Financial Virgin - Issue 35
Financial Virgin - Issue 35
Good morning, everyone. The stock market was a whirlwind again. 🌪️Lets see what the highlights for the week were.
📈What Are “Interest Rates” Anyway?
The Fed announced yesterday that interest rates are going up, and now the stock market is going down, but what the hell are interest rates and what the heck does the Fed have to do with them. 🤔
Interest rates affect many aspects of life in a country, its economy, and its markets. Let’s examine why:
The US Federal Reserve controls the federal funds rate (this ‘interest rate’ JPow talks about), which is the target interest rate at which commercial banks can lend their reserves to each other. A bank’s reserves describe the cash that banks have to keep in actual vaults to make sure they have enough liquid money to satisfy a large withdrawal. The federal funds rate is important because it affects unemployment, economic growth, and inflation in the U.S. 🚨
The federal funds rate affects other interest rates that you may be familiar with, such as interest rates on home or auto loans. 🚗 🏡Why does this relationship exist? Well, because the interest rate at which you have to pay back your car loan depends on the bank’s individual rate for you (this is known as the prime lending rate), and your individual rate is directly related to the federal funds rate.
You probably heard yesterday that the Fed is going to ‘reduce its balance sheet’ and ‘raise rates.’ When the federal funds rate is low, it encourages people to invest or take out loans (because you have less interest to pay back.) That’s why the Fed lowered rates during the pandemic in an effort to incentivize people to participate in the economy in spite of lockdowns. The Fed also started buying bonds and other securities — ‘increasing the size of its balance sheet’ — in a process called quantitative easing to help lower interest rates.
Although lowering rates and increasing asset purchases was an appropriate short-term monetary response to the pandemic-era economy, low rates and printing lots of money causes inflation in the long run, which is where we are now.
So if raising rates helps combat inflation, why is the stock market reacting negatively? Because higher interest rates raise borrowing costs, disincentivise hiring, increase credit card rates, and generally slow down the economy and when the economy slows down, bonds become more appealing investments because they’re less risky — so investors are selling or switching to bonds to avoid losing money. 💡
At the end of the day, the Fed is reacting to inflation in a way that’s historically appropriate. The market just isn’t happy because, in the words of JPMorgan analyst David Stubbs, “What the market doesn’t like, is rapid changes in the monetary landscape.” 🤷
💳Buy NFT with Mastercard
Coinbase customers will be able to use Mastercard credit and debit cards to make purchases the crypto company’s upcoming NFT marketplace. The deal is the latest in a flurry of crypto partnerships for Mastercard and Visa. This will drastically reduce the friction in buying and NFT.
💳 Credit crunch
South Africa's total credit card debt has grown fairly gradually, reaching R137 billion in October 2021 from R61 billion in 2011. It grew by just R4 billion during the two years affected by the pandemic. By contrast, the mortgage market is worth R1.6 trillion and continues to grow strongly. (Source: SARB)
🌎 Global Growth
The IMF estimates that the global economy grew at its fastest pace in 40 years last year, but the organization's not holding out much hope for this one. The IMF cut its US outlook from 5.2% to 4%. The IMF also downgraded its global economic growth forecast from 4.9% to 4.4%. What stock are you buying to combat slow growth projections? In my opinion Find stocks that people will always buy and have some variation of “shrinkflation” built in. Colgate-Palmolive, Coke Cola.
👎 Robinhood Takes a Nosedive
Usually, we’d take the most “prominent” earnings in any given day for our top story. However, there’s just one story we cannot ignore today. Robinhood’s down 12.2% in afterhours because of earnings-related antics… (sorry Apple!)
Robinhood has been in decline for months. So what’s with this collapse? 🤔 Here’s the post-mortem from today’s earnings report:
Revenue: $362.7 million, +14% YoY (analysts expected $370.9 million)
Earnings loss per share: -$0.49 per diluted share (analysts expected -$0.45)
Net loss before income tax: $420 million, -2,310% YoY (analysts expected $362.1 million)
Monthly active users (MAUs): 17.3 million (down from 18.9 million in Q3; analysts expected 19.8 million.)
🏆Apple our Champion
Apple ascended 3.3% in extended-trading, smashing earnings estimates in the fourth-quarter. $AAPL’s revenue spiked 11% to $123.9 billion, setting a new record high. 🏆
| EPS: $2.10 (vs. $1.89 expected)
| Revenue: $123.9 billion (vs. $118.66 billion expected) | Link to Report
🦅 US government’s spending plan
This spending will invests in education, childcare, green infrastructure, and more, but it has been in limbo for a while, and disagreements throughout the year have already brought its price tag down from $6 trillion to $1.8 trillion. Will it get the GREEN LIGHT ? (insert Squid Game reference) Keep in mind the US total debt is now $29 trillion is almost 50% bigger than its economy – and he’s worried that it’ll drive inflation even higher than the 39-year high it hit last month.
🐔Beyond KFC
Plant-based versions of chicken nuggets have been around for years, but new wizardry is aiming to make these alt meats something more than soy dressed up in a cheap chicken suit. And Kentucky Fried Chicken, the fast food chain known for its fried bird, recently rolled out a new plant-based menu item with the bold claim that it would be just as “finger lickin’ good” as the real thing.
DID YOU KNOW?
LINKS THAT DONT SUCK
🚗 How to Winter-Proof Your Tesla
💀 Crypto Leads to Massive Surge in Online Scams
🥃 Don Julio Tequila Maker Diageo Is Running Low on Booze That Takes Years to Make
Cheers All have a great weekend!