POP QUIZ

How many jobs did the U.S. economy generate across 2023? (The answer is at the bottom of this newsletter!)

In The News

👀 Stablecoin Company Takes Second Attempt at IPO

Photo by CoinWire Japan on Unsplash

Unlike other blockchain-based assets like bitcoin and ethereum, stablecoins don’t swing in value, at least they’re not supposed to. Fitting the name, they’re intended to be…stable.

• These tokens are frequently pegged to major currencies, primarily the U.S. dollar, and 1 token usually equals $1.

What to know: The concept resembles digital, blockchain-based money market funds. But not all stablecoins are structured the same, and the companies who manage and offer them aren’t created equally.

• Some are much closer to deserving the title “digital money market funds” than others. (Read a Fed study on this here.)
• Circle probably falls closer to the deserving category — widely considered a respectable stablecoin operator, playing by regulators’ rules and generally operating transparently.

How it works: Like money market funds, stablecoin companies take in customer deposits and purchase assets, like U.S. Treasury bonds. That backstops their stablecoin’s value and provides interest income to fund operations.

Stablecoin transactions can settle much faster than regular banking-system transactions and offer wider access to major currencies.

• For example, pretty much anyone, anywhere in the world could buy a U.S. dollar stablecoin to save or transact with. This enables people to effectively use dollars, regardless of whether they have a U.S. bank account.

Why it matters:

Easy, low-cost access to stable, major currencies is a historical anomaly for most. Often in emerging market countries, people are forced to use their country’s more volatile local currency, leaving them vulnerable to higher inflation rates.

Stablecoins’ proliferation has actually created a major new buyer of U.S. Treasury bonds, helping keep the world’s most important financial market liquid.

• Tether, the world’s largest stablecoin, is now a top buyer of U.S. Treasury bunds, holding more U.S. debt than entire countries and helping fund government spending deficits.

USDC is Circle’s stablecoin, USDT is Tether’s

With over $25 billion worth of tokens in circulation, an IPO approval would be a considerable regulatory endorsement of Circle’s legitimacy, compared to Tether, which has faced controversy for its offshore ties and lack of transparency.

• Circle did take a big hit last year after revealing it held $3 billion in the now-failed Silicon Valley Bank, causing its stablecoin to temporarily “de-peg” and fall to 88 cents on the dollar in trading.
• Months later, Coinbase affirmed its faith in Circle by purchasing a minority stake.

Watch more (how stablecoins can help the greenback)

🤖 Is the AI Boom Real?

Photo by Possessed Photography on Unsplash

We’ve all heard about the AI boom and its expected but profoundly unknown changes to our economy, yielding huge potential gains in productivity.

Of course, epic economic transformations don’t just happen without the proper infrastructure.

Put the pieces in place: The automobile was a captivating development, but cars didn’t have a wide economic impact until we could a) produce them at scale and b) leverage their efficiencies with interstate highway systems.

• The same was true with the internet in the 1990s — corporate investment rates surged, increasing by 3% of GDP, as companies raced to update their systems.

So, with a “boom” in AI seemingly already unfolding, surely we can see the fingerprints of companies’ investments in this transformative technology, correct?

• Apparently not. Instead, businesses’ capital expenditures (“capex”) — the amount spent on fixed assets — have been “remarkably weak,” according to The Economist.
• While capex recovered after pandemic lockdowns were lifted, particularly as companies hurried to shore up decimated supply chains, business expenditures slowed again.

Why it matters:

Surely, some of this is cyclical, especially with interest rates rising in 2022 & 2023, but capex broadly has remained muted.

Familiar names like Microsoft, Nvidia, and Meta — really any “big tech” company — have ramped up spending on research and development, engineering resources, and computing power.

• Microsoft’s total spending is expected to swell 20% this year.

What about everybody else? The Economist calculates that by excluding the firms “driving the AI revolution,” capex growth for other S&P 500 companies is modestly in line with inflation, forecasted to increase by 2.5% in 2024.

• And according to OECD data for major economies, corporate investment spending in the back half of 2023 was slower than typical pre-pandemic rates.

Mixed signals: The question, then, for firms driving the AI revolution is whether corporations worldwide will spend royal sums on the very expensive-to-build tools they’re creating.

If not, or if not yet, it wouldn’t be the first time technologists overstated market demand for breakthroughs. Even the internet took decades to integrate and fundamentally transform society, and the 90s-era enthusiasm for all things internet culminated in the massive “dot com” bubble.

They weren’t necessarily wrong, but they were early, and in finance, early might as well be wrong.

• Perhaps the issue is still timing, and we remain a few years away from feeling AI’s influence.
• A Goldman Sachs survey of top executives found that only 5% think AI will have a “significant impact” in the next one to two years, but 65% foresee its impact within three to five years.

Read more

🌏 Geopolitical Issues are Increasingly Disrupting the Global Economy

Photo by Christian Lue on Unsplash

Mounting geopolitical shockwaves born out of growing competition between powers has spurred investors to pay closer attention to great-power politics.

• Said Solomon, “Everywhere I go, people want to talk geopolitics. That’s not been the case for most of my career.”
• Adding, “We’re now going through a period of time where the impact of geopolitical events is going to have a broader impact on economic growth and capital flows around the world.”

Some context: The end of the Cold War ushered in a new era of globalization, with relative calm allowing countries to form deeper trade relationships, outsource supply chains, open their financial markets to the rest of the world, and so on, prioritizing economic efficiency.

Covid-19, Russia’s invasion of Ukraine, a destabilizing Middle East, and competition between the U.S. and China have pushed companies, investors, and governments alike to reassess risk-return tradeoffs globally, particularly decisions optimizing for efficiency over security.

Why it matters:

Business and governmental leaders are rethinking supply chains. Says Solomon, “You need to think strategically, not just a profit motive. It’s about strategic positioning.”

For Goldman, India is a growing focus. Its offices in Bengaluru are “getting awfully close to being bigger than New York.”

• Nearly half of the bank’s employees are based outside the U.S., but Solomon emphasized, “We certainly are U.S., first and foremost.”
• Hosting six of the world’s leading financial institutions is a “great asset for the U.S.,” he says.

It’s not just Solomon; Merrill Lynch’s chief investment officer commented recently, “Geopolitics used to be considered a lower-level financial risk. Now, it may be the top risk.”

Read more

TRIVIA ANSWER

2.7 million. That’s how many new jobs were created in 2023, adjusted seasonally, according to a CNBC report.