TWIF Monthly Macro #4

Hi and welcome back to Monthly Macro. Unfortunately we missed September so this will be the September and October version. A lot of the same questions and concerns still exist, sometimes it feels like the news just repeats with updates on IPOs, tariffs and wars. So for this version we are going to do something different. 

The usual updates:

There are less headlines about an IPO rush but a notable IPO did happen. Klarna went public on the NYSE in mid September raising over $1.1 billion, and it is now valued at almost $14 billion. As a former CFPBer, I am still skeptical of BNPL. My main question is what are you buying and is it really necessary if you can’t pay in full?

Klarna stock price (WSJ)

However, I’ve since moved to Israel and here pretty much anything you buy on your credit card can be split into multiple payments. Seemingly just for consumer ease, but maybe it is also because Israeli salaries are a fraction of American salaries. So either I am too apprehensive about the benefits of BNPL, or there could be future headlines of a BNPL bubble.

There is still a tariff war happening!

Trump has imposed 100% tariffs on Chinese imports to begin in November. There have been new export controls of software and hardware. This has implications for supply-chain costs for fintechs, especially AI-focused firms, as costs will rise. It is interesting that the national security and economic growth arguments are usually on opposite sides.

Export controls of US technology are meant for national security but they slow down economic growth, and maybe also stagnate innovation. If we are a secure but slow nation is that better? What is the cost of national security? Is the nation secure if we are technologically behind our competitors? 

Now three news stories:

The US government has been shut down since October 1st. The longest government shutdown was for 35 days during Trump’s first term. While there are many implications and problems that result from the government shutdown, the one I will focus on here has to do with the Fed - a macro newsletter would not be complete without talk of the Federal Reserve. 

Of the many things that stop when the government shuts down, so does data reporting. The Bureau of Labor Statistics is shut down which means there is no Jobs Report coming out. The Jobs Report is the Fed’s most important indicator of labor market health and inflation. It includes nonfarm payrolls, unemployment rate, wage growth. The Consumer Price Index is also not reported, which is a more direct measure of inflation. Other federal government data points will also not be collected, however Fed research continues as is. Another obstacle faced by the Fed is loss of access to private jobs data from ADP.  There is financial market data available, but it’s not a 1 to 1 replacement for key data indicators that are missing due to the shutdown.

Trump of course still wants rates to be lowered, and it’s unclear if the lack of available data helps or hurts him on this case. The next rate cut decision will be made at the end of the next Federal Open Market Committee meeting from November 5-6.  So there's still time for the shutdown to end and for the data to become available and used accordingly. (I feel like I’ve already talked about the implications of lowering or raising before but can add that in here too if you think)

Beyond the Fed, the shutdown itself creates uncertainty. While there is probably not data being reported for this now, seeing where money is flowing would be interesting. Is less money flowing into the country now? Are investors who were not already wary from the new President and the tariffs now wary and taking their money elsewhere? Would we even be able to tell this clearly in the data? Is the money flowing in during tariff agreements and truces canceling out any effect we would see? For fintechs does that mean that being an American company is making fundraising harder? And will any of these flows have any permanence after Trump’s term ends if the next president takes a 180 on most of his policies?

Fed Funds Rate (FRED)

According to a lot of the newsletters I get in my work email - yes. AI is still “the thing” and is enticing fintech investments. The IMF warned of dot-com-like excitement, so concerns that it’s a speculative bubble are rising. US policy is pro-AI, as are many other countries. Executives from Nvidia and Goldman Sachs argue that there is no AI bubble, that AI growth and profit is not speculation. 

AI is all-encompassing. It has delved into so many facets of life, beyond tech companies. Even today I see 20 something year old influencers posting ads about using AI to make planning trips easier. I am working at an AI fintech so that is unfortunately not how I am using AI on my daily basis. Since AI has so many applicable uses it has also started to change the employment landscape, making some jobs redundant and creating need for other jobs. 

The amount of money flowing into AI and the risk that a collapse holds is something to think about. One way we could think about this is if there is a collapse, what happens to all the AI fintechs? Will they immediately become devalued? Will these companies all be wiped out basically overnight? And what does that mean for future fintechs looking for investment?

However, my main question about AI isn’t exactly related to whether there’s a bubble, rather if there is (or what is) the real efficiency gain. Say the AI understands you perfectly, you ask it the right question in the right way to get the answer you need. Now you have extra time, which is an efficiency gain. On the other hand, is a task that would have taken you an hour to do start to end still taking nearly as long? But instead of having to think through the logic of each step and manually do it, you are just spending a lot of time talking to AI to get it right? Then you were no more efficient. You haven’t saved any time, you just used your time talking to AI and explaining how to do something the right way rather than taking out the middle man and doing it yourself. Yes, there’s the caveat that you were training the AI and it will be faster next time, I think this depends on if you are doing repeat or similar tasks which may be true for some. 

The US plan to support Argentina’s debt and economy is super interesting.

The US backs about a $40 billion support package to stabilize Argentina’s peso and help them avoid defaulting. $20 billion is from the Treasury Department in the form of a currency swap line with Argentina’s central bank. The other $20 billion will be from the private sector - the Treasury is working with banks and investment funds to create a facility to invest in Argentina’s sovereign debt. The big banks, including Goldman Sachs and JP Morgan, have concerns about collateral, and if the US will act as a backstop.

A Trump quote has the debt plan being contingent on the outcome of the upcoming Argentinian midterm elections while Bessent has stated that this a policy-specific plan. Officially it seems contingent on continual free-market reforms and financial discipline. This is a strong move for the US in foreign policy, and quite unusual in manner. The US guaranteed sovereign bonds for Ukraine in 2014, and the closest precedent was in 1995 when the US gave Mexico a $20 billion loan package. China has done this on smaller scales but in less of an emergency manner and rather linked to infrastructure commitments. 

This could be big for LATAM fintechs like Mercado Pago. It can create extra demand for cross-border payment rails and hedging tools. It can also be big for large US or European fintech companies. Argentina’s economy with high inflation and the tight capital controls, such as strict foreign exchange conversion rules, the use of multiple exchange rates (the official and parallel market rates) making accounting hard, and repatriation restrictions has made it hard for dollar-based fintechs to operate in. 

This debt plan would give Argentina US dollar liquidity, and encourages foreign capital investments (most likely in the form of dollars), which would help with the tight capital controls explained briefly before. Foreign exchange conversion rules could be eased, the official and parallel market conversion rates will converge, and repatriation restrictions should ease. Fintechs like Stripe, PayPal, and Revolut could reopen cross-border merchant settlement in USD (or stablecoins but I won’t get into that here). Considering that Argentina has a population of about 46 million, there is potential for a digital-payments and FX market worth US $300 – 350 billion within a few years. That’s just considering Argentina, but this could open the door to other countries in South America too.