🎙️ Drip Pricing

“Hawkish skip.” One example of Wall Street’s endless jargon.

What does that mean? It references the Fed’s decision to “skip” an interest rate hike at its June meeting, where it warned that a stronger-than-expected economy might keep inflation high.

💭 Why not keep raising rates, then?

While Fed officials punted on a decision, their outlook suggested two more hikes later this year, making it a “hawkish skip” (hawkish, as in aggressively fighting inflation.)

Ex-Treasury Secretary Larry Summers thinks central bank tensions are brewing: “This meeting felt like it was driven as much by the internal political dynamics of the Fed as by any consistent and coherent reading of the economic situation,” which he called “disturbing” 👀

— Shawn

Here’s the rundown:

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

• The psychology behind pricing and hidden fees

• Quantifying AI’s impact on the economy and stock market

• Intel’s big investment in Europe

All this, and more, in just 5 minutes to read.

CHART OF THE DAY

IN THE NEWS

💲 The Real Reason For All Those Hidden Fees (WSJ)

The dreaded add-on fee is all too familiar. Concert tickets, restaurants, hotels, food delivery, even coffee — we're shown one price, then find ourselves paying a much higher price at checkout. Why?

• Four experiments illustrate why "drip pricing" effectively gets consumers to pay. The conclusion: Consumers themselves are to blame. Said one marketing professor: "Even when we know the fees are coming, we underestimate their magnitude."

For starters, rarely is sales tax included with the sticker price. Psychologically, it makes sense: An economist's 2009 paper found that consumers "punish" that price transparency.

• At a grocery store, for example, the study found that sales volume fell 8% for products with price tags that included the tax. So, consumers know sales tax is coming, but it's just that the transparent reminders turn some people off.

In 2013, StubHub, which resells event tickets, attempted to do away with hidden fees, citing research about how hated they are.

• But the strategy failed to boost business. Later, StubHub did an experiment where half of the shoppers saw all-in pricing, and half saw the lower base price with taxes and fees only added at the end. The latter strategy boosted revenue 20%.

Why it matters:

U.S. inflation hit a 41-year high last year and has remained "sticky," or persistent, in many areas of the world. As the cost of living has risen, consumers are paying closer to attention to their expenses.

Yet they apparently don't mind hidden fees much, even if they say they do. In almost all industries, add-on fees at a transaction's end usually boost revenue and bring in more customers. What gives?

• A few psychological effects likely play out: Consumers overestimate the cost of starting over and underestimate the benefits. Or they're excited about the purchase, enough to absorb the fees.

In sum, many consumers get sucked in by low offers, then encounter fees but conclude it's too much time or energy to start over.

BROUGHT TO YOU BY

AI is the wild west right now. Lots of action. Too many updates. Massive potential.

It's almost too much to keep track of. That's when we turn to our friends over at Prompts Daily.

Their free newsletter helps readers get the latest news across AI (and why we should care).

It's written for busy professionals like you.

🤯 How Much Will AI Boost U.S. Stocks? (Goldman Sachs)

AI this, AI that. Sick of hearing about AI, yet?

Maybe so. But Goldman Sachs’ economists released a special report recently, highlighting how productivity gains might ripple through the economy as more companies embrace its uses.

• Nvidia, whose tech powers leading artificial intelligence systems, rattled Wall Street with revenue projections 53% higher than analysts’ expectations for this quarter, helping push its stock to a trillion-dollar market value and making it the fifth-largest in the S&P 500 (its stock hit an all-time high Friday.)

But realizations that the AI revolution is already here haven’t just spurred excitement around obvious beneficiaries like Nvidia. It’s causing sweeping revisions in economic growth and corporate earnings projections for all types of companies.

• They add, “increased economy-wide output (from AI) could translate into increased revenues and earnings for S&P 500 companies, even beyond those firms directly involved in the development of AI.”

Goldman Sachs estimates AI adoption could boost productivity by 1.5 percentage points per year over 10 years, driving a 7% increase in global economic output worth nearly $7 trillion.

The researchers add that changing workflows from AI advances could expose roughly 300 million full-time jobs to automation, adding that around two-thirds of U.S. occupations might be disrupted by some degree of automation.

Why it matters:

Before you resign due to fears of a robot takeover, the researchers offer hope that not all disruptions will equate to layoffs, saying “most jobs and industries are only partially exposed to automation and thus are more likely to be complemented rather than substituted by AI.”

• If history is any guide, AI will create new types of jobs. The economist David Autor finds that 60% of today’s workers are employed in occupations that didn’t exist in 1940, meaning new technology has driven over 85% of employment growth in the past 80 years.

From improving day-to-day efficiency in office jobs to enabling scientists to develop drugs faster and accelerating software coding projects, AI will make society more productive (able to do more with less) — a powerful tailwind for stocks.

• Due to partial or full AI adoption through the economy, the researchers revised their estimate for the S&P 500’s compound annual growth rate in earnings per share (EPS) to 5.4% from 4.9%.
   

• Goldman’s models indicate that, with this higher earnings growth rate, the S&P 500’s fair value is about 9% higher than today.

MORE HEADLINES

🏭 The U.S. appears to be entering a “manufacturing supercycle”

🏀 Michael Jordan finalizing sale of the NBA’s Charlotte Hornets

😁 Some Americans are feeling much better about inflation

🚀 Virgin Galactic stock soars as company preps for first commercial space flight

💰 Intel to Invest $4.6 Billion in Poland (Bloomberg)

Intel (INTC) is boosting its presence in Europe.

The U.S. chip maker giant will invest $4.6 billion in a semiconductor assembly and test facility in Poland.

• To become a leader in chip making and compete with rivals such as AMD, Nvidia, and Samsung, Intel's CEO is investing billions in building factories across three continents. The moves seek to diversify Intel’s manufacturing base beyond East Asia.
  

• Intel already has a wafer fabrication site in Ireland and another planned in neighboring Germany. The three facilities will “increase resilience and cost efficiency of the European semiconductor supply chain,” the company said.

With a presence in the country for three decades and a workforce of 4,000 employees, the company cited Poland's favorable infrastructure, skilled talent pool, and proximity to its planned factory in Germany and site in Ireland as key factors in its decision.

Why it matters:

Despite accommodating semiconductor giants in equipment and research, the European Union (EU) continues to rely heavily on foreign suppliers, leaving it vulnerable to damaging supply chain disruptions. If chip reserves were to run out, it would bring production in various European industries to a standstill.

In April, the EU enacted the “Chips Act,” an initiative to enhance domestic chip production in response to supply chain disruptions and increasing tensions between the U.S. and China.

• The investment comes as the U.S., Europe, and Asia subsidize their homegrown chip-making capacity. Semiconductors go into just about every electronic device, from the device on which you're reading this email to cars and refrigerators. Modern militaries depend on them heavily, too.
  

• A severe global chip shortage in recent years disrupted the automotive (case and point: used car prices) and video-gaming industries, in particular, exacerbating governments’ concerns over their economies’ access to chips.

See you next time!

That's it for today on We Study Markets!

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