Monthly Market Debrief

Market Snapshot

*We are rewriting how we report the CPI and Unemployment numbers to make it more clear. These numbers will always be a month behind since the previous month’s report drops between the 10th and 15th of the following month.

Well, the Fed cut interest rates by a whopping 50 points (.5%) last month. Jerome Powell called me the morning of and said, “Wilson, I hear what you are saying, but I really think it is time to make a big shift. Trust me, buddy.” The numbers don’t lie; markets loved this shift. Now, time will tell if interest rates keep coming down.

Google was too busy fighting off lawsuits to celebrate the interest rate change. In August, a judge determined Google held a monopoly on the search world. In September, the justice department filed another anit-trust lawsuit focused on Google’s advertising business. The government claims Google controls every aspect of the market for the traditional “.com” internet, and they have a strong case. Based on opening statements, it seems Google plans to redirect the argument to highlight that social media now competes directly with Google in digital advertisement. The “.com” internet isn’t as important with social media and therefore, their alleged (but totally real) monopoly isn’t a monopoly. It will be an interesting battle that’ll surely take many years.

Company Highlight - Intel

Intel Corporation is the grandfather of the modern semiconductor industry. It is difficult to overstate their role in defining this industry. Gordon Moore, co-founder, is the theorist behind Moore’s Law. Founded in 1968, Intel has pioneered both the design and manufacturing of the semiconductors used in personal computers. You couldn’t turn the TV on in 2010 without hearing a computer commercial that ended with “powered by Intel XX processor.” Since 2021, Intel has struggled to retain market value with AI, large data centers, and hyper-focused competition.

AI and data centers both use different semiconductors to operate. Intel dominates the personal computer world and has seen their share of the semiconductor industry shrink as other titans rise. 

Intel is one of the few remaining companies that designs and produces their microchips. NVIDIA, ARM, and AMD, to name a few, all design chips but use TSMC (and others) to produce the chips. This allows companies to focus all efforts on one aspect of the supply chain. The production of semiconductors is insanely difficult. The machines building these chips are so precise, they carve details smaller than 5 nanometers. For reference, a strand of DNA is only 2.5 nanometers wide.

By letting TSMC focus on the difficult part, NVIDIA rakes in profit by designing the chips. Intel still does both. 

Since April 2021, Intel is down over 65%. Intel has some big plans to turn this around including taking $8.5 billion from the US government to build multiple new plants in the United States.

Qualcomm, another semiconductor company, sees the potential in Intel. This month, the WSJ reported that Qualcomm approached Intel about a potential takeover deal. Intel shares shot up on the report while Qualcomm shares dove. The union would allow Qualcomm to manufacture its own chips and bring more design expertise into Intel. The alleged talks have a long way to go with the first hurdle being an actual offer. Then, they will have to fight off the likely challenges from the US and Chinese governments over anti-trust and national security concerns.

Intel may be a tragic story of a company that got complacent and failed to innovate, or they may reorganize, trim the fat, and get back on top. Personal computers are not going anywhere. Maybe they will design the premier augmented reality or metaverse chips. Who knows. Don’t count them out just yet.

Current Event - Chinese Economic Stimulus

Since COVID, China’s economy has lagged behind expectations, largely fueled by a failing property sector. The insane, government subsidized property growth led to millions of square feet unsold when the country shut down in 2020. The property sector in China accounts for 25-30% of their GDP which far exceeds the US and Europe which is closer to 15-18%. Even with massive property developers defaulting in 2021, China has yet to find the bottom for the property sector which is pulling the entire economy down.

A dropping property sector plus lagging consumer spending may lead to China missing its 5% growth expectations. For a developing economy that usually posts Shaq sized growth numbers, sub 5% has President Xi stepping in. 

On Friday, September 27th, China announced a suite of stimulus announcements. The central bank lowered interest rates (copy cats), the government plans to issue 2 trillion yuan in bonds, and several cities will lift restrictions on property purchases. The goal is to spur activity in the housing market and stop the bleeding.

To encourage consumer spending, the PRC announced a new stimulus plan that is equally as shocking as Italy switching sides in World War II. China will provide a monthly allowance of 800 yuan or $114 per child to houses with two or more children. From a one child policy in 2016 to rewarding large families in 2024, China is trying to tackle current low consumer spending and a long term population crisis with one stimulus package. Impressive combo, Xi. 

All of this is on top of trade tides shifting against China’s main economic driver, massive exports. Nations all over the world have implemented or are planning to implement tariffs on cheap Chinese goods. Since the Chinese government subsidies production until they dominate the market, the US and EU have responded with tariffs to “level the playing field.” The EV market is where this is most obvious. Chinese production increased so rapidly that China could face a 20 million EV surplus if planned tariffs remain in place and consumer spending doesn’t pick up. 

All that to say, China has a rough road ahead to hit 5% growth this year. This stimulus package, however, was well received with the Chinese stock market soaring 17%.

Quick aside on tariffs

Tariffs are 100% a tax on US consumers. Whether or not they are a useful tool to support economic development and long term, strategic planning is a different discussion. 

Trump likes to say, “It’s not a tax on the middle class. It’s a tax on another country.” That is like shooting someone in the chest who is wearing an ugly shirt and saying, “I didn’t shoot you. I shot your ugly shirt.”

Tariffs might literally be paid for by the foreign government, but they are immediately passed on to the consumer.

Let’s say a Chinese wire hanger retails at $1 and a US hanger retails at $2. To “level the playing field,” the US imposes a 100% tariff on Chinese wire hangers. The Chinese maker now has to pay $1 more per hanger. They increase the price by $1. The US consumer now has to pay $2 for a hanger they could have purchased for $1.

Multiple reports have confirmed that not only were the Trump era tariffs almost completely passed through into domestic prices, but domestic producers increased prices with the reduced import competition!

For the record, Biden has kept or increased the Trump administration’s taxes. I just used Trump’s quote because I haven’t heard Biden saying something so blatantly wrong about tariffs. Then again, I haven’t heard Biden speak at all recently…

What we are listening to:

China, an Alabama business man and a 20 year battle. Were you confused by my oddly specific use of hangers to describe tariffs? That may or may not have been influenced by real life events. By that I mean, it was 100% based on this podcast I listened to this morning. 18 minutes of riveting tariff law over wire hangers. 11/10 would recommend.

Debrief on Deck

Next week, Mike talks about tracking your net worth. Which is good and all, but I want to see an analysis of what happens to someone’s golf handicap as their net worth increases or decreases. There has to be a correlation between the two, right?