We are currently having the Wall Street Morning Briefing. This time, we will connect with Professor Inamoo from Yonsei University's Graduate School of International Studies for a global interview, all the way from Silicon Valley in the United States. Hello, Professor.

Hello! Nice to meet you. How is it in the United States? Is it very hot? I heard that Korea is experiencing a heatwave, but I only see reports about the heat in the U.S. What is it really like?

I am currently in Silicon Valley, staying at an Airbnb. This area is located in Mountain View, near the border of Palo Alto, right in the middle of Silicon Valley. It is now 2:40 PM, and the temperature has risen to 27 degrees Celsius. In the morning and evening, the temperature drops to about 14 degrees, which is nice for a walk. I know it is extremely hot in Seoul right now, but I have only been here for 2 or 3 days.

But here, it's still bearable, I would say. Now, let's take a look at today's content. First of all, overnight, the market had a huge rise the day before and then immediately fell. This is a characteristic of the U.S. market. Recently, we can see that the high-tech market and the volatility of individual stocks have increased significantly. So, I think our investors are having a tough time. I will give a general overview, but over the past three to four days, I have been on the highway, observing traffic volume, visiting retail stores, and experiencing consumer sentiment firsthand. So, while the economy isn't booming right now, I think it's okay. However, the prices, especially the cost of living, have risen significantly, and it's the same in Korea; prices have increased too much.

The lower middle class is struggling quite a bit. I have felt that now. Looking at the performance, earlier we talked about our team leader Park and Amazon. The performance itself seems to be quite good. For instance, Apple has reported record-high service revenue on a quarterly basis, which increased by 14% compared to the same period last year. Additionally, the profit margin for the service sector is much higher than that of product sales. As a result, the operating profit margin has surpassed 30%. However, recently, experts have been expressing concerns about the situation in China. Although the numbers have not been released positively, there has been negative growth. Still, they have managed to perform quite well, and during the ongoing conference call, it seems they are giving somewhat positive comments, indicating that things are improving. Nevertheless, Apple, above all, generates a significant cash flow, and that is beneficial for shareholders.

They don't do much in terms of shareholder returns. So, they generated an operating cash flow of 29 billion dollars and returned more than that, 32 billion dollars, to shareholders through dividends and share buybacks. Amazon also seemed to be doing well. I was a bit worried about whether the cloud side, AWS, would continue to recover, but it grew by 19%, leading to an overall revenue growth of 10%. Additionally, operating profit increased by 91%, and the earnings per share nearly doubled. Here, the operating cash flow generation increased by 53%, reaching 25.3 billion dollars, which is about 35 trillion won. Recently, capital investment has been significant. We have seen Google, Microsoft, and Meta, and I will mention them later, but Amazon started its capital investment cycle a bit earlier than others. Overall, the performance seems to be good, but there is just one concern.

The stock price has risen quite steeply over the past few months, so I think we can expect a bit of a correction. The performance is not a major issue, so I will say that. Now, I briefly shared some comments about the recent market. Let's also check the local atmosphere in the U.S. and hear some insights. First of all, we always have a quiz related to English, and today’s quiz is quite simple. I want to ask a question about Nvidia, which is one of the companies that our overseas investors have invested in the most and is currently a leading company. What does the name of that company mean? I studied this while I was on the plane, so do you happen to know? I was given a hint yesterday, so I looked it up. I found out that it means... Oh, I suddenly forgot. What was it?

I'm sorry, I can't remember. I think it was something about the next step, or next, and this is a video in another language, so if we interpret this, it seems like MB is currently presenting a new vision for the next step in their business. And they are going to showcase some new technology, which I studied means to run. Is that correct? Please turn to the next page. So, in 1993, about 40 years ago, NVIDIA was founded, and in its second year, the first NVIDIA semiconductor product, NV1, is shown here. This is an abbreviation for next vision, and commercially, the first product was said to have failed. However, they had the opportunity to work with Sega, a major player in the Japanese console gaming industry, which became a stepping stone for NVIDIA's growth. The meaning of this is simply...

When we talk about it, it's originally something that others envy and are jealous of. So, it has that meaning. NVIDIA's name combines next vision and vidia, which comes from the Latin word for envy. So, these two concepts are combined to create a company with a future vision that others will envy. The two CEOs, along with one more, co-founded the company. Apple was also originally founded by three people. So, NVIDIA has this significant meaning, and I wanted to share that.

Now, we've discussed NVIDIA. Recently, not just NVIDIA, but many tech stocks have fallen today, and some semiconductor stocks have also dropped significantly in the after-market. This raises the question of what the problem might be, making us ponder. For now, you are in the midst of big tech and tech companies.

Silicon Valley, which can be considered the main hub, has many companies located around it. If you look at the map, below the San Francisco Bay, there is Los Gatos, which is over 100 kilometers away. This area, developed based on the San Francisco Bay, is known as Silicon Valley and the Bay Area. The Google headquarters is located a few kilometers from here. If you go a bit north, you will find Stanford University, which is essentially the heart of Silicon Valley. In Palo Alto, there is Stanford, and Tesla's software headquarters for AI and autonomous driving research is also located there. If you go to the right from there, you will find Meta in Menlo Park. So, this area forms a triangle, and if you go down from here, you will reach Cupertino, where Apple, which announced its earnings today, is located. Further to the right, there are semiconductor companies.

We have AMD and NVIDIA, which announced their results the day before yesterday, gathered in Santa Clara. There are software platform companies a little to the north and semiconductor companies, especially component manufacturers, to the southeast. You can think of it that way. Yes, they are gathered here. 

Now, you can really check the current prices in the U.S. Among the various data available to check prices, you brought up oil prices first. It seems that the gas prices are reasonable at this level, right? So, Americans typically pay about $2,500 to $3,000 a month for their mortgage, including principal and interest, and then they have other installment payments to make. The biggest concern for families is the price of gas since they drive a lot. So, when gas prices go up, it becomes a significant issue.

Consumer spending has significantly contracted, but I just arrived and on the first day, I checked the gas prices at a gas station on the street. The price for regular gasoline is around $4.50 to $4.60; California is a bit more expensive due to high taxes. However, this level of pricing is not a major burden, so consumer spending is somewhat maintained. There is a lot of concern in the market right now, but I don't believe there is a high possibility of a rapid decline. On the next page, you can see that gas prices vary by state in California. Since 2020, over the past five years, the price of regular gasoline has fluctuated. When COVID hit, prices dropped significantly, but in 2022, during the time when our stock market crashed, gas prices rose to $6. When prices exceed $5, consumers start to feel quite constrained. However, right now...

Since the decline, it has shown stability and is now around $4.50. However, looking at the recent situation, the geopolitical risks surrounding Israel and the ongoing tensions may become more pronounced, so we need to keep an eye on that. But, as of yesterday and today, oil prices continue to fall. The market seems to believe that this localized conflict in the region will not escalate into a full-blown war across the Middle East. This is typically referred to as an unknown risk, meaning we cannot predict how the known risks will unfold. 

Additionally, looking at the prices of essential goods, the situation seems serious. Generally, among the products we use, essential consumer goods are experiencing a cycle of change. An article in the Wall Street Journal yesterday highlighted that, compared to before the COVID-19 pandemic in 2019, the restaurant industry in the United States...

Companies and then food and beverage selling companies, like restaurants, include McDonald's, Starbucks, and Chipotle, which serves Mexican grill. Now, if you look at these, five years ago, compared to before COVID in 2019, all companies are reporting record profits. The biggest reason for this is that they have sharply increased product prices. So, following my spouse, I also started to keep a close eye on grocery prices, and I found that the cost of the shopping basket has risen tremendously, comparable to Korea, especially the price of beef has increased significantly. Americans, who traditionally consume a lot of steak, are now shifting to chicken consumption because it is much cheaper. In fact, even at McDonald's, chicken burgers are becoming more popular.

It is said that a lot is being sold, and I think that's why consumers are showing this behavior, especially the middle class. Below that, there are cheaper products, and when I go shopping, I prioritize my purchases based on that. So instead of going to Target, I go to Walmart to buy more generic products, and then I shop at places like Costco or TJ Maxx to get more. If this business model does not become specialized, retail companies will face significant difficulties, and this reflects the changes in consumer behavior. Now, it seems that, of course, the wealthy upper class is still spending and eating well, but particularly those in the lower economic tiers are not benefiting from the effects of wealth.

So, should we interpret this as a failure in distribution, or should we understand that they find it difficult to work and even to earn money? Here, we have data from the University of Michigan, which publishes the consumer index. If you look at the next page, it divides income levels into three parts, showing the amount invested in the stock market by the top 33%. It seems that big tech stocks, which many retail investors are holding, have significantly increased in value, with an average investment of about $400,000 in securities. This means they are investing over $500 million. The middle 33% is seeing considerable benefits, but the bottom 33% has limited exposure to the stock market and their financial assets are not growing. This indicates that they are unable to invest properly. Therefore, the lower middle class is not experiencing income growth either.

Not only is it slow, but in the U.S., they also pay taxes. Korea has many tax exemption benefits, but we are not seeing significant advantages from the increase in financial assets, so we are facing considerable difficulties, around 20 to 30%. Now, if we look at overall consumption, the middle class and above account for the majority, so it seems that it won't have a significant impact on the macro indicators. The earnings season is still ongoing, and even if the earnings reports are good, stock prices sometimes fail to rise significantly, depending on the market atmosphere. However, looking at the details, the forecasts seem decent. Ultimately, earnings are the most important, and the stock price correction we saw yesterday was just a period adjustment, as it was a partial retraction of the significant gains. We have reported earnings for about a third of the S&P 500 companies.

Among them, 78% reported positive surprises, and as a result, the companies that have actually announced their earnings saw a profit increase of 13% compared to a year ago. For the several dozen companies that have yet to announce, an increase of about 88% is expected. When we blend these two figures together, it shows an overall profit increase of around 11%. If profits collapse from here, stock prices could drop significantly, but due to valuation issues, profits are still expected to remain solid, and any decline in stock prices will likely be limited. This is the most important part, right? In fact, the content of the earnings announcements will ultimately reflect how the market perceives the positive aspects, and it will be crucial to see how and when these reflections will occur. Now, regarding the recent FMC, you must have seen it in the U.S. What aspects stood out the most?

I'm curious if you're paying attention. If you look at the next page, ultimately, the most important thing regarding stock prices is performance and how the outlook for corporate profits changes. Then, the other aspect relates to valuation, particularly interest rates. The biggest influence on market interest rates is the policy rate. The Federal Reserve likely anticipated that the economy would slow down a bit. When Chairman Powell spoke earlier this week, he mentioned that, looking ahead, we could potentially adjust the benchmark interest rate as early as September. He indicated that there was a serious discussion among the Federal Reserve committee members about this. However, he added a caveat: it depends on whether the data meets the conditions set by the Federal Reserve. He mentioned this in relation to the discussions leading up to September. It seems that the market is interpreting this in a certain way, so over the next couple of months, we might see some dramatic changes.

If there are no significant changes in the macroeconomic environment, it is expected that interest rates will be lowered in September. The next Federal Reserve meeting will be in November, just a few days after the U.S. presidential election on November 5. It is anticipated that there will be one or two rate cuts to stimulate the economy and slow down the downturn. Morgan Stanley has made this forecast. Economists predict that there will be three rate cuts this year—in September, November, and December—and four more next year, bringing the benchmark interest rate, currently at 5.5%, down to around 3%. Recently, there has been much discussion about the political independence of the Federal Reserve, particularly in light of Trump's support for the presidential election.

Federal Reserve Chair Powell issued a strong warning not to lower interest rates, stating that if I were to be elected, I would dismiss him even before his term ends. However, the Federal Reserve is politically independent, as guaranteed by law. Powell has also mentioned that we do not aim to influence any specific political party, politician, or political outcome. We make decisions purely based on data, objectively and independently. He emphasized that the Federal Reserve will operate quite independently, which suggests that despite Trump's threats, a rate cut will likely occur in September. This can be seen as a signal. 

Next, we will discuss the polarization in economic perceptions. The Democratic and Republican parties are divided, similar to the situation in our country. The Democratic Party...

On one side, the Republicans might view the situation negatively, while the Democrats might see it more positively. I'm curious about that. In the U.S., even from middle school, there are debate clubs, such as the Republican Club and the Democratic Club. Depending on the atmosphere at home or personal inclinations, individuals tend to develop conservative or liberal tendencies from a young age. This shapes their lifelong discussions and support for specific political parties. Here, I have another piece of data from the University of Michigan that I showed earlier. The blue line represents the Democratic members' perceptions of the economy, while the white line represents the Republicans' perceptions. The left graph shows the current perception of the economic situation. Democrats have consistently viewed it positively, although there has been a slight decline recently.

Supporters of Trump, who believe the economy is doing quite well, have recognized that the economy has been very poor over the past three to four years. They are now aware of this, and regarding consumer expectations for the future, the Republican Party still does not seem to be doing well. Although there has been a slight improvement recently, the Democratic Party is looking quite favorable. Biden claims to have many economic achievements during his presidency, but Trump argues that he has done nothing. Therefore, perceptions of the economy differ significantly depending on whether one supports the Republican or Democratic Party. This leads to different interpretations of the facts.

Now, moving on, since you are in Silicon Valley, you have also prepared insights on the political characteristics of Silicon Valley. Traditionally, if a party has a stronghold there...

Are there companies or cities that have a similar tendency? About three to four weeks ago, Elon Musk announced that he would donate a significant amount of money and officially declared his support for Donald Trump. This became a hot topic because traditionally, the West Coast of the United States, especially Silicon Valley, is a stronghold of the Democratic Party. If you look at the U.S., the East and West coasts are quite different, and particularly in the West, there are many reformist and progressive individuals. For instance, Reid Hoffman, who co-founded LinkedIn and is now a well-known partner at Greylock, is one of the most important figures in Silicon Valley. He led a joint declaration of venture capitalists supporting Kamala Harris. So, Silicon Valley is predominantly...

Most people really support Kamala Harris and the Democratic Party. Ahead of the presidential election, I wanted to mention that. Now, we have a photo prepared that shows our Professor Lee Nam-woo in the present. He took a great picture in front of the Tesla Cybertruck. I wonder how he got to experience it; he didn't rent it, did he? I haven't had the chance to ride in it myself. I just took pictures of it parked here and there. Looking at it now, I thought this car would be incredibly large in person, but since the professor is standing next to it, it doesn't seem as big as I expected. Oh, it is indeed enormous. In Korea, parking would be nearly impossible. You can really feel its massive volume. The design is quite unique, and the texture, especially at night...

There is still quite a bit of operation going on, and at night, it gives off a somewhat cosmic feeling. So, there are still many orders for the Cybertruck. It seems that the scale of economy is not yet reached; typically, for regular cars, you need to produce about 300,000 units to achieve that. Therefore, the profitability doesn't seem to be good yet. However, it seems that there has been a clear effect in differentiating the brand. Tesla is indeed different. But as our team leader Park mentioned earlier, there is a general sense of caution among electric vehicle companies in Silicon Valley regarding Chinese automotive companies. Five to ten years ago, the true competitors in the automotive industry were thought to be Toyota or, if going premium, the German manufacturers. But now, electric vehicle companies, especially as they venture into the market, are facing tremendous competition from Chinese electric vehicle manufacturers.

So, now in South Korea, we tend to underestimate China's electric vehicle batteries, but in the United States, they truly have the most advanced technology, especially in terms of price competitiveness, which other companies and countries cannot match. For instance, Uber has signed a contract to operate 100,000 electric vehicles made by BYD outside of the United States, in regions like Europe and South America. The fact that BYD is securing a contract for 100,000 electric vehicles is quite significant. In the U.S., it's not possible due to various political issues. However, looking at this, we can see that the rise of electric vehicles from Chinese companies is remarkable. Now, along with Meta's earnings announcement, the stock surged significantly yesterday, although the rate of increase has slowed down considerably.

It seems that among the big tech earnings announcements, Meta appears to be the best. Right? Meta is doing really well. Currently, due to the unstable communication environment, our professor is paused. However, regarding Meta, it is said that advertising revenue is significantly increasing. One of the main factors contributing to this is the presence of numerous low-cost online brands from China, such as Temu. Their advertising has reportedly more than doubled compared to the previous year. So, where do you think all that advertising appears? When you use Instagram or Facebook, you can see a lot of related ads, and we can continuously observe this impact on Meta's performance. Shall we try to reconnect? Our professor has disappeared. It seems that the communication environment is not as stable as we thought.

I don't think it's good. Here, we can discover that the infrastructure investment in the United States is really lacking. Even Silicon Valley is struggling with internet connectivity. This confirms that we need to quickly expand our infrastructure with our country's 5G and 6G technologies. We can also see that the heat might be a problem; when it gets hot, there tends to be an increase in power consumption, which affects electricity and communication. 

Now, we have some time left, but unfortunately, I will have to wrap up the market discussion by myself. The monthly earnings reports have been good. Currently, the big tech companies, including Google and Tesla, have released their earnings reports. Initially, we were disappointed with Google's report due to high costs, but still, looking ahead...

I waited a bit hoping things would improve, but now there are only five big tech companies left. Apple had its earnings announcement, and today Amazon's earnings will be announced. Meta's earnings were announced yesterday, and looking at the results, they all seem to be in a vague situation. However, Meta showed solid performance, rising over 4.8% yesterday. In after-hours trading, it is showing a slight decline, but compared to other stocks, it appears to be holding up well. Among the stocks, the semiconductor companies' earnings announcements are crucial. Of course, NVIDIA plays the most important role, but Qualcomm and Arm Holdings announced their earnings yesterday, and Intel's earnings will be announced later tonight. After the earnings announcements, the stock prices dropped significantly. Since we are reconnected, it would be good to wrap up with greetings. Professor, here in the U.S., the power supply...

It seems that things are not stable. The computer crashed and then came back up. But it seems like someone wrapped things up well in my absence. So, anyway, among the M7 stocks, if we look at the performance report, we can see that Meta is the last one to be evaluated. As you know, professors give grades like A plus and so on. In that regard, it seems that Meta will receive a good grade. What's impressive about Meta is that compared to 2022, which was the most challenging year, productivity per person, or revenue per employee, has increased by 51%. This means that revenue has significantly increased, while the number of employees has been reduced by more than 20%. Recently, they have still not been increasing hiring. So, the characteristic of Silicon Valley right now is that they are managing very tightly. Even though revenue is breaking records, the cash flow is also very strong. The operating profit margin in their core business...

If we exclude the metaverse, we achieved a 50% operating profit margin. Yes, I understand. So, today, we might not know if this is related to telecommunications or energy, but I think there could be some signals in our market. This was about U.S. infrastructure. I will send my regards to Professor Lee Nam-woo from Yonsei University's Graduate School of International Studies, who provided us with this information. I look forward to seeing you next week. Thank you. Thank you, Park Geun-young, Lee Seon-hyeok, and Yeom Seung-hwan. Let's create healthy investment habits with the careful guidance of investment masters. Check out the 3% membership on the 3% app.

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