President Harris Scenario: Sustained Climate Ambition Faces a Bumpy Road

Economic

Summary:

We expect Vice President Kamala Harris to depart from her 2020 stance and move towards the centre. She is likely to preserve the Biden administration’s most important climate legacy, emphasising a more efficient implementation of the IRA. Harris would want to strengthen environmental regulation but her ability to do so would be constrained.

Since Vice President Kamala Harris replaced Joe Biden as the Democrat Party presidential candidate, she has been strategically silent about her energy and climate policy platform. Her campaign for the 2020 presidential election indeed outlined an aggressive vision, where she proposed to spend $10 trillion to decarbonise the US economy, establish a carbon tax, and ban fracking. But this time around, her ambiguity on climate policy so far is signalling a departure from her 2020 stance and a move toward the centre.

Harris may face mounting pressure to lay out a more detailed energy and climate policy platform as we head to the elections, but either way, we would expect Harris to preserve the Biden administration’s most important climate legacy – the Inflation Reduction Act (IRA) and Infrastructure Investment and Jobs Act (IIJA).

Based on these two laws, she may propose to expand clean energy spending and put a stronger emphasis on certain aspects, such as environmental justice and affordable energy. She is also likely to toughen environmental regulations, such as on vehicles and oil and gas. But those regulations run a high risk of being struck down now that the Supreme Court has overturned the Chevron Doctrine and shifted much of government agencies’ power to the judiciary branch.

Oil and gas

Harris would need to carefully handle the delicate balancing act among energy transition, energy security, and market stability. This will remain difficult given the exacerbated political polarisation, increased cost of living, as well as the US’s role as the world’s largest oil and gas exporter. Thus, as discussed before, we would not expect Harris to take an extreme approach toward the oil and gas industry – in fact, she has already indicated that she no longer supports a fracking ban.

US oil output would likely continue to hit record highs regardless of who is in the White House as we have seen over the last few presidencies. We would also likely see caution from Harris on new LNG export licensing bans, as the January ban has already been overturned by a federal judge and would similarly be struck down by the Supreme Court.

Instead, a Harris administration might try to implement policies asking oil and gas companies to pay more royalties for drilling on federal lands or toughening the rule of fee collection over methane emissions. Harris might even try to reduce current subsidies to oil and gas companies – as newly indicated on the Democrat Party’s policy website. However, this latter policy may prove to be difficult to implement because of the stubborn existing system and the strong lobbying power of the oil and gas industry, especially if the Democrat Party does not control Congress.

IRA

The IRA will not go away, because even if Congress somehow succeeded in voting to repeal the act, the decision would be vetoed by Harris. Nevertheless, the Democrats may need to make compromises on certain IRA provisions. The compromises may be done by cutting certain clean incentives such as for electric vehicles (EVs), making more clean fossil fuel power plants eligible for clean power tax credits, and favouring blue hydrogen over green hydrogen, among others. Additionally, more compromises might be necessary if the deficit issue in the US becomes more severe.

In any case, we expect the Harris administration to work on an even better implementation of the IRA. Harris’ Vice President pick of Governor of Minnesota Tim Walz has signed into law various legislation to help the state tap into the clean energy funding of the IRA and reduce emissions. While not easy to replicate at the national level, the Harris administration can leverage Walz’s experience to work with federal agencies and ensure more efficient flows of funding to states.

EVs

If Democrats do not control Congress, the US EV policy would remain vulnerable, even with Harris winning the White House. Harris would want to support the EV industry even more, but any EV provisions under the IRA – tax credits, charging network funding – would be first in line to be sacrificed for a compromise. Nevertheless, we can still expect the Harris administration to push for educational programmes and work with car manufacturers to upskill the industry’s workforce and promote the adoption of EVs.

EV and hybrid vehicle sales as a percentage of total light-duty vehicles

Hybrid electric vehicle without plug: HEV, battery electric vehicle: BEV, plug-in hybrid electric vehicle: PHEV

Source: Argonne National Laboratory, ING Research

Renewable power

Supportive policies on renewable power would stay largely intact with possible additional efforts to reform the transmission lines and shorten permitting timelines. The renewable industry in the US would continue to develop steadily, further driving down the cost of production.

Hydrogen and CCS

The hydrogen and CCS tax credits have the highest chances of staying among all incentives provided under the IRA. However, without Democratic control of Congress, we would still see pressure to make the tax credit eligibility requirements looser for both hydrogen and CCS. And since the Department of Energy's LPO’s funding does not differentiate among technologies, it is likely to be cut in this scenario, too. Efforts from corporates to develop pipelines will continue, though support from the government will not be high.

Critical minerals

Onshoring key technologies (such as batteries) and securing the critical mineral supply chain would also be a priority for Harris. But as opposed to Trump’s comprehensive tariff proposal, Harris might target tariff hikes on strategic goods, including batteries, graphite, and permanent magnets, among others, with existing/further exemptions or delays in implementation.

Regulation

Harris may put a strong emphasis on strengthening environmental regulation to push the US to a cleaner economy faster. But there is a strong resistance force – the Supreme Court.

In recent years, the conservative Supreme Court has made several decisions limiting the EPA’s regulatory power. In 2022, it ruled that the EPA does not have the authority to limit emissions from power plants by taking a broad view of the Clean Air Act (CAA) and forcing them to switch from one source of generation to another. Power plants must instead be regulated based on the best system of emissions reduction (BSER) method authorised under the CAA.

In June this year, the Supreme Court overturned the 40-year-old “Chevron doctrine” under which lower courts needed to defer to federal agencies to implement legislation that was ambiguous in interpretation. Moreover, the Supreme Court recently temporarily blocked the EPA’s “Good Neighbour” rule to regulate power plant nitrogen oxide emissions from upwind states.

These decisions have shifted more power of interpreting federal law from the executive branch to the judiciary branch. This means that despite Harris’ will, the EPA’s newly finalised vehicle tailpipe emissions rule, its new regulations on coal and gas power plants (following the 2022 Supreme Court guidance on using BSER), and any new regulations could all be at risk. Consequently, the US may need to rely even more on carrots than sticks to drive the energy transition.

Climate leadership

A Harris administration would advance climate leadership through continued engagement in the United Nations Conference of the Parties on climate change. But the US’s climate credibility may be hard to enhance given its lack of a comprehensive climate policy ecosystem, its lagging progress in mandating sustainability disclosure, as well as potential clean energy funding pullbacks.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Goldman Sachs

Economic

Our analysts increased their forecast for US home price appreciation to 4.5% this year and 4.4% in 2025, up from previous estimates of 4.2% and 3.2% respectively in April.

We spoke with Goldman Sachs Research analyst Vinay Viswanathan about the revised outlook and why homes might become more affordable even as prices continue to climb.

Your team recently upped its forecast for US home prices, noting that “bad news is likely good news” for home prices. What did you mean by that?

It’s a reflection of the fact that labor markets appear to be loosening, which gives the Fed more room to cut. Our economists now forecast the Fed will deliver three consecutive 25 basis point rate cuts at the remaining meetings this year.

Now, if we thought the ability of homebuyers to purchase houses would diminish because of a worsening economy, in which people lose jobs and income and are therefore unable to afford a mortgage, rising prices would be bad news.

But we’re not seeing higher permanent layoffs — at least not yet. The reason we think right now that bad news is good news is that rates are falling because of concerns around employment, and we don’t think those concerns will really affect the housing market without income loss. All you’re really seeing is that the cost of buying, of taking on a mortgage, is coming down. To that end, we’ve already seen substantial improvement in funding costs. Just to frame this, the peak in the cycle saw mortgage rates of about 7.8% in Oct. 2023. Mortgage rates have since fallen all the way back down below 6.5%. We believe we’re well past the peak in mortgage rates, and we think it's going to be a slow but steady grind lower over the coming years.

How does your anticipated home price appreciation compare to recent history?

The growth in home prices has been really resilient. At the start of the pandemic, there was a lot of concern that home prices might actually decline, because of the loss of income. The opposite happened. There ended up being a massive surge in household formation, which created an organic need for housing. On top of that, it was also a time when there wasn’t a ton of supply, both in terms of existing inventory and new builds. Those factors in the supply and demand sides led to the strongest home price growth we’ve seen in the country’s history: around 20% on an annualized basis.

Over the last year, home prices have grown by about 5.5 %, which is a little above the historical trend of about 5%. Clearly, there’s still not enough supply. But it also goes back to the household formation story. Peak homeowner age is between 30 and 39, when people start having children. And we have a lot of people in America in that cohort who need housing just based on where they are in their lives.

But isn’t the unaffordability of housing impacting their buying decisions?

It’s true that, by almost any estimate, affordability is the worst right now than it’s been for as long as we have data on record — so since the early 1980s. A lot of folks were thinking we would have home price declines again because of this. We had maybe a couple of months of home price declines, but then very quickly they reversed back up.

US House Prices are Forecast to Rise More Than 4% Next Year_1

I do think we’re bucking some of the historical norms that have governed the housing sector. A lot of that just comes down to what’s happening under the hood. First, consumer balance sheets remain in really good shape overall, despite the fact that there’s weakness in the bottom income quintile, where we are seeing cracks. And second, unemployment has been attributed mostly to temporary layoffs or new entrants into the economy. Permanent layoff rates are still quite low.

If home prices keep rising, though, how does that impact the affordability problem?

There are two ways to get out of this affordability trap that we’re in. One way would be if home prices fall in one fell swoop, and you immediately see, say, a 20% drop in home prices over the course of a year, which brings affordability back to normal.

The other way, which we think is going to happen this time around, is you have a slow grind in affordability back down to normal levels. We think three factors will drive that. First, we’ll have a gradual lowering of interest rates. Mortgage rates have already fallen in anticipation of the Fed rate cuts, so they’ll probably remain unchanged from current levels through the rest of the year. But we think they’ll fall by another 40 basis points next year. Second, we think income growth will remain positive — we’re forecasting real disposable income growth of 2.4% this year and 2.1% next year, which are both pretty healthy levels relative to history. And lastly, we think home price growth will be positive but below trend — just enough that we will see affordability stabilize.

Based on these views, we think we will get back near a healthy level of affordability by the end of the decade, so it will be a five-year odyssey of slow normalization.

US House Prices are Forecast to Rise More Than 4% Next Year_2

Why haven’t we seen mortgage applications respond yet to the decline in borrowing rates?

It’s a good question, and one that we’ve been a little puzzled by. The main factor, in my opinion, is that the timing of the drop-in rates was not ideal. You typically see a seasonal spike in mortgage applications at the end of spring, around April or May. But mortgage rates really didn’t start to drop until June. If that had happened earlier, I think you would have seen a bigger effect. Right now, we’re entering the seasonal slowdown in the market when kids are going back to school and families generally don’t want to move. So I think it’s really just residual seasonality that’s the big driver here.

US House Prices are Forecast to Rise More Than 4% Next Year_3

What are some of the big differences you’re seeing among US regions?

Year to date, we’ve seen the strongest home price growth in three main areas. First is the Midwest, which by most estimates is the cheapest and most affordable part of the country. Cities like Cleveland and Chicago have done really well. Second is the Northeast. New York and Boston have had a really strong year. The third is California, especially San Diego. People assumed California would be the worst-performing state because the baseline level of affordability was so low. But California also has pretty onerous land-use regulations that limit supply, and there’s been a lot less financial distress than people were expecting, with one of the lowest loan-to-value ratios on outstanding mortgages in the country.

We have a model-driven forecast for home price appreciation in the top 381 metros in the country, and we have two very out-of-consensus views as a result. First, we think California home price appreciation will do very well over the next two years. Certain metros like San Jose could see up to 10% appreciation over the next 12 months.

On the other hand, we are pessimistic about the Southeast, and Florida in particular. You’ve seen lower income growth on a real basis in Florida versus the rest of the country, and it has also experienced a massive shock in affordability. Florida actually entered the pandemic being relatively affordable, and now it’s one of the least affordable parts of the country. Not only that, insurance costs have ballooned in Florida, which has to be factored into the outlook.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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FastBull Featured

Daily News

Central Bank

Economic

[Quick Facts]

1. No progress in Gaza ceasefire talks in recent weeks, sources say.

2. Eurozone labor costs have risen too much, inflation may fall going forward.

3. NY Fed reports improved manufacturing but weak employment in Sept.

4. European gas prices fall on warmer weather and improved supply outlook.

5. Oil prices surge on Monday.

[New Details]

No progress in Gaza ceasefire talks in recent weeks, sources say

Palestinian sources familiar with the negotiations stated that there has been no progress in Gaza ceasefire talks in recent weeks. These sources indicated that recent mediation efforts aimed at pressuring Israeli Prime Minister Netanyahu to return to the negotiating table to end the war and release the detainees have failed. Netanyahu's new demands, such as maintaining Israeli military control over Gaza's "Philadelphi Corridor," have disrupted the negotiation process.

The sources noted a "real gap" between Hamas's demands and Netanyahu's, which has hindered the agreement. They also mentioned that Qatar and Egypt are seeking to pressure the U.S. to compel Netanyahu to meet the requirements for a Gaza ceasefire.

Eurozone labor costs have risen too much, inflation may fall going forward

Pantheon Macroeconomics economist Claus Vistesen stated that hourly labor costs in the Eurozone grew by 4.7% from a year earlier, which is still too high for the European Central Bank's (ECB) 2% inflation target. In a report, he wrote: "With the rapid slowdown in the growth of corporate profits and profit margins, core inflation and headline inflation may continue to decline even if unit labor cost increases at a high rate in the next 6 to 12 months."

Vistesen noted that based on earlier data and the ECB's own wage tracker, while wage growth is expected to rebound in the third quarter after a significant slowdown in the second quarter, this is unlikely to alarm the ECB given the overall downward trend.

NY Fed reports improved manufacturing but weak employment in Sept

Business activity in New York State grew for the first time in nearly a year, according to business responses to the September 2024 manufacturing survey. The NY Fed manufacturing index recorded 11.5 in September. The survey showed an increase in new orders, a significant rise in shipments, stable delivery times and supply, and steady inventory levels.

However, labor market conditions remain weak, with modest employment contractions and stable average weekly hours. Input and sales prices have remained virtually unchanged. Despite the capital spending index falling below zero for the first time since 2020, businesses have become more optimistic about conditions improving in the coming months.

European gas prices fall on warmer weather and improved supply outlook

European gas prices fell due to warmer weather and improved supply outlook. The benchmark Dutch TTF gas futures contracts fell 3.9% to €34.26 per MWh on Monday. Florence Schmit, energy strategist at Rabobank noted: "Some short-term bearish indicators are pushing TTF gas prices lower." The main drivers include a warmer weather outlook, a slight decrease in Asian demand for Liquefied Natural Gas, and an expected end to planned power outages in Norway next week.

Meanwhile, EU gas reserves have reached 93.30%, according to industry data. However, Schmit warned: "Volatility has not disappeared. Weather changes in Europe and Asia this winter, as well as gas flows from Russia through Ukraine to Europe, still pose risks for price increases."

Oil prices surge on Monday

Due to Hurricane Francine's impact on oil production in the U.S. Gulf of Mexico, Brent crude oil prices rose by 1.11% on Monday; WTI crude prices rose by 1.82%. The oil market remains cautious ahead of this week's Fed meeting.

Traders are likely to remain cautious before the upcoming Fed interest rate decision. With some production capacity in the Gulf of Mexico still offline, supply concerns are supporting oil prices. Lower interest rates typically reduce borrowing costs and boost oil demand; however, a 50 basis point rate cut by the Fed could raise concerns about oil demand.

[Today's Focus]

UTC+8 15:30 ECB Executive Board Member Elderson Participates in a Panel Discussion

UTC+8 17:00 Eurozone ZEW Economic Sentiment Index (Sept)

UTC+8 20:30 Canadian CPI YoY (Aug)

UTC+8 20:30 U.S. Retail Sales MoM (Aug)

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Kevin Du

Cryptocurrency

The broader market isn’t reflecting Ethereum’s true value, which could be fixed with refined messaging to entice Wall Street investors to snap up spot Ether exchange-traded funds (ETFs), say executives from institutional staking firm Attestant.

Attestant’s chief business officer Steve Berryman and strategic adviser Tim Lowe told Cointelegraph they remain bullish on Ether (ETH) despite the low appetite for the United States ETFs and complaints of “underperformance” in the price action of ETH itself.

But, they’ve set their sights on several crucial developments, including better marketing, diversification, and tokenomics, that could spark renewed appetite for the asset on a longer time horizon.

ETH needs to get ‘mindshare’

Bitcoin (BTC) currently dominates the mindshare of digital assets for institutional investors. With a simple value proposition of being “digital gold” — it hasn’t been hard to sell it to the suits on Wall Street, said Lowe.

However, Lowe believes Ethereum can easily nab some of this mindshare through a mix of refined marketing and a more unified value proposition which will see it naturally accrue value from institutional investors that choose to diversify into the asset over time.

“I think the number one, simple catalyst for Ethereum is diversification. In traditional finance, almost everyone wants to have a more diversified portfolio,” Lowe said. “We know digital assets are becoming an investable asset class for traditional investors, so it’s an easy step to say, okay, we should diversify.”

“How do you diversify? The next step is into ETH.”

But diversification can only come about if Ethereum is made more simple for non-crypto natives to wrap their heads around.

“Is it an app store? Is it a blockchain-based internet, or is it ‘digital oil’?” asked Lowe.

“At the moment Ethereum is only really going to be interesting to people that are interested — a lot of people buying Bitcoin ETFs are just looking at a digital asset that performs very well,” Lowe added.

“But eventually, we’ll see more refined messaging where ETH will permeate its way into the wider consciousness,” he said.

US Ether ETFs have continued to fall short of market expectations after launching in July, with ETF analyst Eric Balchunas correctly predicting a “small potatoes” debut for the funds relative to Bitcoin ETFs.

The nine Ether ETFs have together seen a net outflow of $564 million since launch and on Sept. 10, they broke an eight-trading day streak where the funds saw no net positive inflows.

Staking would be a big win

Staking is another major selling point for Ethereum on a longer-term horizon says Berryman, which would allow Ether ETF investors to earn about 4% a year by owning ETH through a fund.

Several fund managers, including BlackRock, Fidelity, and Franklin Templeton, tried to get regulatory approval to include staking in their ETFs but were rejected by the SEC.

Berryman said the exclusion of staking was a necessary sacrifice for funds to make at the time but added it would be an ideal scenario for Ethereum to see it introduced in the future.

“It makes a lot of sense to introduce staking at some point. If you’re going to hold Ethereum, then why wouldn’t you also stake it?”

Aside from concerns that staking may regulated under US securities laws, Berryman said one of the biggest challenges for ETF issuers looking to offer staking was issues with liquidity, particularly in the short term. “With these ETFs, you need to be able to get in and out quickly and there’s not a finite staking period. If there’s a long queue, then it can take a long time,” he said.

Staked ETH can take days to be withdrawn — a problem for issuers who are required to quickly redeem shares for the underlying asset on request.

Ethereum is “harder” than Bitcoin

Even if staking is never an option, the issuance schedule of Ethereum itself is reason enough to gain exposure to ETH, added Lowe.

While many view Bitcoin as a “harder” asset than Ethereum, due to the capped supply of 21 million BTC, Lowe said Ethereum actually boasts a superior economic model for investors who are attracted to scarcity.

“When you pay ETH for gas, you’re actually taking it out of circulation, which Bitcoin doesn’t have,” he said.

“It’s not going to miners to be sold. It’s being destroyed and reducing the circulating supply.”

The continued halving of Bitcoin’s block reward every four years introduces significant sustainability issues in the long term, Lowe said, something that Ethereum’s development model allows it to avoid.

“In terms of pure numbers, there’s less Ethereum issued each year than Bitcoin,” said Lowe, which he said is a far more attractive prospect for value-driven investors in the long haul.

Source: COINTELEGRAPH

Risk Warnings and Disclaimers

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Owen Li

Cryptocurrency

The United States Securities and Exchange Commission has seemingly “dug in” on its stance on a rule that would curtail crypto custody services for regulated financial firms.

In a Sept. 9 address to a banking conference, SEC chief accountant Paul Munter discussed the agency’s regulatory stance on accounting for crypto assets, focusing on SEC Staff Accounting Bulletin No. 121 (SAB 121) and its applications.

“The [SEC] staff’s views in SAB 121 remain unchanged,” he said.

“Absent particular mitigating facts and circumstances, the staff believes an entity should record a liability on its balance sheet to reflect its obligation to safeguard crypto-assets held for others,” Munter added.

ETF Store President Nate Geraci said in a Sept. 10 X post that the SEC “appears dug in” on SAB 121.

“They simply don’t want to provide regulated financial institutions with the ability to custody crypto,” he added.

The SEC introduced SAB 121 in March 2022, outlining its accounting guidelines for institutions looking to custody crypto assets.

The rule was divisive in political circles as it virtually prevented banks and regulated financial institutions from custodying crypto assets on behalf of clients.

The SEC believes that entities with such safeguarding arrangements should record a liability on their balance sheets for digital assets.

Munter said the SEC had reviewed various accounting scenarios involving blockchain and crypto assets and acknowledged that not all arrangements fit the proposed guidelines set out in SAB 121.

Bank holding companies that safeguard crypto with bankruptcy protection may not need to record a liability on their balance sheets, he said.

Additionally, “broker-dealers” that facilitate crypto transactions but do control the cryptographic keys may also not be required to record liabilities.

Meanwhile, SEC Commissioner Hester Peirce, who has been vocally against the rule, said on X she continued “to be concerned about the SAB 121 substance and process.”

The US House of Representatives voted to overturn controversial SEC guidance in May. However, President Biden vetoed the repeal the following month.

Source: COINTELEGRAPH

Risk Warnings and Disclaimers

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SAXO

Economic

Political

As the Harris-Trump debate unfolds and news surrounding it emerge, it's crucial to understand how each candidate's policy proposals could significantly impact financial markets. The decisions made in the election will have a ripple effect—from spending and tax strategies to national debt and which sectors thrive or struggle. That’s why we’ve put together this table as a compass to help navigate the potential economic impacts of Kamala Harris's and Donald Trump’s policies.

But remember, the U.S. election brings both risks and opportunities for investors. The key to successfully positioning your investments in the mid to long term is understanding how fiscal policies are likely to evolve. Yet, with so much uncertainty in the air, it’s wise to consider protecting your portfolio from election-driven market volatility. In this piece, we’ll explore some of the best tools and strategies to weather what could be a bumpy election season.

The table below is based on data from the Penn Wharton Budget Model, a nonpartisan, research-based initiative that provides accurate, accessible, and transparent economic analysis of public policy's fiscal impact. It serves as a useful guide to help you prepare about what lies ahead.

Election Faceoff: Harris and Trump’s Policy Differences and How to Weather Volatility_1

Strategies for Stability: Protecting Your Portfolio in Uncertain Times

Given the potential for volatility caused by election-related news and policy changes, investors can use various strategies and instruments to manage risk and protect their portfolios:

Diversified ETFs:

One can minimize risk by investing in U.S. and global stocks with lower volatility and defensive sectors to weather election-related volatility. ETFs focused on low-volatility assets, defensive sectors like utilities or consumer staples, and bonds can offer protection while still positioning for potential growth, depending on the election outcome.

iShares MSCI USA Min Vol Factor ETF (USMV).

This ETF seeks to minimize risk by investing in U.S. stocks with lower volatility compared to the broader market. It's designed to provide exposure to less volatile companies, offering a more defensive position during uncertain times like elections.

iShares MSCI Global Min Vol Factor ETF (ACWV).

This ETF focuses on minimizing volatility by investing in global stocks with lower risk, making it a solid option for managing market swings during election uncertainty.

iShares U.S. Utilities ETF (IDU).

Utilities are a defensive sector that tends to be less sensitive to market fluctuations. This ETF provides exposure to utility companies, which are often considered safe investments during periods of volatility.

Vanguard Consumer Staples ETF (VDC).

Consumer staples, such as food and household products, tend to perform well during periods of economic and political uncertainty. This ETF offers exposure to companies that produce essential goods, helping shield your portfolio from election-driven market swings.

Bonds:

Sovereign bonds offer lower-risk alternatives that provide stability during periods of heightened uncertainty. Bonds tend to be less volatile than stocks, making them a reliable safe-haven during election-induced market swings. Plus, bonds are an excellent way to diversify your portfolio, helping balance risk across different asset classes.

Hedging with Options:

Options strategies can provide downside protection by allowing investors to hedge their positions against potential declines in stock prices due to election-related market fluctuations.

Gold and Precious Metals:

Precious metals like gold are widely regarded as a safe haven during times of inflation and market volatility. Gold typically performs well in periods of uncertainty, making it a go-to investment during elections and major geopolitical events.

Currency Hedging:

Election-related news often affects the strength of the U.S. dollar. By using currency hedging strategies or investing in foreign currency funds, investors can protect against unfavorable shifts in currency valuations that could arise from major policy changes.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

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Thomas

Stocks

Intel is one of the most famous semiconductor chip producers. Founded in 1968, it was the legendary chip foundry that had its “Intel Inside” almost every personal computer and server in the 1980s and 1990s. But its success in that sector missed the rise of DRAM (dynamic random access memory) and NAND (NOT-AND logic circuit) flash memory chips, today dominated by South Korean chipmakers; GPU (graphics processing unit) chips led by Nvidia; and ARM (Advanced RISC Machine) reduced instruction set computer architecture chips used widely in mobile phones.

In other words, while Intel reaped the benefits of dominating general purpose chips, it missed the rise of specialised chips used in gaming machines, mobile phones (such as the M1 chip used by Apple) and crypto-asset mining computing equipment, as well as the artificial intelligence (AI) chips used in big data processing centres. Its asset-heavy vertically integrated foundry fab model has been challenged by asset-light but design-intensive (fabless) chip companies such as Qualcomm, AMD and Nvidia, which rely on specialist makers such as Taiwan Semiconductor Manufacturing Co (TSMC) to do high-quality fabrication.

Intel’s legendary co-founder Gordon Moore coined Moore’s Law, which predicted that the number of transistors in integrated circuits (ICs) would double every two years, generating speed, scale and scope in computer processing capacity. Meanwhile, co-founder Andy Grove was the ruthlessly focused engineer and corporate captain who drove research and development (R&D), production efficiency and product branding, particularly the famous 86-series chip.

Intel was the darling of the tech market in the run-up to the Nasdaq boom of 2000. Thereafter, the company was led by marketing and financial engineers who slowly lost focus on how to evolve chip design and production in a situation where the design and manufacturing of smaller, faster and energy-efficient chips were costing more and more. Consulting firm McKinsey estimated that the design cost of bringing a 65nm (nanometer) chip to production in 2006 was US$28 million, whereas this rose to US$540 million for a 3nm chip by 2020. The cost of each advanced ASML lithography machine essential to producing such advanced chips is now more than US$378 million (RM1.6 billion) each. The financial cost of capital and capacity expansion rise with each new generation of chips, making it tough not to keep investing for the long term, but companies must do so at the right cycle.

Intel became the top chipmaker because for half a century, US companies like Intel, Motorola and Texas Instruments (TI) were vertically integrated as they designed, manufactured and marketed their own chips. In the 1980s, Motorola and TI were much bigger than Intel, but they were more conservative in R&D.

As the cost of R&D rose, from 2019 to 2023, Intel spent US$101 billion on increasing plant and equipment (P&E) capacity and US$75 billion on R&D. But it also lavished shareholders with US$30 billion in stock buybacks and US$25 billion in cash dividends, which together absorbed 79% of its net income. Intel’s distribution to shareholders has been far greater than that of TSMC and Samsung, which distributed 67% and 38% respectively over the same period.

Despite the vast sums that Intel had aggressively indulged on its shareholders, it consistently allocated 30% of its revenue to P&E and 22% to R&D. The other major global integrated device manufacturer (IDM), Samsung, had a big gap of 13% between P&E and R&D compared to Intel. In contrast, TSMC, which is a pure foundry that manufactures to client needs (such as Apple), has allocated a significant 45% of its revenue to capital expenditure while its spending on R&D remains low at 8%. In other words, TSMC lets its clients focus on R&D while it focuses on production excellence. But being involved in different chip sectors, the broad skills and knowledge intensity of its engineers are impressive.

During the pandemic, even though Intel made huge allocations to catch up with its competitors, its financial performance began to weaken when its net income declined more than 50% after 2021. To maintain its share price, the company generously provided a dividend payout to shareholders averaging 129% of net income between 2022 and 2023. At the same time, Intel increased borrowing, bringing its total debt to around US$45 billion. For a financial analyst, this looked more like financial engineering to produce profits through leverage, rather than paying attention to real excellence and cutting edge engineering.

Despite getting more than US$8 billion from the US government under the CHIPS Act to help onshore chip manufacturing return to the US, Intel is beginning to experience both financial and operational headwinds.

On Aug 1, the company announced 15,000 job cuts and suspended dividends. The market reacted harshly after it released its 2Q2024 earnings report, resulting in around US$30 billion being wiped off its market cap. Market rumours swirled after Lip Bu Tan — a former CEO of Cadence Design Systems, which produces cutting-edge software tools to design advanced chips — resigned from Intel’s board, with unconfirmed disagreements on the company’s strategic direction.

Intel’s 2Q2024 earnings report showed that operating losses had increased by US$948 million compared to last year. Key factors contributing to the huge losses included the higher cost of producing smaller processors such as Meteor Lake, and increased construction charges on new AI fabs in the US and supporting facilities around the world. Our calculations of economic-value-added based on Intel’s financial accounts suggest that value-added declined to negative-value-added of US$11.5 billion from the previous year.

Intel has shown the classic strategic choice for market leaders, which is to keep milking profits from legacy winners but lose focus on keeping the R&D edge over strong competitors like AMD, Nvidia and Qualcomm, which offer comparable AI chips with better performance or price. If you do not cut out the fat earlier with short-term impact on quarterly profits, the market will punish you when you take belated action. TSMC today has eight times the market cap of Intel.

Beleaguered CEO Pat Gelsinger has called in Wall Street advisers like Goldman Sachs and Morgan Stanley to advise Intel on how to move forward. Can financial engineers fix real engineering strategic issues, other than to temporarily calm impatient investors? There are options such as spinning off subsidiaries like Altera or splitting the company into different listed companies. The risk is that Intel, which has a total market cap of less than one-tenth of that of any of the Magnificent Seven tech giants, will be bought up as their manufacturing arm.

As Grove used to say, only the paranoid survive. The question is whether the present Intel leadership is paranoid enough to survive that cruellest of market tests.

Source: Theedgemarkets

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US House Prices are Forecast to Rise More Than 4% Next Year

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Condivergence: Intel Faces Big Headwinds

Source: Theedgemarkets

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