🏦 America's massive debt dilemma

Tuesday, September 8, 2020 by Robinhood Snacks | Disclosures

When the 2020 credit card statement arrives

Last Week’s Market Moves
Dow Jones
28,133 (-1.82%)
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11,313 (-3.27%)
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$10,606 (-7.77%)
10-Yr US Treasury
0.721%

Hey Snackers,

Some Flat-Earthers in Italy were forced to quarantine after sailing out to find "the end of the world" during lockdown. Guess 2020 wasn't enough for them.

On Friday, we learned that the US economy added ~1.4M jobs in August. The unemployment rate dropped for the 4th month straight, falling to 8.4% from 10.2% in July. Stocks still fell for the week.

On the pod: Peloton is reportedly unveiling a cheaper treadmill. Tune into our 15-minute pod to hear why it's way easier to sprint downmarket than up.

IOU
1. US debt will exceed the size of the economy for the 1st time since WWII

BRB, deleting Venmo... The US is kind of like that person who racked up more in Venmo requests than they can pay. US debt has been growing for decades, but it skyrocketed in the corona-conomy. From April-June, America's debt became larger than the size of its economy on a quarterly basis. Last week...

  • US debt reached its highest level relative to the size of the economy since WWII. Next fiscal year, debt is projected to be bigger than the US' GDP for the full year — a 1st since 1946.
  • GDP: That's the total value of all goods and services produced by a country over a period of time (usually a year).
  • $27 trillion: That's America's national debt. It's ~10X the size of every African country's GDP combined and it's $82K per American.

One shrinks, one explodes... The US GDP shrank at a record rate last quarter as consumer spending and manufacturing declined. Instead of that $5 Starbucks latte, you made WFH iced coffee. Meanwhile, debt ballooned:

  • Government spending spiked an extra $3T this year on corona-related rescue programs. Think: $1.2K stimulus checks, enhanced unemployment, and loans to businesses.
  • But government revenues fell 10% this spring compared to 2019. As corporate profits disappeared and millions lost their jobs, way less payroll and income tax $$$ flowed to the government.
  • More gov't spending + less gov't income = bigger deficit: The federal budget deficit is expected to hit $3.3T this year, more than triple 2019's deficit and the biggest mismatch between income & spending ever.
THE TAKEAWAY

Tomorrow's generations will have to repay today's debts... The bigger the debt, the more the US has to pay back — with interest. Right now, the US (counterintuitively) enjoys record low interest on government debt despite the massive IOU. But in the long term, higher interest rates on debt could force the US government to cut spending on services like healthcare, education, and defense — and/or raise taxes. Big spending is necessary right now to prop up the economy, but it's trouble for future generations.

Highs

Abnormally Happy Hour... Zoom's profit soared 3,300% last quarter compared to the same time last year. In 3 months, the video conferencing icon made double the money that it made last year. Zoom's sales more than quadrupled to $663M and it significantly raised its full-year forecast, so investors sent the stock zooming up 40%. Zoom is growing abnormally fast for a public, relatively mature company (even compared to other corona-conomy winners).

Trying to sneak the Red Vines in... AMC shares soared 15% on Friday after America's largest movie theater chain said 70% of its US theaters would be open on Labor Day weekend. Chris Nolan's much-hyped thriller "Tenet" also dropped on Friday, kicking off US theaters' 1st big weekend since March and bringing in $20M. In June, AMC said it was "generating effectively no revenue" (niiice) and doubted it could remain in business much longer. Since then, AMC stock has soared 70% on the reopening hype.

Lows

Elon gets rejected from the club... Tesla stock plunged 7% Friday on news that the S&P 500 added Etsy to the famous index, but not the e-car maker. Tesla became eligible for an S&P 500 Club invite in July after posting 4 straight profitable quarters. If Tesla did get in, funds that track the S&P would need to buy over 120M Tesla shares, likely driving up the stock price. Turns out Elon hasn't made it past the S&P bouncer yet.

Throwing profit puppies out the emergency exit... Desperate move. United said it's permanently dropping its $200 change fee for domestic flights. Delta and American predictably followed suit. Profitable add-ons like change fees have 5X'd over the past decade and made up 15% of US airlines' sales last year. Buuuut: travel is still down ~60% from 2019 and airline bailout money runs out in October. Between pandemics, hurricanes, and fires, booking a flight with a $200 change fee is... risky. Airlines hope that killing those fees will boost sales.

What else we’re Snackin’
  • Visualize: The most popular websites since 1993 in a timelapse. Watch Google rise to #1 as AOL shrinks (and Amazon loses to adult websites).
  • Watch: 3 tips for managing your money, paying off debt, and building financial independence through saving and investing.
  • Achieve: How to make time for purposeful "Deep Work" — 2 hours of disconnected focus can be worth more than other people's full work day.
  • Control: Having an alter-ego helped Beyoncé conquer her nerves. This "Batman Effect" could help you improve self-control, too.
  • Work: 5 tips for a productive job search during the pandemic — virtual eye contact is key.

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Snacks Daily Podcast

Spot what these have in common: J. Crew, Pier 1 Imports, Neiman Marcus, GNC, Modell's, and JC Penney.

These retailers (and 40+ more) all went bankrupt in 2020. But what actually happens to a company after it files for bankruptcy?

Some get new beginnings, some get sold for scraps, and others get reincarnated as ecommerce companies.

Tune into our digestible 15-minute pod to hear why bankrupt companies aren't dead — they're just zombies.

This Week

Disclosure: Authors of this Snacks own shares of Delta, Amazon, and Lululemon

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