Classical Economics #2: Growth

Here's the overview:

Economic Performance

• GDP Growth: The U.S. economy showcased robust growth, with real GDP increasing at an annualized rate of 2.8%, surpassing expectations significantly. This growth was driven by strong consumer spending, which rose by 2.3% for the quarter, alongside contributions from private inventory investment and nonresidential fixed investment.
• Inflation Dynamics: Inflation showed signs of cooling, with the personal consumption expenditures price index (PCE) rising by 2.6% for the quarter, down from 3.4% in the first quarter. Core PCE, excluding food and energy, was up by 2.9%, indicating a more manageable inflation rate but still above the Federal Reserve's long-term target.
• Labor Market: Despite a slight uptick in the unemployment rate, the labor market remained robust, with initial jobless claims aligning with forecasts, suggesting continued employment strength.

Market Movements

• Stock Markets: The market experienced volatility but ended the quarter with gains. The S&P 500 rose by 3.48%, driven by sectors like semiconductors, particularly Nvidia, which significantly influenced the semiconductor index's 22.55% increase. This performance was partly fueled by ongoing interest in AI and technology sectors.
• Bond Markets: Bonds saw a modest recovery, with the U.S. Core Bond Index up by 0.17%. The yield curve remained inverted, reflecting market expectations of future economic conditions and Fed rate movements.
• Commodities and Currency: Oil prices experienced a slight decline, with WTI crude oil down by 2.59% for the quarter. The U.S. dollar strengthened against major currencies, reflecting confidence in the U.S. economy's performance.

Federal Reserve's Actions and Market Sentiment

• Interest Rates: The Federal Reserve's stance shifted slightly, with expectations now leaning towards one rate cut for the year, a decrease from previous projections. This adjustment came in response to the evolving economic data, particularly the cooling inflation rates.
• Market Sentiment: Investors reacted positively to the economic data, especially the better-than-expected GDP growth and easing inflation. However, concerns about geopolitical issues and the upcoming U.S. presidential election introduced elements of uncertainty, emphasizing the need for diversified investment strategies.

Looking Forward

The third quarter and beyond are anticipated to be influenced by how the Federal Reserve navigates the fine line between combating inflation and supporting economic growth. The market's focus will likely remain on inflation trends, employment data, and any further policy adjustments by the Fed.
Conclusion

The second quarter of 2024 was marked by economic resilience, with the U.S. economy showing strength in growth and consumer spending, alongside a cooling inflation rate. Markets responded with cautious optimism, driven by sector-specific gains, particularly in technology.

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‍But first, an obvious choice

Meta may be interested in purchasing technology and know-how. While they may feel no need to own X as a social media platform, there can be compelling reasons to buy the technology and know-how X develops under its new direction. Simply put, buying X would be a two-for-one special: Eliminate X as a social media nuisance and more importantly integrate their newly-purchased X-tech across all their products. What’s $100-billion or so to a $1.35-trillion behemoth, especially if there’s considerable measurable upside?

But Meta buying X is hardly a stretch of the imagination. Let’s dig deeper.

‍Overview

As the tech landscape continues to evolve, Microsoft has shown a strong ability to adapt and expand into new markets. However, despite its dominance in software, cloud computing, and productivity tools, the company has notably missed several key opportunities. Two of the most significant are social media and content creation tools for creatives—areas where competitors like Google and Meta have thrived. By acquiring X (formerly Twitter), Microsoft could bridge these gaps and position itself as a leader in the next wave of digital transformation. Here's why Microsoft would be a great candidate to buy X and how it could integrate this asset into its broader strategy.

‍Filling the Social Media and Content Creation Gaps

Microsoft has made various attempts to enter social media, most notably with its acquisition of LinkedIn in 2016. However, LinkedIn primarily serves a professional audience and doesn’t capture the broader, more dynamic conversations happening on platforms like X. Additionally, Microsoft has largely stayed out of the content creation space, an area where other tech giants have built strong ecosystems around tools like YouTube, Instagram, and TikTok. By acquiring X, Microsoft could immediately gain access to a massive user base and a platform that is becoming increasingly integrated with content creation and distribution tools.

Under its new leadership, X is not just focusing on real-time communication but is also expanding its offerings to include content creation tools for Creatives. These tools are designed to allow users to produce, share, and monetize their content directly on the platform. This aligns perfectly with Microsoft’s ongoing strategy to enhance its creator-focused products, such as its Surface devices and creative software like Clipchamp. Integrating X’s content creation tools with Microsoft’s existing suite would create a more comprehensive offering for Creatives, helping Microsoft to compete more effectively with platforms that already serve this audience.

‍X’s Ambitious Plans: Payments, AI Integration, and Being The World’s Town Square

X is evolving into more than just a social media platform; it’s positioning itself as a multi-functional hub that includes social interaction, financial transactions, and real-time content creation. Its plans to integrate payments into the platform could turn it into a key player in the digital payments space—a market where Microsoft has shown interest, especially with its cloud services for financial institutions. By acquiring X, Microsoft could enhance its fintech capabilities and offer a seamless experience that combines social media, payments, and content monetization.

Let’s not overlook the upcoming opportunity to integrate blockchain/crypto into transactions either – something X’s leadership is keenly aware of and interested in. If blockchain is a public ledger, then X with blockchain is the public ledger in the middle town square.

Moreover, X’s recent advancements in artificial intelligence, particularly with the introduction of Grok, present another compelling reason for Microsoft to consider an acquisition. Grok, an AI tool designed for real-time and recent data analysis, could significantly enhance Microsoft’s existing AI suite, which includes Azure AI and collaborations with OpenAI. By combining Grok’s capabilities with its own, Microsoft could offer even more sophisticated tools for real-time data processing, benefiting both individual users and businesses.

Additionally, Microsoft has had a minimal role in the news industry, an area where X has traditionally been strong. X is the go-to platform for breaking news and real-time updates, something that Microsoft has struggled to capture. Integrating X into its ecosystem could give Microsoft a foothold in the news industry, allowing it to better compete with companies like Google and Apple, which have established news platforms.

‍Synergies with Microsoft’s Existing Ecosystem

The acquisition of X would not only fill a gap in Microsoft’s portfolio but also create synergies with its existing products and services. X’s social media platform could be integrated with Microsoft Teams, adding a new dimension to enterprise communication by bringing in real-time public discourse and creative content sharing. This could make Teams even more versatile, appealing not only to businesses but also to a broader audience, including content creators.

Furthermore, X’s ad tech could significantly boost Microsoft’s advertising business, which currently lags behind competitors like Google and Facebook. X’s ability to deliver targeted ads based on real-time trends and conversations, coupled with Microsoft’s existing data analytics capabilities, could create a powerful advertising platform that reaches a wide audience.

‍A Strategic Move in the Competitive Landscape

Finally, acquiring X would be a strategic move for Microsoft in its ongoing competition with other tech giants. While companies like Meta and Google have established themselves as dominant players in social media, content creation, and news, Microsoft has remained largely on the sidelines. Buying X would not only give Microsoft a seat at the table but also position it as a major competitor in these spaces. It would signal that Microsoft is serious about expanding its influence across all aspects of digital life—from productivity and gaming to social media, content creation, and beyond.

‍Like their OpenAI play, Microsoft can be bold and strategic 

In conclusion, Microsoft’s acquisition of X would be a bold and strategic move that fills critical gaps in its portfolio. With X’s ambitious plans for payments, AI, content creation, and news, combined with Microsoft’s strengths in cloud computing, enterprise software, and artificial intelligence, this acquisition could create a powerful new platform that redefines the intersection of social media, finance, and technology. By integrating X into its ecosystem, Microsoft could not only catch up to its competitors but potentially leapfrog them in the race to dominate the digital future.

‍Personalities and human nature

Let’s be frank: Elon Musk is a major personality. And he speaks of and works for high-order, human-redefining accomplishments. He has warned against Google, and he has warned against an unethical direction for AI. What’s good for Microsoft is often bad for Google. So Elon would like that check to be in place. The last step would be for him to see that Grok is indeed a check against any OpenAI concerns he has. That may be a large hurdle to clear. But Microsoft may have learned from some wobbly OpenAI days, and be able to present a compelling case – and overpay.

And the institution that Microsoft is would immediately provide the top-cover to “formal and establishment” voices and therefore major advertisers. And the unaware crowd that doesn’t understand the role X plays as town square would adopt. Top-cover, integrations, mass adoption, and an overall huge value-add for Microsoft.

‍Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

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    We’re the Guide.

‍

Note: Economics is the study of how society uses resources for the development, production, procurement, distribution, and consumption of tangible products (such as iPhones) and intangible services (such as Apple Music).

John Maynard Keynes

The most important name in today’s worldwide economic system is John Maynard Keynes. Keynes is the one who developed economics as we know it. He wrote “The General Theory of Employment Interest and Money” in 1936 in the UK. Similar to Copernicus seeking to understand the movement of the Sun, planets, and stars, Keynes wanted to understand unemployment because The Great Depression was such a problem in the 1930s, and the existing understanding of economics did not explain what was happening (or what could be done about it) very well enough for governments to partake in righting the economic ship during the storm.

Note: Come back later for more articles about other economists across the ages, such as The Austrian School of economics (also very significant).

Keynes wanted to understand

He wanted to know what existing economics at the time could not explain about The Great Depression – but he did so with an emphasis on unemployment and by taking snapshots of the economy, as if it was static. So what he developed is useful, but lacks usefulness on growth or inflation issues.

More specifically, Keynes wanted to understand how employment and prices affect each other; how government affected employment and prices; and more than anything, he wanted to know how to “control” (or at least influence economies/money), such as how to drive employment up. 

More or less, Keynes used existing approaches that microeconomists used when evaluating businesses, plus some new approaches to expand economic knowledge into something bigger: macroeconomics

Simply put, Keynes took what was small or local and made it big – big enough for governments to use. Naturally, macroeconomics includes microeconomics since the economy of each piece would be part of the economy of the whole.

Milton Friedman came later

He pointed out that Keynesian Economics could not explain the relationship between price levels and economic output. He called this “the missing equation.” Friedman melded classical economics understandings of Adam Smith (and others) with Keynesian Economics. Friedman concluded that the classic theories worked in the long-run, but Keynesian Economics works in short intervals.

Local isn’t universal

“What goes up must come down” is right locally (in your backyard), but on a bigger scale it is wrong . The meteorites from space that have landed on Earth did not come back down to their origin when they “went up.” They never came back down.

Building on Friedman’s work

An economist from New Zealand began working with 100 years of UK data on the relationship between unemployment and inflation. The economist’s name was AW Phillips, and his work became known as The Phillips Curve. This curve was adopted by economists worldwide and is now a major contributor to economics. It shows that as unemployment rises, wages increase, and when unemployment falls, wages decrease.

Friedman and fellow economist Edmund Phelps felt that manipulating monetary policy (such as managing inflation) was not the right way to manage unemployment and that unemployment should be left “natural” and unaltered by central banks, the banks of governments.

Then in the 1970s and 1980s the US experienced both high unemployment and high inflation. Phelps and Friedman then clarified the understanding to show that The Phillips Curve was true if inflation was unanticipated. If it was anticipated, then the conditions were different. This ushered in a whole new element to economics: Expectations are part of the equation in a significant way.

Nowadays, we see expectations set by world governments very deliberately so they can use it as another way to manage economic systems. Something like “a period of somewhat-higher inflation can be expected in the next two quarters,” is common to hear from a Fed Chairman (Federal Reserve Chairman) since this economic understanding came to be.

Of note, since the late 80s/early 90s, economic growth theory is what has dominated economist efforts (since inflation, employment, and prices were already being managed with Keynesian and Friedman understanding), and GDP expansion continued as a top priority.

Back to The Great Depression

Let’s not forget how the interest and need for macroeconomics got started: The Great Depression. The Great Depression was not just in the US. It was global. It started in the US in 1929 though, and by 1930 it had reached the UK. Half of Britain’s trade (sales around the world) disappeared, and in some areas unemployment reached 70%! No wonder efforts were made to understand economics better.

The US had an awful time through The Great Depression too of course, as did countless other countries. For the US, The Great Depression did not end until we entered WWII in 1941. The statistics and the stories are really sad, and to this day people and governments study, fear, and work to avoid the conditions that led to The Great Depression.

Note: The Industrial Revolution followed by The Great Depression followed by WWII followed by The Cold War firmly cemented Keynesian Economics into world governments for a variety of reasons.

Boom and bust

Economic booms (a hot economy) and busts (a cold economy) are now known as business cycles. You may think that you always want your economy hot, but that is actually not true. Booms can lead to bubbles and bubbles pop and you get busts. Understanding business cycles is just one piece of the economy. Another piece of the economy is understanding growth.

Note: As investors, if we understand where things have been we can better understand where things are going — and that’s a major strategic advantage.

Let’s talk about GDP

When you add up all of the goods (such as iPhones) and services (such as Apple Music) you get GDP (Gross Domestic Product). GDP is measured as Total County Production measured in dollars (if you’re the US). GDP has been growing for 200 years for capitalist countries.

Note: there is no purely capitalist country, but each country has rules and people that are more capitalistic than others.

GDP across decades has a very obvious upward trend

But GDP throughout the weeks, months, quarters, and a year can (and do) have significant ups and downs. It is within these ups and downs that successful investors thrive and profit.

Let’s talk about inflation too

The last concept to introduce in this article is inflation. For most people the word has nothing but negative connotations. But in the world of Keynesian economics inflation is a given, and it's managed with government actions. 

Simply put: inflation is a rise in prices. 

Often people think inflation is simply a devaluing of currency by printing too much currency, but consider this: if currency was devalued then prices would go up, no? They would. So devaluing currency is a type/cause of inflation, but there are other types/causes too.

It’s right to monitor and take appropriate action against inflation

When prices go up enormous amounts this is called hyperinflation. For instance, between WWI and WWII Germany had inflation of 230% per month at times! That means every day prices went up 4% on average. So if milk cost $1 on Monday, it cost $1.04 on Tuesday, $1.08 on Wednesday, $1.12 on Thursday, and $1.17 on Friday. By the end of the month milk would cost $2.30. By the end of the year milk would cost $8.20. And a $25,000 car would cost $180,020.60 if those hyperinflation rates happened to us today. No wonder it scares people.

Historically, the US has managed inflation well

In the last 100 years, our worst experience had been in the 1970s when inflation reached 7% from 1973-1975. However, in 2022 inflation met or exceeded 7.5%. 

The US government used many tools and decision-makers to keep it down and return to the 3-4% average we have had since 1946 (on the heels of WWII). Before WWII, the US averaged about 1.7% inflation.

Around the world though, countries have been far more adversely affected by inflation. As mentioned, Germany experienced 230% inflation per year. Israel saw 400% inflation in 1985; Argentina has seen 700% inflation; Bolivia saw 12,500% in 1984. There are many more examples, but Keynesian economics does indeed have the understanding, tools, and systems that manage inflation well.

Inflation is like cancer to economies — and it must be detected early and expertly managed. When inflation is detected, it gets everyone’s attention!

So that’s the introduction to economics. There is a lot more to follow, but we hope you liked what you read, and we hope you have learned something too. Is this enough understanding for you to go start investing in stocks with great success? No. But we can build to that.

The key concepts in this article to remember are:

• John Maynard Keynes “invented” macroeconomics for governments
• Government using macroeconomics to influence and manage a country’s economy
• Milton Friedman identified the relationship between prices and economic output
• AW Phillips identified the relationship between Unemployment and inflation, known as The Phillips Curve
• Phelps-Friedman established expectations as a key component of an economy
• Business cycles, GDP, and inflation as the major factors government considers
• Since the late 80s/90s, economic growth has become the priority for economists

Built for The One in the Arena

Arena Investor is on a mission not only to help with financial planning, and investment management, but also with education. Keep reading, watching, following, and sharing great Arena Investor content. And as always if you want professional advice, we are glad to be your teammate – along a financial journey you can actually enjoy.

You’re the Hero.
    We’re the Guide.

‍