The Economy’s Weekly Recap

5/31/24 - 6/7/24

Raymond Lin

Apologies for the delayed post. The software used for the Phi Fiscal newsletter has restrictions, so this week’s newsletter was unfortunately postponed.

This Week’s Prominent Events

Texas’ New Stock Exchange

• In the past, the US had many regional stock exchanges. But in recent decades, they have been acquired or shut down, resulting in just two major stock exchanges persisting in the US: the New York Stock Exchange and Nasdaq. There are some minor stock exchanges, such as IEX and Cboe Global Markets, but they have little market share and no attention among most investors.

• Despite the prominence of this duopoly, there has been some pushback and dissatisfaction in recent times. Some companies have been dissatisfied with the high cost of accessing trading data and the regulations regarding corporate governance and board diversity. The latter issue has become particularly politicized as more conservative companies and investors have fixated on those regulations as overreaching and unfit.

• Due to these factors and attitudes, the TXSE Group has raised $120 million from investors including BlackRock and Citadel Securities, to set up a Texan stock exchange. TXSE plans to file for registration in 2024, with goals of executing trades in 2025 and hosting listings in 2026. The exchange will be more “CEO-friendly” by having fewer regulations, but the founder and CEO James Lee has said the stock exchange will be apolitical.

• While the success of this exchange is still uncertain, it is certainly emblematic of Texas’s rising status as a major hub of innovation and finance recently. Texas is tied with New York as the state with the second most Fortune 500 companies. Additionally, Tesla and HPE have moved their headquarters to Texas, joining companies like American Airlines, AT&T,  and Exxon Mobil, which have been in Texas for decades. Goldman Sachs started building a Dallas campus in 2023 for more than 5,000 employees while JPMorgan has more employees in Texas than New York. 

Nvidia’s New AI Chips

• The AI boom has been very favorable to Nvidia, which has seen its revenue, profits, and stock price grow extensively recently. In fact, it recently became the second most valuable company in the world, beating companies like Apple, Saudi Aramco, Alphabet, Tesla, etc.

• In addition to the astounding growth it's already seen and the general excitement around AI, another reason for its seemingly continually rising stock price is its rapid rate of innovation. 

• One such example is Nvidia’s announcement on Monday of the new Rubin AI chips. Although few details were given, the fact that Nvidia is developing new AI chips just a few months after announcing their Blackwell line of chips in March highlights Nvidia’s innovative prowess. CEO Jensen Huang has also said that Nvidia will operate on a 12-month cadence for chips, constantly developing new chips. 

• With this rate of progress, it is easy to see why Nvidia has a dominant position in the AI processor market and why investors have been so excited about Nvidia, with the stock split likely to encourage more fervor among retail investors. 

Another Day, Another Disappointing Jobs Report

• As the title suggests, the May jobs report was quite disappointing in the sense that it far exceeded expectations. In May, 272,000 jobs were added, much higher than expectations of 190,000 and last month’s 175,000. Additionally, wage growth rose 4.1% year over year, higher than inflation. 

• The main areas that saw jobs added were…

  • Education and Health, which saw 86,000 jobs added

  • Government, which saw 43,000 jobs added

  • Leisure and Hospitality, which saw 42,000 jobs added

  • Business Services, which saw 33,000 jobs added

  • Construction, which saw 21,000 jobs added

• The problem with these figures, even though workers and the general economy are benefiting from them, is that they reinforce the inflationary environment we are in. 

• If many jobs are being added and wage growth is strong, inflation is a likely result as workers have more to spend. As a result, prices could continue to rise and inflation could persist for longer. Additionally, this would discourage the Federal Reserve from cutting interest rates, disappointing the many investors and companies that have been looking forward to the cuts. 

• However, the job market is only one aspect of the economy. With Q1’s sluggish 1.3% growth and the number of open jobs declining, it's possible, although still uncertain, that economic growth and inflation could continue to slow over the next few months, prompting rate cuts.

Elections and Economics

• Politics is generally not mentioned in Phi Fiscal for very good reasons, but politics often spills over into finance and economics. One recent example has been with elections in two major economies: Mexico and India. 

• In Mexico, the Morena party is on track to win a supermajority with President elect Claudia Sheinbaum replacing current president and founder of Morena Andrés Manuel López Obrador. Following this news, Mexican markets responded quite poorly, with the Peso falling around 4% and the Mexican stock market diving 6%. Investors felt this apprehensive because this massive electoral win for Morena means that López Obrador’s constitutional changes regarding the elimination of independent oversight agencies and stricter regulation on private investment are now very likely to pass. Additionally, it means López Obrador’s plan to ban industrial sites in water sensitive areas, which is most of the economically wealthy north of Mexico, could be enacted. 

• In India, the ruling Bharatiya Janata Party(BJP) did worse than expected in elections, failing to secure a majority but still winning a plurality. This means that the BJP will have to form a coalition government, which will limit its ability to pass economically beneficial changes that some were hoping for. This led to the Indian Rupee falling 0.5% against the dollar, the largest drop in 16 months, and the Indian stock market falling 6%. 

• What these two elections demonstrate is that the financial world is very intertwined with politics, especially when it comes to things like regulation and climate policy. With the US election coming up in November, it’ll be an election with great economic importance that Phi Fiscal will be sure to cover. 

Retail Shenanigans

• A few weeks after GameStop champion Keith Gill, also known as Roaring Kitty or Deep F****** Value, reentered the public eye by returning to his social media accounts, he has once again been in headlines due to the excitement and then disappointment surrounding GameStop. 

• Gill’s X post a few weeks ago sparked excitement among retail investors as it featured a meme of a man leaning forward in his chair, suggesting that things were getting serious. This helped trigger a GameStop rally, although nothing like the original, that saw GameStop stock rise 158% over the last month and 53% from Monday to Thursday. 

• However, on Friday, things took a turn for the worse for investors. It started hopefully, with Gill hosting a YouTube stream that had more than 600,000 viewers watching. The livestream only lasted 50 minutes and was mainly positive, although Gill advised viewers to do their own due diligence. This now seems to be a very astute disclaimer as GameStop released its earnings while the stream was happening, revealing Q1 sales had dropped from $1.2 billion in 2023 to just $0.9 billion in 2024. GameStop also filed paperwork to sell more shares, further disappointing investors.

• This led to a rout in the stock, with it falling 40% by the time the stream ended and 54% by the end of the day. Along the way, the New York Stock Exchange paused GameStop trading more than 15 times. What this saga demonstrates is that the retail investor conviction remains strong, although it seems to sometimes be built on faulty hopes.

Future Events

Global Rate Cuts

• While Phi Fiscal has extensively covered the US struggle combating inflation and raising/cutting interest rates, other countries’ experiences have often been neglected. So, this story will be dedicated to covering some actions by other countries regarding their interest rates. 

• Among wealthy economies, there have been 4 rate cuts this year: Switzerland, Sweden, Canada, and the EU, with Canada and the EU doing so this week. All of them have only cut rates once, amounting to a 0.25% decrease in interest rates in those countries. As a result, they went from…

  • 1.75% to 1.5% in Switzerland 

  • 4% to 3.75% in Sweden

  • 5% to 4.75% in Canada

  • 4% to 3.75% in the EU

• So, given that other central banks have begun cutting interest rates, can we expect the US to follow suit? Well, if you’ve been reading Phi Fiscal, then you already know the answer: No. 

• The US is in a different economic situation than other countries. Several of those countries face issues regarding economic growth and debt, which cutting interest rates can help resolve. Thus, even if lower interest rates can spark inflation, the potential economic upside is more important for those countries. However, in the US, economic growth has remained strong, leaving inflation as target #1 above economic growth. 

• Perhaps if US economic growth continues to slow or if US inflation decreases in the next few months, a rate cut will be likely. Otherwise, one should keep waiting. 

Climate Change Today

• Every passing year, the issue of climate change worsens slightly, and the effects are already apparent. Take, for example, the recent heat dome in the South West. There, 20 million people are being affected by extremely high temperatures. These high temperatures were caused by a heat dome, which is when hot air clumps in an area with high pressure that prevents the air from rising. 

• But how are they related to climate change? Isn’t this “heat dome” a natural event? Well, yes. Heat domes are natural and so are their high temperatures. However, they have been exacerbated by climate change, which has raised global temperatures and made higher temperatures more common. 

• To see this, one only needs to look at some of the data from the heat dome, such as…

  • Death Valley breaking a daily temperature record from 1996 with a high of 122 degrees.

  • Las Vegas reaching 111 degrees, the earliest the city has ever reached the mark

• On top of the toll on human life, six of which have been claimed by the heat dome, the heat dome inhibits outdoor work and makes fighting fires much harder. In summary, these heat domes serve as a reminder of the gargantuan task of facing climate change and its impotence.

AI Antitrust

• The explosive growth of AI has left many stunned, including ordinary people, investors, and the government. The last of these has particularly struggled due to its polarization, bureaucracy, and unfamiliarity with AI. However, while the legislative branch remains idle, it seems some parts of the government have begun taking serious action against AI companies. 

• According to people familiar with the topic, the Department of Justice(DOJ) and Federal Trade Commission(FTC) have reached an agreement over what companies they will pursue for antitrust action, The DOJ will be investigating whether Nvidia has violated antitrust laws, particularly regarding chip-supply agreements, while the FTC will be investigating ChatGPT creator OpenAI and Microsoft. 

• Not many details have come out yet as the investigations have just begun, but they will be interesting and important to review if they develop into antitrust lawsuits, especially in Microsoft’s case. Microsoft, which has poured billions into a special relationship with OpenAI and which has previously skirted antitrust review via a unique acquisition deal, may be of particular relevance to these antitrust issues, raising the possibility of Microsoft once again facing major antitrust issues.

Weekly Question

True or False: The Francis Scott Key Bridge, which collapsed a few months ago, has been rebuilt. 

Answer: False. It has yet to be rebuilt, but the Port of Baltimore is expected to be opened in the next week as the debris is almost completely removed.