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šļø Exorbitant Privilege
[5 minutes to read] Plus: Silver linings for commercial real estate


By Matthew Gutierrez, Shawn OāMalley, and Weronika Pycek
If you put AI in charge of picking stocks, will it pick AI stocks? š¤
Maybe, if the AI had some self-awareness, it would ā mainly to accelerate investment in AI and take over the world.
Sci-fi plots aside, apparently, the answer to this question is āno.ā
According to the Wall Street Journal, at least 13 ETFs have put AI-powered applications in charge of managing their investment portfolios, and almost all have ā quite ironically ā missed this yearās rally led by tech stocks expected to benefit from AI, like Nvidia.
š Or maybe these AIs are so self-aware they see a bubble forming? Hit reply to tell us your thoughts.
ā Shawn, Matthew, & Weronika
Hereās the rundown:

Today, we'll discuss the three biggest stories in markets:
What the āBRICSā summit means for the U.S. dollar
Commercial real estateās bright spot
How and why car prices became so expensive
All this, and more, in just 5 minutes to read.
POP QUIZ
IN THE NEWS
šµ BRICS Bank Aims to Reduce Reliance on the Dollar (FT)
Goodbye dollar, my old friend: Every few years, markets are consumed by talk about the dollarās demise as the go-to currency for international banking and trade. Expect that chatter to crescendo heading into this yearās āBRICSā summit ā an acronym for Brazil, Russia, India, China, and South Africa ā which starts today and runs through Thursday.
While the group of burgeoning economic powers will discuss how to finance more projects in their local currencies, how to increase trade denominated in their own currencies, and even how to potentially form a common currency, what this means for the U.S. dollarās dominant role in the global economy remains unclear.
According to South Africaās ambassador to the group, the BRICS summit isnāt calling for āde-dollarization,ā acknowledging that his country doesnāt even necessarily intend to limit its dollar usage.
Per the Society for Worldwide Interbank Financial Transactions, the dollar is used for 42% of currency transactions.
Economic privilege: The dollar has been considered the leading global reserve currency since World War II, which the French Minister of Finance famously called an āexorbitant privilegeā in the 1960s.
This privilege stems from the reality that global trade, particularly for key commodities like oil, is denominated in dollars, giving the U.S. the ability to purchase resources in a currency it can print.
The economist Barry Eichengreen puts it: "It costs only a few cents for the Bureau of Engraving and Printing to produce a $100 bill, but other countries (have) to pony up $100 of actual goods in order to obtain one."
As the worldās āreserve currency,ā the dollar is artificially stronger than it might otherwise be since thereās always plenty of demand for dollars in foreign exchange markets. That boosts Americans' spending power for imports and when traveling abroad.
Why it matters:
While dollar rivals like the Chinese yuan have made inroads in their global adoption, much of that has come at the expense of currencies other than the dollar, according to a report by ING Bank analysts.
Still, the BRICS nations have established the New Development Bank (NDB), based in Shanghai, to rival U.S.-dominated institutions like the IMF and World Bank.
The NDB hopes to increasingly lend in BRICS currencies like the South African rand or Indian rupee.
Building an alternative: Dilma Rousseff, who heads the NDB, sees it as part of an emerging and āmore multipolar systemā alternative to the dollar-based financial system.
Yet, the NDB has been forced to suspend all operations in Russia (which puts the āRā in BRICS) to avoid being sanctioned by the current global financial system it wishes to challenge.
Morgan Stanley strategists highlight that āThe (NDB) has continued to primarily lend in U.S. dollars and doesnāt expect the adoption of a common currency in the near-term.ā
The center of global economic power is undoubtedly shifting, but it may be a long time before the dollar-based financial system is displaced or even truly challenged.
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šļø Commercial Real Estateās Bright Spot (WSJ)
Oh no ā another doom-and-gloom commercial real estate story.
Nope, this isnāt what you think. A bright spot for commercial real estate: retail shops.
New-store openings are holding steady despite inflation and interest-rate challenges that have hindered entities like office buildings and the housing market overall. Open-air malls, in particular, have picked up steam.
Retailers are en route to opening about 1,000 net stores in the U.S. despite industry-wide pressures and liquidations that have plagued big-box retailers such as Bed Bath & Beyond and Christmas Tree Shops.
Why? Itās likely the result of a drop in retail construction since the 2008-09 financial crisis. Meanwhile, online sales boomed, lessening the need for physical spaces. But when retailers have opened stores, theyāve used online data to select good locations more accurately.
Back to brick: Remember years ago when headlines predicted internet sales would wipe out physical retail? It didnāt materialize.
In many cases, digital-native companies are opening brick-and-mortar locations to complement their online offerings and emphasize the person-to-person experience that canāt necessarily be replicated online.
Plus, shoppers flocked back to stores and restaurants after pandemic-era restrictions ended. The rate of available retail space has fallen to 4.8%, the lowest level in the 18 years data has been tracked.
So while the office-vacancy market sits at a 30-year high of 18.2%, retail stores, including boutique clothing stores, mom-and-pop bakeries, and local coffee shops are doing relatively well out of the pandemic.
Said one shopping-center owner: āOffice is in the crosshairs. But retail is outperforming.ā
Why it matters:
To be sure, low-end, enclosed malls are in crisis, especially malls built in the 1960s and 1970s.
But many shopping centers in the suburbs have stood to benefit from the pandemic, remote work, and larger demographic shifts. Consumers have visited local grocery stores and other shops during workweeks, while visiting major cities less frequently.
And like many market stories, you can often simplify trends to supply-and-demand dynamics: While the supply of new retail areas hasnāt increased since 2008, suburbanization and remote work have grown sharply. As another shopping-center CEO said: āThat gives us better pricing power.ā
While landlords in large cities have lowered rents, retail space rents have risen 6.3% since mid-2020 at $23 per square foot, the highest level in over a decade.
Another factor: Americans continue to spend, even if it means more credit card debt.
Noted one of the CEOs: āI think the consumer is actually healthier than people anticipate.ā
MORE HEADLINES
š Yellow bankruptcy sparks bidding war, $1.5 billion bid submitted for trucking terminals
š U.S. existing home sales drop while prices hike from a year earlier
š® Microsoft, Activision to sell streaming rights to secure biggest video gaming deal
š Dickās Sporting Goods blames theft problem for profit plunge; stock falls 24%
š» Meta releases more advanced AI-powered language translator
š Car Loans Strain Buyers Due to High Prices & Interest Rates (WSJ)

From Unsplash
Five years ago, you could buy about a dozen new car models for under $20,000. Today, you can get one: the basic Mitsubishi Mirage hatchback.
The model constituted roughly 5,300 of the 7.7 million new vehicles sold in the U.S. during the first six months of this year.
Explained: After supply chain disruptions, persistent parts shortages, and factory shutdowns, car prices have risen sharply, outpacing inflation.
This includes used car prices. The average listed vehicle costs around $27,000 ā surpassing pre-pandemic levels by over 30%.
Higher interest rates donāt make it easier for buyers. Today, the average monthly payment for an average new car loan exceeds $750, with an average interest rate of 9.5%.
For used cars, the average rate exceeds 13.7%. Over the last three years, the average loan term has been nearly six years, based on Experian's records.
Consequently, rates of severe delinquency for auto loans are at their highest levels since at least 2006, despite unemployment sitting near its lowest level in the past 50 years (meaning the delinquencies arenāt a result of a surge in people being laid off.)
In other words: More borrowers with subpar credit are missing payments while the job market remains strong, which is uncommon. If youāre confused, thatās OK. Much of what has happened since the pandemic has defined conventional market wisdom.
āUsually you get the default spikes when unemployment spikesāitās the biggest correlation in consumer credit,ā noted one fund manager. āTo see them go up that much while unemployment is still low is not typical.ā
Why it matters:
Lucky winners: Automakers and dealers benefited the most from the car price hike. Share prices for public dealership groups have surged this year.
Automakers have thus generated profits to reinvest in their transition to electric vehicles.
Meanwhile, dealerships are posting substantial profits from their parts and service businesses as drivers hold on to cars for longer.
Warning bells: The spike in defaults and skipped payments on car loans is expected to increase further as borrowers face even greater financial constraints when a payment moratorium for student loans expires at the end of the month.
That may impact people with student loans who acquired new car loans during the pandemic.
TRIVIA ANSWER
See you next time!
That's it for today on We Study Markets!
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