🎙️ Ready for Takeoff

💳 A combo of inflation and higher rates has stretched consumers’ balance sheets, as America’s collective credit card debt exceeded $1 trillion in Q3.

When the Fed raises interest rates, big banks can make even more money off the interest they charge consumers. Today, the average credit card charges about 21% on overdue payments — roughly five percentage points higher than in 2022.

“Rising balances may present challenges for some borrowers,” Fed researchers wrote, but “American consumers have so far withstood the economic difficulties of the pandemic and post-pandemic periods with resilience.”

— Matthew & Shawn

Here’s today’s rundown:

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

• SpaceX weighs spinning off Starlink via IPO

• The elusive soft landing comes into view as inflation eases

• Catching up with Ark’s Cathie Wood

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

CHART OF THE DAY

IN THE NEWS

🚀 SpaceX Weighs Spinning Off Starlink via IPO in 2024

The year is 2040. We all pay for the internet through Starlink using Dogecoin, and Elon Musk controls internet speeds based on the emoji he posts on X (formerly Twitter) that day.

While we’re mostly kidding, who would’ve guessed a decade ago that the founder of the struggling EV company, Tesla, would turn it into the world’s most valuable automaker, takeover Twitter, and run a space company with a significant role in a land war in Europe against Russia? That wasn’t on our bingo cards.

What’s happening: Now, SpaceX, Musk’s pioneering space company mentioned above, is looking to spin off its fast-growing Starlink satellite business, according to Bloomberg.

• Starlink is already widely used by global militaries, maritime shipping companies, and other firms operating in remote areas, and it hopes to keep disrupting the satellite-internet industry.
  

• SpaceX has supposedly transferred Starlink’s business assets into a wholly-owned subsidiary, enabling Starlink to go public next year or in 2025 and list on a major stock exchange.

Why it matters:

Musk disagreed with Bloomberg’s report, simply calling it “False” on X. Yet, he’s flirted with the idea of a Starlink IPO for years and suggested in 2021 that Starlink may be spun off once it can make predictions about the unit’s cash flows “reasonably well.”

In 2022, Musk told employees that Starlink’s stock market debut may be years away, but as the business has boomed recently, the prospect appears likelier. SpaceX hopes to rake in $15 billion in sales next year, making it one of the largest privately-owned businesses in the world, and Starlink is expected to make up most of that revenue soon.

• With Starlink, SpaceX controls over 5,000 satellites orbiting Earth, providing customers across 60+ countries with high-speed internet.
  

• While Starlink’s business matures, Musk recently posted on X that it had finally hit “breakeven cash flow.”

Justus Parmar, founder and CEO of the venture capital firm Fortuna Investments, commented that whenever the IPO happens, it would “be an extremely strong catalyst for everything space-related.”

Read more

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✈️ The Elusive Soft Landing Comes Back Into View

Folks, we’re due for some more “soft landing” talk. 

Many economists had deemed a soft landing impossible. Inflation falling to around the Fed’s 2% target without a recession? Not in this economy. Not when virtually every pundit on TV said otherwise earlier this year. 

The Federal Reserve has seldom brought down inflation without sparking a recession.

Yet here we are, possibly on the cusp of the first-ever soft landing in the past 80 years.

No turbulence for now: As inflation hit a four-decade high of 9.1% last summer, the Fed raised rates to about 5.5%, the highest level in 22 years. 

• October’s soft inflation rate showed inflation is down to 3.2%. Core inflation, which excludes food and energy, ran at 2.8%, well below the 5.1% clip earlier this year. One Bloomberg reporter called it a “dream inflation report.”

We’re not out of the woods just yet, so we’d suggest Jerome Powell and Co. not throw a celebration party for a bit longer. He said as much on Nov. 1, noting that the process isn’t over until inflation returns to 2%.

By then, the economy could falter in 2024 as the impact of interest rates still trickles throughout the economy. A risk we aren’t considering now could also end the fun and prompt a hard landing.

• But Powell and Co. might have threaded the needle about as well as one could. 

• “It looks like a soft landing until there’s some turbulence and things get hairier,” said one labor market economist. “You only know it’s happened once you’re on the ground.”

Why it matters:

What gets less attention is wage gains, specifically the slowing wage gains that provide further evidence about falling inflation. Higher wages can coincide with higher prices, but average hourly earnings rose only 4.1% in October year over year, the lowest increase since June 2021. 

The labor market is clearly cooling, and unemployment remains historically low. More good news.

• As one economist put it, “If one was looking for a clear sign of a soft landing, the disinflation inside the [consumer-price index] is one unavoidable and unmistakable sign that the U.S. economy has proved far more resilient than anyone anticipated at the outset of 2023.”

Read more

MORE HEADLINES

🦃 A drop in gas prices this year will collectively save Americans over $1 billion in travel costs for Thanksgiving

🎯 Target shares jump after retailer posts big earnings beat

🏝️ Ken Griffin sees Miami possibly replacing NYC as finance capital

📉 U.S. producer prices slid 0.5% in October, the biggest drop since 2020

💬 Life expectancy gap between men and women in the U.S. continues to widen

🗣️ Catching Up With Ark’s Cathie Wood: Deflation, Bitcoin & More (Plus: Notes on Buffett’s Latest Moves)

Cathie Wood is back making headlines, this time with more big, bold bets. 

Wood, whose investment funds became pandemic darlings by betting on unprofitable technology companies, still expects bitcoin to hit $1 million per coin one day, possibly even $1.5 million. In an interview with The Wall Street Journal, she also touched on artificial intelligence, Coinbase, FTX, and deflation. 

• “A global, digital, private, rules-based monetary system is a noble idea and a big idea,” Wood said, referencing bitcoin. 

Her flagship fund, the Ark Innovation ETF (ticker: ARKK), is up 41% year-to-date but is roughly flat over the past five years after a rough 2022. 

• One of her big bets, bitcoin, is up about 125% year-to-date and 890% over the past five years. 
  

• One of her other big bets: Nvidia. Wood was one of the first big investors to have a major stake in the chip maker, whose shares are up 1,087% over the past five years — one of the few stocks outperforming bitcoin (for now).

Here are the high-level takeaways from Wood:

• On the spot bitcoin ETF, Wood said access to bitcoin will be easier, and investors apprehensive about buying through exchanges like Coinbase could be more incentivized to buy a small amount of bitcoin. “I think that investors take a lot of comfort in the fact that the SEC, after a lot of controversy, if it does approve [the funds], that will be a seal of approval that it didn’t have before.”
  

• On Tuesday’s soft inflation report, Wood said “the bigger risk here is deflation, not inflation. And we’re seeing more and more signs of it.” She added: “If we’re right and deflation is the bigger risk, we are in a very good place. Technology is deflationary. And so they know how to operate in a deflationary world.”

• On FTX and Sam Bankman-Fried, Wood said FTX’s implosion and Celsius and Three Arrows only temporarily impacted bitcoin. The blockchain “didn’t skip a beat as though it didn’t happen,” she commented.

• On artificial intelligence, Wood’s team sees a “transformational convergence” between bitcoin and AI. 

Why it matters:

When big investors talk, we take note. It’s not about agreeing or emulating their every move but studying their investment decisions to understand their thinking. 

Wood’s comments come the same week as Warren Buffett’s recent 13F filing, which showed that the Oracle of Omaha eliminated its stake in General Motors and  Johnson & Johnson. Berkshire also sold smaller Procter & Gamble, Mondelez International, United Parcel Service, Amazon, and Chevron positions.

• Berkshire is sitting on a record $157.2 billion in cash and equivalents — probably patiently waiting to take a big swing on an undervalued business. 

Read more

QUICK POLL

Yesterday, we asked: Does the U.S.’s credit rating deserve to be downgraded?

—Most respondents seem to be on the same page. “We have PRINTED way too much money!” someone wrote. “The government can’t keep spending and expect to not have a downgrade.”

—One reader’s advice: “Treat the U.S. budget as if it were your own household.”

— Another left this excellent insight: “With debt, it’s ok until it isn’t. You hit a tipping point where the interest as a percentage of the budget becomes untenable, and then massive budget reductions are needed vs. tackling the problem long term beginning today.”

— And on team No, “The US can always repay debt in its own currency, which is the pre-eminent global reserve currency.”

See you next time!

That's it for today on We Study Markets!

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