The Economy’s Weekly Recap

6/28/24 - 7/5/24

Raymond Lin

Apologies for the delay in this week’s Phi Fiscal. Due to recent travel, the author was unable to write Phi Fiscal. However, this week’s edition is still as accurate and informative as any other, even if it may be less timely. - Raymond Lin

This Week’s Prominent Events

Tesla’s Delivery Resurgence

• In recent months, Tesla has experienced a spell of bad news as headlines about its shareholders fighting about compensation packages, fierce competition in China, and falling sales dragged its share price down significantly. Additionally, Tesla’s lack of public involvement with the generative AI boom helping companies like Nvidia, Microsoft, and Alphabet has led some to become disillusioned with Tesla. 

• However, Tesla’s recent delivery figures for Q2 offer some hope as Tesla delivered almost 444,000 in Q2 2024, up 14% from Q1 but still down 5% from Q2 2023. This higher than expected delivery figure insinuates positive sales and growth for Tesla, which has been lowering prices and offering low interest loans for its vehicles to spur demand. 

• In response to this news, as well as excitement about Tesla’s robotaxi ventures, Tesla’s stock rose tremendously, rising 26% in the last week and adding hundreds of billions to its valuation. However, this set of positive news should be considered in context to mellow out positive hype.

• Year to date, Tesla is only up 1%, far lower than most of its peers and especially low compared to AI involved companies. Additionally, other automotive companies reported similar success. While Tesla’s sales dropped 5% from last year, GM’s sales rose 1%, Toyota’s sales rose 9%, and BYD’s sales rose 21%. Compared to many of its peers, especially Chinese companies, Tesla’s resurgence is standard if not disappointing and just part of a larger trend. 

• However, Tesla’s sales figures are still good news. When combined with the possible benefits of the launch of robotaxis and the new Chinese EV tariffs, Tesla may stand to benefit and appreciably grow its sales. 

A Luxury Acquisition

• Since the advent of e-commerce, many retailers have struggled in the face of cheaper and more convenient online alternatives, with Macy’s downsizing and Neiman Marcus’ bankruptcy serving as clear examples. 

• However, some retailers have fared slightly better, managing to engage consumers and avoid severe downsizing or bankruptcy. One example, although it has also faced its own financial issues, is the retail conglomerate HBC, which owns Saks Fifth Avenue, Saks Off Fifth, and Hudson's Bay. 

• This week, HBC took a step towards consolidating its position in the luxury industry by acquiring Neiman Marcus for $2.65 billion. This new entity would have 75 stores and 100 off-price outlets. In addition to cost efficiencies and larger operations, this larger retail entity would give the firm greater negotiating power with brands. 

• An interesting helper in this acquisition is Amazon, which invested in the merger to “innovate on behalf of customers and brands”. Given Amazon’s previous ventures with clothing stores, this investment may be a sign that Amazon is still interested in expanding its role in retail in the near future. 

• Despite these positive signs for the retail industry, the FTC may spoil excitement as, while it has yet to take action, the FTC did move to block another acquisition in the retail industry a few months ago between Tapestry and Capri.

The Revival of a $10 Billion Lawsuit

• Earlier this week, a US appeals court rejected the dismissal of a $10 billion antitrust lawsuit against 10 banks, such as Bank of America, JP Morgan Chase, Wells Fargo, and others, on the grounds that the judge that dismissed the case had a conflict of interest because his wife owned up to $15,000 in one of the defendants of the case.

• The lawsuit in question was one where bondholders accused big banks of overcharging more than $10 billion for corporate bonds, but the 2020 dismissal of the case killed the lawsuit. However, with its revival, the lawsuit is back and could go to court. 

• Even then, the case’s status and monetary value are uncertain. The more interesting part of the lawsuit is how it relates to a wider issue with the judicial system. This case is part of a wider investigation into judicial ethics by the WSJ, where the WSJ found that, since 2010, more than 130 federal judges had violated federal law by overseeing cases where they or their families held stock.

• This question of a conflict of interest raises questions about other rulings, such as if a judge held stock in a competitor to a defendant. Such cases are certainly concerning, even if not directly related to finance. 

Boeing’s $8.3 billion Reintegration

• In 2005, Boeing spun off Sprint Aerosystems to lower costs, which became a major supplier of commercial and defense airplane parts. Over time, Sprint began to diversify away from Boeing, serving major competitors in the defense industry like Northrop Grumman and Lockheed Martin while still playing a major role in supplying commercial aircraft.

• However, following recent disasters in quality control and public outcry, such as the Alaska Airlines fiasco, Boeing has been trying to fix its broken operations and has decided to acquire Sprint for $8.3 billion when including equity and debt to reintegrate its supply chain and quality control. The hope is that, by directly controlling its suppliers, Boeing can better root out issues like improperly drilled holes and misaligned fuselage panels. 

• Another upside of the deal is that it’s unlikely to face regulatory oversight since Sprint’s European operations are being acquired by Airbus. Additionally, fixing Boeing’s issues may be of more importance to the government than opposing the acquisition for antitrust reasons. 

• While Boeing’s situation is still unenviable, reintegrating Sprint may be the first step to repairing its operations and reputation. 

Battle of DEI

• DEI, ESG, CSR, whatever you call it, the ideals of inclusion and social uplift have permeated the business community, but not without backlash. Many conservative groups have attacked these ideas and measures related to them for being corrosive to shareholders or generally unfit, calling for boycotts and public admonishment. 

• One company that faced these pressures and bowed to them is Tractor Supply. Tractor Supply, a major supplier of farm equipment and other supplies with over 2,200 stores in rural areas, eliminated all of its DEI operations. It removed its DEI roles, ended sponsorship of activities like Pride festivals, and withdrew carbon emissions goals, caving to conservative opponents. 

• While some rejoiced, other customers were disappointed, such as the National Black Farmers Association. Its President John Boyd Jr. said “I was appalled by the decision” and the NBFA is now calling for Tractor Supply’s CEO to resign. 

• However, the direct impact on Tractor Supply due to the end of DEI and progressive backlash is uncertain, with analysts not believing it will move the needle of the company’s valuation significantly. 

Future Events

EU’s Antitrust Enthusiasm 

• After charging Apple with violating the Digital Markets Act, the EU is back at it, accusing Meta of also violating the DMA. To give a summary, the DMA is a piece of European legislation that regulates big tech companies and prevents them from exploiting their dominant position. If companies violate the DMA, they can be fined up to 10% of global income, or $13.5 billion for Meta.

• One important aspect of the DMA is data privacy, and Meta in prior months tried adhering to data privacy by offering two versions of its popular services: one €13 a month version without advertising that does not collect data and the normal version that does have ads but is free. 

• However, the EU has said that this solution by Meta is a binary option that leads to pay or consent, which the EU believes is in breach of the DMA because it forces users to pay for privacy. 

• Meta has responded by saying that the subscription model is standard and a fair alternative that complies with the EU’s DMA. Meta’s President of Global Affairs Nick Clegg added that the EU was overregulating companies “making companies hesitant to roll out new products”, leading to economic stagnation. 

Google’s Growing Emissions

• In the past, Google announced that it had a goal of reaching net zero emissions by 2030. While it is still committed to that goal, Google now says it is “extremely ambitious”. The reason? AI.

• AI is costly to run and develop, resulting in Google spending billions on research and building AI data centers. This has led to increased electricity usage for AI, worsening Google’s emissions. 

• Additionally, while an ordinary Google search requires 0.3 watts on average, a ChatGPT request uses 2.9 watts, almost 10 times as much, showing how AI usage is broadly much more energy and emissions intensive than normal searches. 

• As a result, emissions have skyrocketed. Google’s emissions have increased 48% from 2019 due mostly to data centers, which are used for AI. From 2023, it increased 13% while data center electricity consumption increased 17%. Microsoft has fared similarly poorly, with emissions increasing 30% since 2020.

• Given that many companies have or plan to integrate AI into their operations, it’s likely AI usage and emissions will grow extensively in the near future, posing a serious threat to environmental goals. 

June’s Jobs Report

• With positive news about May’s CPI and PCE inflation last month, it’ll be exciting to see whether June’s inflation will similarly decrease and increase the likelihood of interest rate cuts this year. Until those figures come out in the coming weeks though, there is another useful piece of data to look at when it comes to the health of the economy and interest rates: employment.

• In June, some important employment data points were…

  • The addition of 206,000 jobs, higher than expectations of around 200,000 but still lower than May’s 218,000.

  • Unemployment increasing to 4.1%, a historic low but the highest rate since October 2021.

  • The labor force participation rate, which is the percentage of working age people who have or are looking for work, increased 0.1% to 62.6%. 

  • Wages increasing 0.3% monthly and 3.9% yearly, the slowest yearly wage growth since 2021. 

  • Long term unemployment increasing 166,000 to 1.5 million.

• These figures show that the labor market is continuing to slow as jobs added and wage growth slows while unemployment ticks up. Although this may be bad news for workers and the economy, it is good news for inflation. A weaker labor market and slower wage growth should lead to slower inflation in the coming months, which could lead to the resolution of the issue plaguing Americans since 2022. Additionally, it could lead to interest rate cuts in the future, possibly as soon as September, which would help the economy. 

Weekly Question

Besides Tesla, what is the most valuable automotive company?

• A: BMW

• B: BYD

• C: Stellantis

• D: Ferrari

Answer: B. BYD is valued at around $95 billion, third place behind Toyota and Tesla. However, it is far ahead of many of its peers by valuation, due in part to its rapid growth and position in the Chinese market.