🎙️ Rockets & Feathers

What Magnificent 7?

Two key members, Tesla and Apple, have had a tough start to the year. Tesla shares have fallen ~35% in about nine weeks, while Apple shares are down ~7% year-to-date.

They could bounce back in a matter of weeks, but as of now, it looks more like the Fab Five in 2024, with the likes of Nvidia, Amazon, Microsoft, Alphabet, and Meta charging higher and higher.

— Matthew & Shawn

Here’s today’s rundown:

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

• The land of big profits and high inflation

• The latest from Argentina

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

Chart of the Day

In The News

🤔 Big Profits and High Inflation: There Is a Correlation

Inflation has been around for the better part of three years now, just as big American companies continue to print record profits. 

President Joe Biden has blamed “shrinkflation,” corporate concentration, and junk fees. But they aren’t likely the culprits. 

He’s also called out “price gouging.” Now, there might be something going on there. 

Soaring prices: Look, the federal government’s own spending has likely contributed to the macroeconomic phenomenon, but The Wall Street Journal’s Greg Ip notes that corporate profit margins jumped from 13.4% to 17% between late 2019 and early 2022. (Those margins are pretax profits.)

• Whether higher margins lead to inflation isn’t clear, but a good case is to be made here. Consider that profits = prices - costs. Since late 2019, prices have jumped 17%, far more than labor and nonlabor costs. Meanwhile, profits have grown 41%.
  

• WSJ reports that had profits grown at the same rate as labor costs, prices would have only jumped 12.5%, an average annual rate of ~1 percentage point lower. That’s meaningful. 

Why it matters:

In a nutshell, many people worldwide (well, not Japan and China) have felt inflation’s sting the last three years. Beyond that, there are a few layers worth exploring further.  

Rockets & feathers: We can’t prove that profits drive prices and vice versa. There are many factors at play. However, consider a rockets and feathers analogy that Goldman economists created: Prices behave like rockets and feathers as “rising input costs are passed through to prices more quickly than falling input costs,” Ip writes. 

• Importantly, Goldman pointed out that industries where margins benefited from supply constraints (take semiconductors), have seen their profit margins surge.
  

• Think about it: You and I won’t be all that upset if a company raises prices because of rising costs everyone is dealing with. And we won’t stop shopping there because they didn’t lower prices and the supply situation improved.
  

• As a Yale economist commented,  “If people are paying $3 for a dozen eggs last week, they’ll pay $3 this week. And firms take advantage of that. It is unfortunate for the consumer. These prices shouldn’t be elevated, but they are.”

Read more on how corporate profits might be driving inflation

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🇦🇷 Argentina Makes Progress Toward Removing Currency Controls

Remember all the buzz a few months back about Argentina’s contentious presidential elections?

Libertarian Javier Milei was inaugurated as the country’s new leader, promising to upend government spending, dollarize the country, and otherwise fix its history of bloated bureaucracy and debt defaults — ambitious goals.

The latest from Buenos Aires: On Tuesday, Argentina’s economic ministry, led by former Wall Street trader Luis Caputo, announced that it had refinanced $50.3 billion worth of the country’s debt owed in pesos.

• That delays 77.3% of the government’s bond payments due for 2024, pushing repayment back between 2025 and 2028.

End the money printing: The hope is to eliminate Argentina’s fiscal deficit (when a country spends more than it brings in through tax revenue), allowing the government to end its reliance on “money printing,” which has undoubtedly underpinned the chronic inflation its citizens have endured.

• Because the country’s finances have been so poor, and inflation so bad, the Argentinian peso remains under strict currency controls that fix its exchange rate and limit how much money can be taken out of the country.
  

• However, Milei reportedly hopes to remove these currency controls imposed by previous governments later this year after stabilizing Argentina’s budget and dire financial situation.

Why it matters:

Lenders are used to making concessions to Argentina’s government and renegotiating debt payment terms, yet there is a renewed sense of optimism that Milei’s pushes represent a new chapter in the government’s history.

• Meanwhile, the peso’s artificially fixed value—about 830 pesos to 1 USD—causes “huge distortions in Argentina’s economy and are a barrier to investment,” writes the Financial Times.
  

• Annual inflation in Argentina is at a three-decade high, hitting 276.2% in February, but monthly rises are coming down, increasing 13.2% in February versus 20.6% in January — a sharper decline than most expected.

Much more work to do: To remove currency controls, Argentina’s government must converge the official exchange rate and the black market rate (there’s a 20% difference between the two rates.)

Considerable work remains to fix Argentina’s situation.

• The head of research at a Buenos-Aires-based investment firm commented, “The government must still build up its [dangerously low] foreign exchange reserves or secure a loan from the IMF, in order to calm market expectations of a sudden drop in the peso against the dollar…That’s a precondition for lifting controls.”

Read more

More Headlines

½ What to know about the upcoming bitcoin halving

💻 A tech startup unveiled the first “the first AI software engineer,” a coding tool that threatens to make some programmers obsolete

⛏️ The Department of Energy backstops EV push with $2 billion loan to lithium miner

💲 Steven Mnuchin on why government spending is driving inflation

🤖 Coming soon: a programmable army of humanoid robots

🪧 President Biden to speak out against sale of U.S. Steel to a Japanese firm

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Quick Poll

Yesterday, we asked: Investing in oil and gas is controversial for many. Do you mind investing in oil/gas futures or stocks and bonds connected to these types of companies?

— Many readers seek out oil and gas companies, noting: “The world runs on oil and will for some time moving forward.” Another wrote: “This is how the world works!”

— Wrote another: “While the sector can be a bit cyclical, I pick my spots, but oil and gas aren’t going anywhere anytime soon, so might as well make some money off of it while it’s around.”

— Among readers who avoid them: “These companies actively destroy the climate and environment. My few hundred/thousand dollars means nothing to them but everything to me. I refuse to support them even if it means losing dividend income and a lower ROI.” As another said, “There are plenty of alternatives. Why would I want to profit from a business making life worse for my grandchildren?”

— Added another who said they avoid them: “Let’s try to save the planet.”

See you next time!

That's it for today on We Study Markets!

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