Happy Easter 🐣 Monday!

📝 Focus

• New BoJ boss' job: Don't blow up the world

📊 In the Markets

• Tesla cuts again: EV price war rages on

• Samsung Cuts Back Memory Chips as Profits Collapse

📖 MoneyFitt Explains

🎓️ Microchips, Semiconductors and Confusion

📨 Who’s Your Favourite Financial Influencer?

It’s time to be the judge! Click here to choose the Best Financial Influencer 2023.

Before voting, be sure to explore their work and see how they are making an impact in the world of financial education.

Watch this to learn more about the MAIAs!

📝 Focus

New BoJ boss' job: Don't blow up the world

Kazuo Ueda officially took the helm of the Bank of Japan on Sunday as the new governor and will lead the central bank through a crucial period for Japan and the world. His predecessor installed unconventional policies focused on raising inflation to lift an economy that had been stagnant for decades (see Dec MFM.) Ueda is expected to end that decade of ultralow interest rates, raising risks for the world economy.

..... ► Dirt-cheap money was one of the three components of the "three arrows policy" along with fiscal stimulus and structural reforms to boost inflation, growth and competitiveness ("Abenomics.") The theory was that ultra-low interest rates would help lift inflation, which would then raise corporate profits that feed through into higher wages for workers, who had seen years of stagnant salaries, who would then spend more, creating a virtuous cycle. Without the expectation of prices dropping in the future --i.e. deflation-- workers would also no longer be incentivised to put off their purchases till later. Win-win!

..... ► But that goal has been elusive over this past decade and the current pickup in inflation, now at its highest in 40 years, has not been from growing demand but from temporary factors like the weak Yen --thanks to the low-interest rate policy compared to hikes everywhere else-- and supply chain disruptions. That inflation has further squeezed the already parsimonious Japanese worker. Meanwhile, businesses and households have become increasingly dependent on low-interest rate loans, while many have variable rate mortgages with payments that would go up on interest rate increases, further squeezing spending.

..... ► Worse than that, the immense bond-buying programme needed to keep interest rates down has meant that the Bank of Japan has bought up more than half of all outstanding Japanese government bonds (JGBs) and is now one of the largest players in the stock market. But the impact outside its borders is that the BoJ has been one of the most significant sources of easy money in the world, unleashing ¥465 trillion or $3.55tn of Japanese cash into the investment industry, including ¥54 trillion into global shares since April 2013. Japanese investors are the biggest foreign holders of US government bonds and among the largest in Australian, Dutch and NZ securities. The "carry-trade" then led many traders to borrow in Yen (and pay a low interest rate) to buy currencies ranging from Brazil’s real to the Indonesian rupiah (and receive at a much higher interest rate.)

..... ► If Japanese interest rates are expected to rise significantly, the Yen will likely strengthen as well, potentially leading to a reversal of this tsunami of money and posing a risk to the global economy and financial stability from a credit crunch (a sudden sharp fall in the amount of money available to borrowers from banks.) And it could all be happening while the effects of a year of sharp rate hikes elsewhere have only just started to show up in cracks in the international banking sector (SVB, Signature and Credit Suisse, anyone?) Japanese investors already sold a record amount of overseas debt in 2022 as local yields rose on speculation about just such a policy change. What more can we expect for 2023?

📊 In the Markets

In March, the US economy added 236k jobs, which was almost bang in line with expectations. January and February forecasts had been wildly off thanks to forecasters' not noticing that the weather had been pretty decent outside. (The US Labor Department usually reports nonfarm payroll data on the first Friday of every month and did so again last week even though markets were shut for Good Friday. The NFP data is based on a survey of about 141,000 businesses and government agencies and is an important influencer of the US Dollar, bond and stock markets.)

..... ► The March number was down from much higher than expected increases of 326k in February and 472k in January, which upset markets which, at the time, were worried about runaway inflation. The narrative has since changed and the worry is now much more about slowing growth. Luckily, this slower pace of new job additions shows only a gradual cooling, while still showing a strong (maybe slightly less-red-hot) labour market. The unemployment rate ticked lower to 3.52% from 3.59%. The last time it was even a bit lower was back in May 1969.

US markets on Thursday had been subdued ahead of the NFP data and the long weekend, but recovered from early losses and closed higher on positive comments from influential St. Louis Fed President Bullard that "financial stress seems to be abated, at least for now” and that incoming Q1 economic data is stronger than expected, sparking a rally in bank stocks that dragged up the broader market (though he added that while inflation had declined, it remains too high.) The US Dollar rose as the NFP data increased the likelihood of a rate hike at the next meeting on May 3rd (since higher interest rates can make one currency relatively more attractive to hold than another.)

..... ► Jamie Dimon had said on Thursday in an interview with CNN that the recent turmoil in the financial industry had probably made a US recession more likely, though a downturn won’t necessarily happen and that last month's rather scary US bank crisis is probably nearing the end, even if more unforeseen failures did occur.

ByteDance, the private company that owns TikTok and its China clone Douyin, clocked a record high in underlying profits in 2022 according to the FT, making more money even than Chinese tech titans Tencent and Alibaba for the first time ever. Earnings before interest, tax, depreciation and amortisation (EBITDA) hit $25bn in 2022, up nearly 80% from the $14bn it made the year before, on sales of almost $85bn, a 30% increase over 2021. Tencent and soon-to-be-broken-up Alibaba reported EBITDA of $23.9bn and $22.5bn for 2022. Notably, ByteDance’s international business, which includes TikTok, saw only about $15bn in sales compared to China revenues at about $70bn, but the business, though loss-making, was growing more quickly.

Tesla cuts again: EV price war rages on

Tesla has slashed the prices of its electric Electric Vehicles (EVs) in the US for the fifth time in just three months, according to its website pricing, with cuts of 2% to 6% ahead of tighter rules on EV tax credits coming in this month. Its most expensive cars, Models S and X, are $5,000 cheaper than this time last week at $84,990 and $94,990. The base Model S is now a full $20,000 cheaper than it was last year. (The cheaper Models 3 and Y are down by $1,000 by $2,000 respectively.)

..... ► Tesla’s industry-high profit margins, driven by its economies of scale and early mover advantage, gave it the flexibility and firepower to turn up the heat on smaller EV competitors desperately dealing with high costs, and in January it slashed prices by up to 20%. (See MFMs on the start of the EV price war in January and the red flags already fluttering in March.)

..... ► The worry is that those aggressive price cuts have only resulted in a modest increase in deliveries. Tesla hit record vehicle deliveries of 422,875 in the first quarter... but that was just 4% higher than the prior quarter. This could reflect an ageing lineup (software updates aside), more EV competition from still deep-pocketed incumbent carmakers and a slower economy (or, just maybe, a rethink about support for Tesla's mercurial CEO, Elon Musk.) More price cuts may be needed to hit Musk's target of 2 million deliveries in 2023, exacerbating the deflationary price dynamic where buyers hold off in expectation of ever-lower prices.

..... ► Meanwhile, Tesla is facing a class action lawsuit accusing it of violating the privacy of customers following reports that its workers used an internal messaging system to privately share with each other sensitive ("sometimes highly invasive") photos and videos captured by the cameras on customers' Teslas. Reuters reported that Tesla employees could see customers "doing laundry and really intimate things. We could see their kids."

Samsung Cuts Back Memory Chips as Profits Collapse

With the company's quarterly operating profit plunging 96% to its lowest since 2009, South Korean tech giant Samsung Electronics said it would make a “meaningful” cut in memory chip production in a move to ease a major glut in the increasingly commoditised industry. Its semiconductor division made billions of dollars in losses in the first quarter as chip demand dries up in a slowing global economy. "Demand for memory has declined due to the macroeconomic situation and low consumer sentiment," the company wrote. It reported profits of KRW600bn, well short of the KRW1,450bn expected and the KRW14,120bn clocked a year earlier.

..... ► Samsung, the industry leader, had earlier resisted pressure to cut its DRAM (memory) production in the face of plummeting prices from oversupply and soaring client inventories unlike its smaller industry rivals Micron, Kioxia and SK Hynix. It even said it would stomach further pain by continuing to invest for the mid to long term, maintaining its capex for 2023 at levels similar to 2022’s.

..... ► Historically, the DRAM sector has been among, if not the most, cyclical tech subsector. By using its scale, deep pockets and continuing to invest in R&D, Samsung was planning to widen its technological and manufacturing leadership going into the next upcycle. (See end-Jan MFM on Samsung's bold call to keep investing through the cycle.)

..... ► Beware of the confusion even among some quite sophisticated investors of the different semiconductor segments 🎓 and parts of the chain, many of which face massively different demand, supply and price dynamics (including geo-political issues) at any one time.

📖 MoneyFitt Explains

🎓️ Semiconductor Sector (logic/memory, foundry/fabless, equipment)

• Semiconductors are the basic building blocks of an ever-widening range of electronic products, far beyond just computers and electronic items. The word's often used interchangeably with "microchips" or just "chips."

• Chipmakers generally focus on one of two major product groups

  • 1) memory chips (DRAM etc, not storage - e.g. Samsung, Micron) and

  • 2) logic microprocessors (CPUs and GPUs - e.g. Intel, AMD, Nvidia)

• But there is another distinction: Whether or not they have their own factory (foundry, fabrication plant, or "fab") or not ("fabless", where they just do the design, such as Qualcomm, Broadcom, Nvidia... and Apple.)

• A fabless semiconductor design house needs its chips built by a contract manufacturer or foundry, which invests enormous sums in its plant, equipment and, as importantly, people and processes. TSMC is by far the largest, most advanced and most profitable foundry in the world.

• (Semiconductor equipment makers are quite separate - e.g. ASML, AMAT, Tokyo Electron, which supply the advanced equipment that both integrated players and foundries rely on.)