🎙️ Margaritaville

🏝️ Jimmy Buffett was more than just “Margaritaville.” The iconic singer, who died Sept. 1 at 76, was a longtime Berkshire Hathaway shareholder and friend of Warren Buffett.

The singer even recorded a short composition to be played at the 2003 and 2004 annual meetings:

“I bought Berkshire way back when it was cheap,” he sang while playing acoustic guitar. “I bought Berkshire way back then, and I do nothing but keep…it” 🎶 

— Shawn, Matthew, and Weronika 

Here’s the rundown:

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

• Why China’s economy may never overtake the U.S.

• The people who benefit from bankruptcy

• A boom in battery recyclers

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

CHART OF THE DAY

IN THE NEWS

🥶 China’s Economy May Never Overtake the U.S. (Bloomberg)

In the 10th episode of season 7 of The Office, Michael Scott spirals about China’s economy taking over the world. It’s starting to look like Oscar was right after all, though — Bloomberg Economics no longer expects China to consistently eclipse the U.S. as the world’s largest economy in the coming decades.

If it’s going to happen, Bloomberg’s economists see China briefly pulling ahead in the mid-2040s before “falling back behind.” The team added, “China is down-shifting onto a slower (economic) growth path sooner than we expected.”

Why? A few reasons:

• “The post-Covid rebound has run out of steam, reflecting a deepening property slump and fading confidence in Beijing’s management of the economy.”
  

• And “Weak confidence risks becoming entrenched — resulting in an enduring drag on growth potential.”

Confidence crisis: Modern economies are driven by spending. One person’s spending is another’s income. But people must feel comfortable about spending to do so.

From strict pandemic lockdowns to a rapidly aging population, regulatory crackdowns, record youth unemployment, large debt levels, and a brewing real estate crisis, the Chinese economy faces several short-term and long-term challenges, hurting its population’s economic confidence and willingness to spend.

Why it matters:

China’s economy grew at one of its slowest rates in decades last year at just 3%. While its Covid reopening stirred optimism, the recovery has lost steam.

Geopolitical consequences: As Bloomberg puts it, the U.S. and its allies are “increasingly looking at evidence of deep-seated structural problems in China, seeing opportunities that ultimately will strengthen the West’s hand against a weakening geopolitical competitor.”

• While not in decline, it’s thought that China may be nearing a peak in its relative economic power.
  

• As global governments, particularly U.S. allies, have re-evaluated their relations with and dependence on China recently, shifting expectations about China’s peak economic dominance will weigh on economic leaders’ decisions today.

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🤑 The $700 Million Bonanza For Crypto Collapse Winners (NYT)

In markets, there are always winners and losers.

Amid last year’s crypto collapse, people grew rich not for betting against Bitcoin (shorting). No, bankruptcy lawyers and other corporate specialists made millions on fees from the bankruptcies of five cryptocurrency companies, including FTX.

How many millions?

• More than $700 million in fees since last year have been shared among lawyers, accountants, consultants, analysts, and other professionals, per a New York Times analysis. The sum will likely grow over the next few months and could touch a billion when all is said and done.
  

• The five firms: FTX, Celsius Network, Voyager Digital, BlockFi, and Genesis Global.

Large fees are common in the bankruptcy world. Still, the $700 million bonanza has sparked outrage because the losers are largely amateur investors — not big corporations that can weather a crisis.

An arm and a leg: Big bankruptcy fees are nothing new. Among the biggest winners are two law firms, one of which (Sullivan & Cromwell) manages FTX’s bankruptcy and has charged more than $110 million in legal fees and over $500,000 in expenses.

• Another firm has billed $101 million, including $2.5 million in expenses. Hourly rates have run north of $2,000 for partners at those firms.

In response, the firms said a lack of clear crypto regulations has made the cases more complex, time-consuming, and costly.

Why it matters:

Two things:

1. While Bitcoin has surged 54% this year, many investors who bought the asset during its big run in 2020 and 2021 are still in the red.

2. The story underscores how much corporate bankruptcy has grown in the last few decades, blooming into a giant business where law firms, accountants, and other professionals have made millions managing distressed companies like Enron, Fruit of the Loom, and FTX. One partner has billed $2.8 million for his work on the FTX bankruptcy alone.

Of note: The legal backdrop underpinning financial markets is an important but often overlooked aspect.

Bankruptcy rates weren’t always at sky-high prices. Research has shown that fees in these cases have grown about 10% yearly since the turn of the century.

• But there’s some reason for the high fees: The high stakes. Celsius and Voyager cost investors more than $6 billion, and FTX’s failure erased nearly $10 billion in user funds.

MORE HEADLINES

🪲 Invasive species cost the global economy over $400 billion per year

🇨🇳 China to launch $40 billion state fund to boost chip industry

🧑‍⚖️ Musk threatens to sue the Anti-Defamation League after blaming it for X ad sales slump

🏜️ Burning Man festival road reopens, allowing thousands to escape the muddy trap

🔋 Investors Flock to Battery Recyclers (WSJ)

Investors are eagerly searching for clean-energy startups poised to benefit from climate legislation. Battery recyclers might be the jackpot.

New legislation: The Inflation Reduction Act, passed last August, has already boosted investment in renewable energy, leading to $150 billion in renewable and battery commitments in just eight months and tens of billions more in other clean technologies, including electric car batteries, clean hydrogen, and carbon capture.

• Overall, the legislation could drive up to $3 trillion in total spending over the next ten years.

Firms like BlackRock and Goldman Sachs are heavily investing in the emerging field of battery recycling, where reusable components for electric vehicle (EV) batteries are sourced from either old batteries or scrap metal.

• Investors expect these startups to remain in demand even after government subsidies cease.

Energizer Bunny: Tax credits for electric vehicles, linked to the amount of material sourced from domestic or trading partner suppliers, boost recyclers’ business.

• Investment is heating up — Ascend Elements, a battery recycling startup, announced a $460 million funding round recently, bringing the company's valuation to approximately $1.5 billion.
  

• Its competitor, Redwood Materials, also secured financing, to the tune of $1 billion.

Why it matters:

Recycling and refining battery materials are increasingly important industries, especially since environmental objections and permitting issues make mining for minerals like nickel and lithium difficult domestically.

• Ultimately, the burgeoning industry in the U.S. hopes to challenge China's control over EV supply chains.

Bumpy ride: Like many other clean-energy firms, most battery recycling companies have yet to reach profitability. A few years back, low-interest rates and eager investors fueled a boom in clean-energy startups.

• However, funding has largely evaporated, causing many startups to file for bankruptcy.

See you next time!

That's it for today on We Study Markets!

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