🎙️ Wrecking Ball

If you need a reason to feel more confident in your investment decisions, look no further.

Michael Burry’s 2007-08 bet on the housing bust made him very wealthy, but he’s recently shared dire predictions like “could be worse than 2008” and “greatest speculative bubble of all time.” This year’s: “SELL” 😨

Yet, buying the S&P 500 after each prediction would have made an investor an average annualized gain of 36% over the next six months.

💭 As they say, investing is one of the only games where amateurs can beat the pros. Pundits are about as accurate as a coin flip.

— Weronika, Shawn, and Matthew

Here’s today’s rundown:

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

• The U.S. dollar’s wrecking ball effect

• The $100 trillion path to net zero

• Why Walmart is cutting pay

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

CHART OF THE DAY

IN THE NEWS

🚧 The Dollar’s Surging Value is a Wrecking Ball (Bloomberg)

This summer, the biggest markets story is arguably not China’s slumping economy, the AI-driven tech boom, or whether the Fed will keep hiking interest rates.

There’s one thing at the intersection of these stories and many others: The surging U.S. dollar.

What to know: When the dollar surges, it’s different from a stock rallying. Instead, the dollar’s exchange rate against a compilation of other currencies is strengthening (the same dollar can be exchanged for more euros, yen, pesos, etc.)

• Since currency exchange rates affect global trade, investment flows, debt repayment, and much more, currency fluctuations can have major implications for financial markets.
  

• For example, companies globally issue debt in U.S. dollars — if their country’s local currency, in which business revenues are earned, depreciates against the dollar, repaying dollar-denominated debts becomes costlier.

Why is the dollar at the intersection of these other major stories?

• Many factors can contribute to a currency’s exchange value, but expectations around the country’s interest rates, trade balance, inflation, and economic growth relative to peers are the most decisive.

American exceptionalism: The U.S. economy has baffled economists with its continued strength, especially compared to other major economies.

Consequently, the Fed has continued to raise interest rates, despite inflation broadly cooling, with no sign of cutting them anytime soon (all else equal, higher inflation-adjusted interest rates = a stronger currency.)

• At the same time, the U.S. is a leader in the global AI race, further boosting confidence in the country as a destination for investment.

Why it matters:

For Americans, a stronger dollar helps the Federal Reserve fight inflation, as imports of foreign goods are cheaper due to more favorable exchange rates.

Wrecking ball: For everyone else, it’s a problem, especially since the dollar is the neutral currency governments and companies worldwide use to facilitate trade, borrowing, and investment.

• There’s a reason Wall Street vets call a strong dollar a global “wrecking ball.”
  

• In Japan, the yen is at its weakest exchange rate versus the dollar in the 21st century, crimping Japanese consumers’ purchasing power — key commodities like oil are priced in U.S. dollars and become more expensive as the yen weakens.

On top of higher prices for economic inputs, a stronger dollar makes having dollar-denominated debt repayments more challenging, particularly in emerging markets where the dollar is heavily relied on to secure international financing.

• We’ve seen this a few times in the 1980s Latin American Debt Crisis and the late ‘90s Asian Financial Crisis.

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⚡ Behind the $100 Trillion Path to Net Zero (FT)

Many scientists and world leaders agree on the benefits of getting to net zero: renewable energy is (long-term) less expensive and healthier for the planet. But the cost to get there? Enormous.

Net zero is the target of completely negating the amount of greenhouse gases produced by human activity. But without a global carbon tax, the green transition is becoming pricey.

• Optimists one day hope for all-electric cars, boats, and planes, mostly run on green hydrogen, wind farms, and solar power, bringing all humans affordable energy.

Not so fast: The International Monetary Fund (IMF) estimates countries can meet net-zero targets at a cost of just 0.5% of GDP by 2030. But many scientists and leaders say not so fast because:

1. A carbon tax covers less than 25% of global emissions
   

2. Governments’ commitments to green targets are already under political and financial strain

It’s not necessarily wishful thinking, but “it’s just not happening,” said the UK’s Institute for Fiscal Studies deputy director.

• One problem: Lawmakers push and sign solutions that are politically convenient but economically less efficient.

The scale of funding needed to hit net zero is profound: Lord Nicholas Stern, chair of the London School of Economics’ Grantham Institute and a former World Bank chief economist, estimates $100 trillion is required.

That’s across 30 or 40 years to “boost renewable energy, electrify transport systems, decarbonize the heating and cooling of buildings, and foster green hydrogen.

• Added another economist: “Some estimates on climate change transition are in the stratosphere. The demands of net zero are just too high — they have to come from the private sector.”

Why it matters:

Governments spend hundreds of billions on incentives and subsidies, research, and infrastructure — electric grids and flood defenses, to name two — but that still likely won’t put a big dent in the issue.

No free lunch: Another leader and economist put the situation bluntly: Fiscal costs will be sky-high no matter how we cut it. “People have to take into account the scale of the transformation needed. We shouldn’t present things as free lunch.”

• There are also opportunity costs. Every million or billion poured into green energy could go toward places with more short-term outcomes, such as soaring healthcare costs as populations age or hunger and disease alleviation.
  

• It’s also problematic when simply installing a greener heating system can cost a family a year or more of earnings.

Governments are considering whether more public borrowing can fund the green energy movement, a big question mark amid soaring borrowing costs. Yet, given the potential costs of inaction, many wonder what’s the alternative?

MORE HEADLINES

🍎 Apple’s two-day slide wipes out $200 billion in market value over China iPhone curbs

👔 Dating app Grindr loses nearly half its staff after trying to force a return to office

☕️ Job interview 'coffee cup test' used by corporate executive goes viral

🏠 ’House-rich’ Americans sitting on nearly $30 trillion in home equity

📝 Every student will have their own AI tutor, according to Khan Academy’s founder

🛒 Walmart Cuts Starting Pay for Some New Hires (WSJ)

Walmart, which employs 1.6 million Americans, is cutting pay and costs, a sign that the once-hot labor market for hourly jobs has cooled.

Pay cut: Walmart now offers some new hourly workers lower starting salaries than three months ago, indicating that companies may finally have too many staff.

• In the updated wage model, most new employees will start at the store's minimum hourly rate. Previously, certain new hires, like online order pickers, would earn more than other entry-level roles, such as cashiers.

Nothing good lasts forever: The changes follow a period during which Walmart and other major employers have consistently hired new staff, increased salaries, and added perks to lure workers amid a competitive job market.

• In January, Walmart increased its minimum hourly wage from $12 to $14, as rivals like Amazon and Target started at $15.
  

• The company also gave raises and bonuses to in-demand roles like truck drivers and introduced worker perks like subsidized college courses and fertility benefits.

Walmart says the updated pay structure allows employees to switch between work groups — like food, cash registers, stocking, or digital fulfillment — without affecting their salary.

Keep calm: Walmart says its updated wage structure doesn't cut pay for existing staff but does enable the hiring of new employees at lower rates, thus reducing labor expenses, while the company also explores using more self-checkout registers and automation in warehouses.

Why it matters:

Walmart's actions provide insights into the direction the industry may be moving toward. Other retailers are likely exploring ways to cut costs as they anticipate consumer spending to weaken toward year-end.

Labor market’s switch: The general U.S. employment landscape is losing some steam. Hiring decelerated over the summer, and the national unemployment rate increased to 3.8% in August from 3.5% in July, indicating more Americans are looking for jobs.

See you next time!

That's it for today on We Study Markets!

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