of investments into clean energy are in Republican states like Alabama and Texas. This means a concerted effort from people across the aisle that has helped increase the extent of renewable projects and improve our environment.

• Its exact environmental impact is difficult to measure but we can look at the overall status of renewable energy globally and over time as a surrogate to see its success.

  • Renewables are expected to overtake coal as the largest generator of global electricity by 2025.

  • In the US, renewable energy has gone from 13% of electricity to 23% in the last decade, which means it increased about 76%

  • The sharp increase of solar and wind electricity generation recently.

Arm IPO

• Arm, a chip designing company that makes chip blueprints for customers like Apple, Samsung, and Qualcomm, is going public for a valuation of between $60 to $70 billion. It could be one of 2023’s biggest IPOs and could raise up to $10 billion for Arm.

• It was purchased by Softbank in 2016 for $31 billion, meaning that the chip designer’s valuation would have doubled if the IPO goes through successfully.

• However, Arm’s story is not all rosy. Its business model is under attack as its own customers begin to make their own cores for chips and only pay arm for architectural licenses, which could lower Arm’s revenue significantly in the future.

• In an effort to prevent this decline, Amazon and a number of other Arm customers have been courted about purchasing a stake in Arm to stabilize the stock price and to give them a vested interest in Arm.

China’s Decreasing Importance

• As mentioned in last week’s Phi Fiscal, trade has been deteriorating between China and the US because of geopolitical conflicts. A number of actions, including bans, tariffs, export controls, and restrictions, were used as a part of the trade war.

• The results of this trade war were analyzed by the Wall Street Journal, showing how the US and China are moving away from each other. Some of the most interesting facts are

  • China’s share of US imports declining from 21.6% in 2017 to 13.3% so far this year. Mexico’s share of US imports in June matched China’s.

  • China being the third largest US trading partner. Mexico is first at 15.7% while Canada is second at 15.4%. China is third at just 10.9%.

  • China’s share of US apparel imports declining from 40.4% in June 2017 to 25.9% this June.

  • US imports of Chinese electronics declining $13.4 dollars for the last 12 months YoY.

Weekly Question

Which of the following has the smallest economy?

• A: Italy

• B: Japan

• C: Brazil

• D: Canada

Answer: C. Brazil has a GDP of $1.9 trillion, slightly smaller than Canada and Italy’s $2.1 trillion and $2.0 trillion respectively. However, all of them are dwarfed by Japan’s $4.2 trillion.