Morning Briefing | How We'll Know the Battle Is Already Lost
Musk could soon enter the AI war. During his virtual appearance at the Wall Street Journal's CEO Council Summit event, Elon Musk discussed the creation of an artificial-intelligence ("AI") business that can compete with the likes of Alphabet's (GOOGL) Google and Microsoft (MSFT). He also hinted at the possibility of involving Twitter and other various parts of his corporate empire in this venture. Musk even predicted that Twitter could soon end its financial losses. Given Tesla's (TSLA) use of AI in enhancing its autopilot and self-driving technologies, Musk suggested that Twitter and Tesla could potentially collaborate as partners in an AI company, drawing a parallel to the relationship between Microsoft and OpenAI.
Nvidia shares surge. Nvidia (NVDA) issued a strong projection for its second-quarter revenue, surpassing expectations on Wall Street by more than 50%. The company also revealed its plans to increase its supply in order to meet the rising demand for its AI chips, which are utilized in powering ChatGPT and similar services. Following this news, Nvidia's stock climbed a staggering 28% in after-hours trading.
A divided Fed. Opposing viewpoints on the need for more interest-rate hikes dominated the Federal Reserve's May meeting. Some participants said that further policy tightening might not be needed if the economy improved as forecast, while others expressed concerns about the slow progress in achieving the 2% inflation target.
The U.S. default risk is rising. According to JPMorgan Chase (JPM), the U.S. has a 25% chance of running out of cash before a deal to raise the debt limit is reached. Still, the company's chief U.S. economist, Michael Feroli, said the government will likely raise the debt ceiling in time. He also remarked that the chances of passing that deadline without an increase are rising.
Credit downgrade. Fitch Ratings warned that it may downgrade the U.S.'s credit ratings due to the increasing political division that's impeding a resolution to the nation's debt-ceiling crisis. The ratings agency expressed concern over the lack of progress in raising or suspending the debt limit despite the approaching deadline. In response to this news, the value of the safe-haven Japanese yen briefly rose before retracing some of its gains, and there was a modest decline in Treasury futures.
The U.K. can blame Brexit for rising food costs. The London School of Economics reported that the U.K.'s departure from the European Union has added nearly £7 billion (roughly $9 billion) – or £250 per household – in extra food costs between the end of 2019 and March 2023. Had the U.K. remained in the EU, it would have shaved 8% off the 25% food inflation over that time frame.
Korea's inflation is easing. According to South Korea's central bank, producer prices rose at the slowest rate in 27 months in April, as agricultural and utility prices declined. The Producer Price Index increased 1.6% year over year in April, which is down from the 3.3% rise recorded in March. This marks the slowest growth rate since January 2021.
Inflation risk. During a session with lawmakers in Brussels, European Central Bank Vice President Luis de Guindos highlighted potential inflation risks. He mentioned that upward risks to inflation come from rising wages and expanding profit margins. On the other hand, potential downside risks include a decline in lending if the banking sector faces renewed pressure.
Regular readers know I (Kevin Sanford) think McDonald's (MCD) is one of the world's best companies...
But it's not about how successful the company is... It's about how in tune with consumers McDonald's is.
As I explained a month ago, it knows how its customers "tick."
McDonald's understands everything from spending habits to customer engagement. For example, it recognizes when customers are purchasing fewer items off its menu... and when they're starting to push back on higher prices.
Basically, it knows what works and what doesn't.
And when we look at McDonald's business, there's a lot it can tell us about the overall health of the economy...
You see, changing trends in the habits of McDonald's customers can give us a sign of where the economy is headed – whether we're looking at a rebound or a recession. That makes McDonald's one of the most important companies to watch as an investor.
Last week, Stansberry Digest editor Corey McLaughlin expanded on this idea in an excellent piece titled "Value Is in Again," where he talked about discount retailer Walmart (WMT)...
When Walmart execs talk, we listen...
Not because we're friends... and we definitely don't hang on every word. But if you listen just a little, you can often learn about the state of the entire U.S. economy. Walmart is America's largest retailer, so the trends in its stores matter beyond its balance sheet.
[We're] more interested in how Walmart customers (and I know a few) are behaving, because 70% of the American economy is linked to consumer spending... [It also] represents the largest grocery store in the nation, with 25% of market share. (This might shock some city slickers.)
As Corey explained, consumer spending makes up a massive part of the U.S. economy. So trends seen in the nation's largest corporations should not go unnoticed. And that's especially true in turbulent times like today, when consumer habits are changing rapidly.
Corey continued...
In the first quarter of 2023, Walmart saw a huge shift in how people spend their money... from people buying discretionary or big-ticket items to using their money to buy groceries and essentials.
Walmart Chief Financial Officer John David Rainey said on the analyst call that sales of "general merchandise" in the U.S. declined in the mid-single digits. But people were still spending, just more on food, where spending increased by low double-digits.
This shows the impact of inflation, a slowing economy (with higher interest rates), and pandemic stimulus programs finally ending. Financial life for everyday Americans has gotten noticeably harder... and more people are increasingly spending money on what they feel they absolutely need, not what they want or think would be nice to have.
People who may have been shopping at other stores are also turning to Walmart in search of lower prices, and others are buying more Walmart-brand items. "Customers continue to seek value given the impact of inflation," Walmart CEO Doug McMillon said.
As I said yesterday, the U.S. consumer is losing a game of tug of war against the Fed – inching closer and closer to the middle red line, where it loses its battle against the central bank's aggressive rate hikes. And we're seeing this play out right before our eyes at McDonald's and Walmart.
Consumers were able to fend off pricing pressures for longer than most expected, but eventually, the weight of the Fed's interest rates pulled consumers closer to that middle red line. And as consumers lose ground, they trade down – sacrificing the quality of goods and services (and potentially the quantity as well) for cheaper alternatives.
Today, we're seeing consumers...
- Buying fewer items per transaction
- Opting for lower-priced retailers that offer better value
- And switching from "wants" to need-based purchases.
Once this trade-down effect takes hold in the economy, overall spending and growth slows. That's why you should pay attention to these major corporations and look beyond the nominal figures you see in the media.
Only a select few companies can weather this type of environment with little financial damage. And when big names like McDonald's and Walmart are the only ones left standing in their industries, that's when you know the battle in the economic arena is lost.
As always, please submit all thoughts, questions, and commentary to new@stansberryresearch.com.
Our Stansberry Research offices will be closed on Monday, May 29, in observance of the Memorial Day holiday.
Stansberry NewsWire will resume publishing on Tuesday, May 30, with our "Weekly Edition." And on Wednesday, May 31, we'll have our mailbag issue. In it, I answer a reader question about artificial intelligence's impact on investing. And trust me, you won't want to miss it...
Until tomorrow,
Kevin Sanford, MBA
May 25, 2023
Join for free. See how over a million people are taking control of their wealth…
