This is issue #083 of our WTF is going on with the Economy x abroaden weekly insights newsletter. Get these insights delivered directly to your inbox by subscribing here (or in the many places in this article 🙃)
What we’re reading this week
- Google does some gymnastics with the splits
- Facebook celebrates the Olympics by going diving
- European Central Bankers make the euro go up
- We learned about lending
- A guy named Furio is furious about the price of his coffee
Last Tuesday, Alphabet Inc, better known as Google, announced that it was splitting its stocks 1 to 20.
In short, this means that on July 15th, existing shareholders will receive 20 shares for every 1 share of Google they hold.
The price of a new share is worth 1/20th of the original ones.
(For example. Yesterday, the stock closed at 2,792.00 USD. If the split occurred now, the new shares would be worth 139.60 USD each).
Why Google did the stock split
Companies like to periodically split stocks to make them more accessible and manageable to individual investors.
As you can guess, a share price of close to 3,000 bucks a pop isn’t exactly within reach of many entry-level investors. By splitting the stock into 20 new ones, more people can buy into and profit from the company’s success, all without having to own fractional shares.
Second, splitting the stock makes managing it easier for investors of all levels. We always talk about using diversification to reduce our risk as investors.
Part of that process involves periodically rebalancing our portfolios.
Here, we want to ensure that one investment doesn’t get too big compared to holding the other ones. If we don’t, then if that ‘star performer’ suddenly collapses (see the next section for a real-life example), it takes our portfolio down with it.
By splitting the stock, Google lets investors and index managers more efficiently tweak their holdings to benefit from its growth while managing risks.
Additionally, Google felt that investors gave the company a vote of confidence over the past few years, which gave them more reason for the split.
It’s worth noting that Google will apply the split to all three of their share classes:
- A Class: which have voting rights of one vote per share, and most institutional investors hold
- B Class: these are shares for the founders, early investors, and key employees. They have ten votes per share
- C Class: the most commonly-traded shares by individuals with no voting rights.
(Companies of all sizes regularly issue different share classes to meet conflicting business and investor needs).
We shouldn’t see any impact for us savvy investors living abroad, as the ETFs we hold will continue to follow the index weights.
Speaking of tech stocks, everyone’s favorite social media company 🙄 and “big tobacco for mental health” took a giant hit last week.
And by giant hit, we mean the most significant one-day drop ever in the history of stock markets.
That’s right, Meta, AKA Facebook, saw its market value plunge by over 230 billion USD on Thursday. To put that into perspective, that’s like the entire Portuguese economy disappearing in an afternoon.
Facebook’s face plant initially came out of investor fears that all tech companies were in a bubble. Before the drop, the firm announced that the number of regular users dropped for the first time, disappointing ad revenue.
Generally, as the economy enters another part of its cycle, tech stocks do poorly as investors prefer companies that pay profits overgrowing.
At first glance, the data might support that, as tech funds and companies had a terrible January and consumers were looking elsewhere to spend their time and money. While that might hold with many companies (especially with crazy-high startup valuations), Meta’s peers didn’t seem phased.
Indeed, the shares of Amazon, Google, Microsoft, and Apple all did moderately okay last week. At the same time, Facebook fell off of its cliff. This disconnection is notable as these stocks tend to move together.
It’s no secret that Facebook is a controversial company, not least because of its apparently tone-deaf CEO as well as a business model that seems to do more harm than good.
The bad times for Meta might not be coming to an end any time soon. Yesterday, the company threatened to block its services (including Instagram) in the EU. That might backfire if the company doesn’t appreciate public sentiment to their way of doing business. In that case, we’ll likely see more deep dives from Zuc.
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The euro goes up (or the dollar goes down)
Exchange rates also got in on the “let’s mess around with everyone for no good reason” action. Last week, the euro’s turn was to take over the currency markets. It did so mainly within a few minutes on Thursday afternoon.
Over that short time frame, the EUR to USD rate went from 1.128 to 1.144. The reason? The European Central Bank held a press conference announcing the possible increase of interest rates, along with a stop to their bond purchasing programs.
In other words, investors believed that parking money in Europe could be more attractive in the coming months.
As President Lagarde announced the potential changes, the interest rates of government debt across Europe went up. Yet, the exchange rates weren’t the only rates impacted. European countries in the Mediterranean and Iberian peninsula have benefited from bond-buying programs that made borrowing money cheap during the pandemic.
Suppose the rate they have to borrow increases. In that case, it takes away spending power for these governments at a time when we’re rebuilding from the pandemic. These changes will affect our economic recovery for years to come.
This video on how lending works
We love everything finance and FinTech-related at abroaden.
That’s why when we saw this video about how bank lending works made by FinTech gurus 11:FS, we immediately thought of sharing it with you.
If you have 11 minutes to spare, check it out; it does a fantastic job explaining the history of lending, how banks do it, and why the practice can be better.
Our event in Barcelona this week
As many of you know, we love talking about wealth. We also enjoy a glass of wine and some networking.
If you’re in Barcelona this week, come and meet us for our first “Wealth and Wine” event at La Vaca Coworking this Thursday. The event starts at 18:30.
If you can’t make it, we’re thinking of streaming it on Instagram. Give us a follow, and we’ll be sure to announce the stream there.
Italy’s espresso insurrection
In what should be the most coveted piece this week but somehow slipped the eyes of the world, Italians are facing skyrocketing espresso prices.
The coffee that the Italians that run our coworking swear by is up 10% over the year.
High coffee bean prices globally are pushing up the popular beverage with erratic weather blamed for poor growing seasons.
In our first issue this year, we wrote about how climate change is the key inflation driver globally.
Will coffee’s rising prices be the climate precipice that many activists were waiting for?
It’s hard to tell (especially without another espresso or two), but who knows; we’ve seen weirder vehicles for change.
One thing is for sure; Italians won’t take these price hikes sitting down (coffee first, though).