🎙️ Knockout Earnings

Did you call out sick from work today? Join the crowd 🤧

August 24th is America’s biggest “sick day” — the work day most commonly taken off by Americans, followed by February 13th, which pairs closely with the Super Bowl and Valentine’s Day.

But Fed Chairman Powell didn’t have a sick day today. In fact, he, alongside many economists and journalists, is in Jackson Hole, Wyoming.

💭 He’ll be taking the podium tomorrow to give an important update on inflation, and we’ll be here to provide all the details.

— Weronika, Matthew, and Shawn

Here’s the rundown:

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

• Nvidia pops on another earnings beat

• Behind China’s $9 trillion problem

• Companies turning scrap metal into green energy

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

CHART OF THE DAY

IN THE NEWS

📈 Nvidia’s Knockout Earnings (Axios)

Chipmaker Nvidia crushed earnings again, signaling that we might only be in the early stages of an artificial intelligence boom.

The numbers: Nvidia reported $13.5 billion in revenue for its second quarter, up 88% from the previous quarter and much more than the $11.2 billion estimate.

• Doubling revenue isn’t unheard of for high-growth companies, but doubling revenue at this scale — Nvidia’s market cap is about $1.18 trillion — is exceedingly rare.
  

• Here we go again: Nvidia gave surprising, massive guidance in May, which sent the stock soaring. This month, its forecast was again bullish, predicting revenue of $16 billion for the current quarter, $3.4 billion higher than anticipated.

Chip hoarding? Nvidia is riding the AI wave and a tailwind from the Biden administration’s moves to keep advanced AI hardware sales in the U.S., which prompted Chinese firms to stock up on Nvidia chips while they can.

The Financial Times reported that Chinese firms placed $5 billion in orders to Nvidia this year. Other nations, including Saudi Arabia and the UAE, have spent on Nvidia chips, which power much of the AI world today, ChatGPT included.

• One analyst who’s covered Nvidia for years said, “It’s about AI demand…The rest of tech will see this unprecedented spending wave not seen since 1995 (the dawn of the internet) over the coming years, but Nvidia is on the front lines and the best barometer of true (AI) spending.”

Why it matters:

Some investors have warned that the chip industry is cyclical, and the good times could turn quickly. Its rapid sales surge also comes with challenges, namely that it might not be able to meet demand.

Plus, the company doesn’t make the chips itself; it outsources designs to companies, including Taiwan Semiconductor Manufacturing, leaving it prone to a slowdown if that company doesn’t produce enough supply.

Jack of all trades: Nvidia’s chips — which account for 70% of U.S. chip sales — have various use cases, including:

• Graphics processing for PC games

• Physics simulations for scientists

• Minting new cryptocurrency tokens

• Production and development of AI systems for companies like Amazon

• Expediting drug development through simulated trials

Nvidia’s stock has more than tripled this year.

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⚠️ China’s $9 Trillion Debt Problem is Worsening (Bloomberg)

It’s again popular to worry about China’s economy “collapsing.” We’ve covered a number of the economic challenges facing China and will continue to do so.

Debt problems: What about the $9 trillion of “off-balance-sheet” local government debt, dragging down the country’s growth?

• President Xi Jinping is trying to thread the needle, enabling cities and provinces to cut down spending and restructure debt following the world’s largest infrastructure boom without popping its property bubble all at once.
  

• As Bloomberg puts it, the path forward for China is a “treacherious one.”

Off balance sheet? Municipal governments across China rely on so-called “local government financing vehicles” (LGFVs) — companies that allow city governments to borrow money not explicitly in their name, hence making the problem “off balance sheet.”

While the central government has tried to form these LGFV companies into profitable businesses, Bloomberg reports that hasn’t panned out.

• Now, Beijing has permitted local governments to raise some $137 billion in new debt to, at least in part, pay back LGFV debt. Yet, that’s just a drop in the bucket for China’s thousands of LGFV companies.

Zooming in: One LGFV example in Chongqing makes the point. The local government-owned company borrowed hundreds of millions of dollars to build roads, water pipes, housing, and factory buildings to transform its old mining district.

• While economic output quadrupled over the next decade, these resources were made available for free or cheaply to promote “public welfare,” leaving the company unprofitable.
  

• These days, the LGFV can’t even cover the interest payments on all the money it borrowed to fund these projects, with six times as much debt coming due soon as it has cash on hand.

Why it matters:

Many wonder whether these firms supporting local governments will need a bailout by Beijing — any defaults from the $2 trillion worth of bonds these LGFVs have issued risks destabilizing China’s $60 trillion financial system.

• As one China analyst framed it, “The most important variable impacting China’s economic growth over the next two years will be the success or failure of local government debt restructuring.”

No more can-kicking: LGFVs rely on local governments for income, typically from infrastructure payments or subsidies. They also borrow heavily from banks, but as China’s economy turns down, those banks are much less willing to roll over LGFV loans when they come due.

As LGFVs are already missing payments at record rates, all eyes are on what comes next.

• According to one LGFV executive, the status quo of using LGFVs to raise lots of debt for free/cheap services for the public welfare “has come to an end.”

MORE HEADLINES

🥪 Subway sells itself to Dunkin’ owner, ending five decades of family ownership

🛍️ Americans are shopping less at some of the country’s biggest retailers, but the economy is still humming

🏘️ The 15 best cities for first-time home buyers (the top 3 are in Texas)

👟 Nike shares fall as sneaker inventory piles up

💵 What is a BRICS currency, and is the U.S. dollar in trouble?

🏗️ Mining Companies Want to Turn Scrap Metal Into Treasure (WSJ)

Searching for critical metal resources to make cars and electronics? Try a scrapyard.

Some international mining companies are exploring resources in urban scrapyards to capitalize on the rising demand for commodities driven by the energy transition.

Scrapping away: Rio Tinto and Glencore, two mining and commodity giants, have recently entered agreements to expand their critical metals recycling efforts, diverging from their previous focus on large-scale mining operations in countries like the U.S., Australia, and Congo.

• The move comes amid growing demand for eco-friendly metals in cars and electronics.

Competitive advantage: These companies also want to transform increasing scrap metal supplies into an opportunity.

• Based on available data, the market for scrap resources is projected to grow across all metal categories.

Last month, Rio Tinto, acquired a 50% stake in Matalco, a Canadian recycled aluminum supplier, for $700 million. Rio Tinto’s aluminum is widely used in electric vehicles, solar panels, and wind turbines.

• In May, Glencore and Li-Cycle Holdings partnered to explore the creation of Europe's largest recycling hub to generate enough recycled materials to supply up to 36 gigawatts of lithium-ion batteries per year.
  

• The companies said the hub would be a leading European provider of recycled lithium, cobalt, and nickel.

Why it matters:

Saving the environment: These initiatives are part of the resource sector's broader strategy to counter investor concerns about mining's environmental impact, including its role in climate change.

• “You use less energy when you recycle, and you have less impact on nature,” Rio Tinto’s CEO said. “So I do think that anywhere where we can do that, we should try to do that.”

Mining companies recognize a profitable venture ahead. As China's several decades of industrial growth generate unprecedented volumes of secondhand metal, firms aim to recycle and resell these materials.

• The capital required to establish aluminum recycling facilities is generally just 10% of what new production plants need.

Staying relevant: In some regions, regulators have set aggressive recycling benchmarks. The European Union (EU) announced an objective to source at least 15% of certain essential raw materials from domestic recycling efforts.

• Major Western mining firms might have to pivot toward incorporating scrap metal into their supply chains to stay relevant.

See you next time!

That's it for today on We Study Markets!

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