🎙️ Debt Danger

🤔 Quick: What’s the best performer of the past 30 years?

The Everything Store. A $10,000 investment in Amazon in spring 1994 would be worth about $24 million today after compounding 33.6% annually. But you would have had to endure dozens of nasty downturns, including one 90%-plus drop when the tech bubble burst.

Check out the chart below to see how other great companies like Monster Beverage, Nvidia, Apple, Netflix, and Copart stack up.

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• GE completes split into 3 public companies

• A million simulations, one verdict

This, and more, in just 5 minutes to read.

Chart(s) of the Day

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In The News

👀 GE Completes Its Dissolution

With time, all great things shall pass. For General Electric, time took 132 years, but it, too, has passed.

Once one of America’s most prolifically innovative companies, embodying American excellence in 20th-century manufacturing and even tracing its roots to Thomas Edison, General Electric has been officially split into three companies as of Tuesday.

The independent spin-offs are:

• The energy business, GE Vernova, trading under the ticker GEV, is valued at around $35 billion. General Electric shareholders will receive one GEV share for every GE share.
  

• The aerospace business, GE Aerospace, trading under the classic ticker GE, is valued at over $150 billion.
  

• GE HealthCare, already a standalone company worth $40.5 billion after splitting in 2023, trades under the ticker GEHC.

Why it matters:

Debate over General Electric’s fatal prognosis will rage for decades, not only due to the company’s economic importance—once the most valuable business on earth—but also its symbolic importance, especially after Jack Welch, who led GE between 1981 and 2001, became the “fist celebrity CEO,” according to NPR.

Despite being the object of “a certain amount of CEO worship” during his time at GE, as NYT correspondent David Gelles put it, Welch has since been dubbed “The Man Who Broke Capitalism.”

• One of his more notorious practices was assembling an annual ranking of employees and firing the bottom 10% each year. In his first few years, he conducted over 100,000 mass layoffs, spurring accusations that Welch “gutted the heartland” and crushed “the soul of corporate America.”
  

• These are strong words, though many see Welch as a driving force behind the collapse in labor-union participation across the country beginning in the ‘80s.

Welch’s legacy: While his tactics were long praised in business school case studies, his efforts in hindsight seem more like financial manipulation, massaging short-term earnings to hide structural challenges.

• In other instances, not only were financials being manipulated, but initiatives were entirely unsustainable, such as GE’s focus on subprime mortgages, which was a great money maker — until the 2008 Financial Crisis hit.
  

• While Welch’s approach boosted GE’s stock, the company’s brewing vulnerabilities only became clear after his exit. Says Gelles, “When he leaves, all of these flaws are fundamentally exposed and Wall Street starts seeing through the charade” of optimizing for short-term profits.

Despite officially being disbanded now, you might say GE died in 2018, when the company was removed from America’s iconic blue-chip Dow Jones Industrial Average—it was one of the first to join the index and was the last of its original constituents to be withdrawn.

Read more

More Headlines

📉 Mentions of DEI plummet in quarterly earnings calls

💸 U.S. households’ net worth hits over $156 trillion

🔋 Tesla shares fall after vehicle deliveries dropped more than 8% from last year

💬 Using AI to set prices can be a form of price-fixing, argues FTC and DOJ

📺 Why streamers are shrinking their content libraries

🫴 New Jersey store donates $30k lottery ticket commissions to charity

⚠️ U.S. Government Debt Risk: Danger Ahead

Folks, we may have a debt problem.

Bloomberg Economics ran a million forecast simulations on the U.S. debt outlook — 88% of which show borrowing on an unsustainable path, which poses economic, national security, and social challenges if not addressed.

A big burden: A new report from the Congressional Budget Office (CBO) warned that U.S. federal government debt is on a path from 97% of GDP last year to 116% by 2034, higher than it was during World War II. 

• But the CBO paints a rosy picture. Bloomberg analysis found that the more likely scenario is a debt-to-GDP ratio that rises to 123% in 2024. Should ex-President Donald Trump’s tax cuts (mostly) stay put, the burden could be much higher.
  

• The Biden Administration says its budget, with tax hikes on big companies and wealthy Americans, will ensure fiscal sustainability and manageable debt-servicing costs. 

Bridge the divide? Biden administration proposals offer “substantial deficit reduction that would continue to hold the level of interest expense at comfortable levels. But we would need to work together to try to achieve those savings,” Treasury Secretary Janet Yellen said in February. 

But that plan would require action from a divided Congress. It’s a long shot: Republicans, who control the House, want deep spending cuts to reduce the ballooning deficit, while Democrats — who oversee the Senate — say spending is less of a factor in unsustainable debt. They say interest rates and tax revenues are more important. 

Why it matters:

What does this all mean? Potentially a crisis. 

Economists say it could be a rout in the Treasuries market because of sovereign U.S. credit rating downgrades, or “a panic over the depletion of the Medicare or Social Security trust funds” to spark real action. 

The potential consequence? Soaring yields. But more important, the U.S. dollar’s central role in international finance would be at stake. 

• Undoubtedly, it would take a big crisis to “shake investor confidence in U.S. Treasury debt as the ultimate safe asset,” one economist observed, but the dollar’s fall from the top could be a watershed moment — the U.S. would likely lose its access to cheap financing, plus its power and prestige. 

Bloomberg’s report this week concluded on an ominous note:

“Herbert Stein – head of the Council of Economic Advisers in the 1970s – observed that ‘if something cannot go on forever, it will stop.’ If the US doesn’t get its fiscal house in order, a future U.S. president will have the truth of that maxim confirmed. And if confidence in the world’s safe asset evaporates, everyone will suffer the consequences.”

Read more

Quick Poll

Yesterday, we asked: Do you use Twitter/X more or less after Elon Musk's takeover?

— Said one reader who never uses Twitter/X, “I do not believe the extremely abbreviated way people communicate on Twitter is healthy for society.”

— On team more, “I didn't even use it prior to Elon taking over. I thought the content was far too curated.”

— On team less, “Just less good content to view means I spend less time on it. Simple but sad reality.”

— Also on team less, “Really I'm only still on there because that's where sports communities still largely remain, especially in more niche media markets. But even that isn't drawing me in too regularly, just if there is a big, fast breaking story in one of my sports…Once the sports media is gone or finds a new primary or even secondary home I'm out because even in sports, the pay to play model of post boosting is making the comments section uninteresting at best and spam filled at worst.”

See you next time!

That's it for today on We Study Markets!

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