SB Capital Insights

7/29/2024

Good morning. Vice President Kamala Harris has officially begun her presidential campaign, receiving an estimated $100 million in donations in the first 24 hours. The Olympic Games kicked off Friday. Go team USA! NBC paid $7.75 billion in 2014 to broadcast the games through 2032. Look out for your favorite brands as advertisements will pay this staggering bill and the popularity, hence profitability, of live broadcasting is being questioned.

Keep reading as we try to make sense of the U.S.’s staggering $34.95 T national debt and take a look at its implications.

Markets

• The Nasdaq experienced strong declines between market close Tuesday and Wednesday. The gains in tech over the last year have largely come from the hype around AI. Investors are now becoming more conscious of the longer time horizon for the productivity gains brought by the roll out of AI systems. 

  • Many of the big tech companies are releasing earnings this week, which will be a catalyst for increased market volatility. 

• Bitcoin continues its rally, close to breaking the $70,000 price level. This gives the crypto currency a $1.37 trillion market cap. The sentiment toward Bitcoin has completely flipped from bearish to bullish. In addition, during the Bitcoin 2024 Conference over the weekend, former president Trump made a speech backing the adoption of crypto.

Tesla Earnings 

This past week Tesla released earnings, falling short of EPS expectations, while beating revenue expectations.

Despite difficult operating conditions in terms of the global EV, Tesla managed to set a record for quarterly revenue. Their automotive sales revenue has declined on YoY basis by 7%, however there was immense revenue growth in their energy generation and storage business. Operating income has declined on a YoY basis, however free cash flow is back to being positive and the company is sitting on record cash. The company remains invested in areas that have the potential to bring high revenue growth and is well capitalized to make such investments.    

Tesla remains a highly volatile stock as future cash flows are difficult to accurately estimate. Since the stock price reached the 1 year low back in April, the stock has rebound very sharply. Following earnings last week, the stock price fell by 10%. 

Making sense of the U.S. national debt

• U.S. national debt is the total sum of money that the federal government owes to borrowers. This debt occurs when the government runs a deficit. In fiscal year 2023 the U.S. ran a $1.7 T deficit, meaning it spent more than it collected.

• Since 2001 was the last time the Federal government ran a surplus in their budget. 

• In 2024 the public holds 27.61 T while the government holds 7.22 T. While the national debt is large, the debt held by the government (intergovernmental debt) is considered an investment and largely serves as a record of government transactions.

• U.S. debt as a share of GDP has reached 123%. With the national debt larger than one year's gross domestic product it raises concerns on the nation’s ability to pay.

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• The congressional budget office predicts that the U.S. is on track to reach 165% share of gdp by 2054. As the U.S. government continues to spend more this figure is seen as a warning to cut back the nation's debt to avoid such a large figure.

• As of June 2024 fiscal year the 17% of federal spending has gone towards serving the nation's debt. This means that the U.S. spent 868 billion on interest payments alone.

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High profile figures comments on U.S. Debt

• Jamie Dimon: “Any country can borrow money and drive some growth but it may not always lead to good growth, so I think America should be quite aware that we’ve got to focus on our fiscal deficit issues a little bit more and that is important for the world,” Dimon commented.

• “The worse that gets, the more we are going to have that long-term problem,” he said. “You can see it in the numbers. It’s just a matter of numbers. We are near that inflection point.”

• Ray Dalio:  Along with the basic budget issues, Dalio also cautioned that foreign buyers, who make up about 40% of demand for U.S. Treasurys, have been backing off, creating a supply-demand problem.

• Treasury Secretary  Janet Yellen: “That is not something to feel we’re in a catastrophic situation”

• Fed Chair, Jerome Powell: has called the national debt “unsustainable”

What to look out for this week

• Fed Interest Rate decision (Wednesday) - Investors are confidently pricing in one 25-50 basis point rate cut this year in September. While recent data has shown a decline in inflation, a decision to cut rates in this week's FOMC meeting is highly unlikely.

• Magnificent 7 earnings to look out for: MSFT, APPL, AMZN, META

We are two college students on a mission to immerse ourselves in the financial industry. We are eager to learn more and make new connections. Our goal is to share exciting and informative content that provides a broad picture of current events and offers valuable insights.

Authors: Ben Banchik, Zachary Singer

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