Your Financial News Roundup
September 13, 2023
1. Economy: The U.S. national debt nears $33T; while e-commerce prices dropped in August and gas prices ticked upwards.
2. Tech: Food delivery app Instacart wants to IPO with a $7.2-$7.8B valuation; meanwhile Apple’s valuation declined $200B on news that China will ban its government workers from using iPhones.
3. World: The G20 summit in India focused on promoting peace in Ukraine and restoring the Black Sea grain deal; and Egypt protests Ethiopia’s construction of a mega-dam project.
Personal Finance Concept [Part 7/10]: Debt Detox — HELOCs
💸 Growing Pains: With the U.S. national debt nearing $33T, economists are raising concerns over its potential economic harm. Debt has historically been used for emergencies and is easier to finance through borrowing than taxing the public. However, since the beginning of the pandemic, the national debt increased by more than 89%, with the U.S. debt-to-GDP ratio close to 100%. As the Federal Reserve continues raising interest rates, servicing the debt may become more difficult. (CNBC)
Our Take: The U.S. national debt’s continuous rise presents a complex economic puzzle. While debt can fuel growth and address emergencies, unchecked accumulation can strain younger generations’ finances and likely means higher taxes.
📉 Online Prices Falling: E-commerce prices saw a 3.2% year over year decrease in August, marking the largest annual decline in over 3 years. This trend suggests inflation is slowing down across the U.S. economy, especially following the Fed’s aggressive interest rate hikes. Despite the overall drop in online prices, certain goods, like gasoline, continue to see price hikes due to supply chain challenges. The national average for regular gas reached $3.84 a gallon, a 12-cent increase from last year. (CNN)
Our Take: The decline in online prices is a welcome relief for consumers’ wallets and the broader fight against inflation. However, the challenge lies in stabilizing prices of other goods and services.
🛒 Instacart a Decacorn?: Instacart’s new S-1 filing reveals an IPO price range of $26-$28 per share. With plans to sell 22M shares, the company’s IPO could raise up to $616M. However, only 14.1M of these shares will be from Instacart directly, with the remaining 7.9M coming from existing shareholders. This sets an IPO valuation between $7.2-$7.8B and a market cap of $8.6-$8.9B, a significant drop from its $30B private-market valuation in 2021. (TechCrunch)
Our Take: While still impressive, Instacart’s proposed IPO valuation showcases the volatile nature of tech valuations, especially in the transition from private to public markets. The company’s decision to go public at a much lower valuation underscores the tough competition in the food delivery space.
📱The Stumbling Giant: Apple shares declined for 2 days straight following reports that Chinese government workers are banned from using iPhones. This led to a 6%+ drop in Apple’s stock market valuation, translating to nearly $200B wiped. China accounts for 18% of Apple’s total revenue. The reported ban came just ahead of the iPhone 15 launch and has also impacted shares of Apple’s suppliers, such as Qualcomm. (BBC)
Our Take: Escalating tensions between the U.S. and China has led both nations to impose tit-for-tat restrictions and bans. As they duke it out, companies like Apple find themselves at the crossroads of business and politics.
🏾🏼 When the Greats Meet: The G20 summit in Delhi focused primarily on the ongoing war in Ukraine while touching on climate action and debt resolution frameworks. However, Russia and China’s leaders were notably absent. Despite challenges, a joint declaration was achieved, emphasizing the Black Sea grain deal and its global food security implications. (CNBC)
Our Take: India’s role at the G20 summit highlights its emerging diplomatic prowess amid shifting global alliances. Collaborative efforts, like those between India, Brazil, South Africa, and the U.S., are pivotal in addressing global challenges and counterbalancing China’s influence.
🇪🇬 🇪🇹 Trouble on the River Banks: Egypt raised concerns over Ethiopia’s plans to build the Grand Ethiopian Renaissance Dam (GERD) on the Blue Nile, fearing the dam will threaten its water supply. As Africa’s largest hydroelectric project, the GERD will double Ethiopia’s electricity output and give power to nearby countries. But, Egypt, which relies on the Nile, worries that reduced water levels will hurt its food and power supplies. Still, Ethiopia is moving forward with building the dam despite treaties that give Egypt and Sudan Nile river water rights and the ability to veto upstream projects. (BBC)
Our Take: As these nations strive for progress, balancing development goals with equitable resource distribution and diplomatic resolution is crucial in an era where water is becoming increasingly scarce.
Finance Concept of the Week
Debt Detox [Part 7/10]: HELOCs
Common types of debt and how to best tackle them
One of the main perks of homeownership over renting is the opportunity to build equity in your home. As you build more equity, you’ll have the option to take out a home equity line of credit (HELOC) to use for renovations, medical bills, debt repayment, or other major expenses. Think of a HELOC as a revolving line of credit you can use similar to a credit card, but with one major caveat — your home is used as collateral to secure the loan. In other words, you are borrowing money against the equity you’ve built in your home.
How HELOCs Work
With a HELOC, the amount of credit you can draw depends on how much equity you have in your home, your credit score, employment history, and debt-to-income ratio (DTI). Typically, you can borrow up to 85% of your home’s value minus the amount owed (i.e. mortgages, HELOCs, and home equity loans).
Because your home gets used as collateral, HELOC interest rates are usually much lower than those of credit cards or personal loans and often comparable to mortgage rates. But the rates are often variable, meaning they can fluctuate over time.
HELOCs are fairly accessible and generally do not have origination fees. Terms may vary, but most have a draw period of 10 years and a 15-year repayment period. You can borrow up to your credit limit on your HELOC and make minimal payments during the draw period. But, once the draw period is over, you’ll need to make larger payments to repay your debt.
Common Types of HELOCs
- Standard HELOC: This is the most common type of HELOC, where you can borrow funds up to a pre-approved credit limit, typically based on a percentage of your home’s equity. You can use the funds for various purposes, and you’ll only pay interest on the amount borrowed.
- Interest-Only HELOC: With an interest-only HELOC, you are only required to make interest payments during the initial draw period (usually 5-10 years). After the draw period ends, you must start making principal and interest payments. However, if you do not meet the lender’s credit requirements, you may not qualify for an interest-only period.
- Fixed-Rate HELOC: While HELOCs typically have variable interest rates tied to a benchmark, some lenders offer fixed-rate HELOCs. These loans have a fixed interest rate for a specified period, providing stability in monthly payments.
- Home Equity Loan Conversion HELOC: Some HELOCs offer the option to convert a portion of the variable-rate credit line into a fixed-rate home equity loan. This allows you to lock in a fixed interest rate for a portion of your debt, potentially leading to lower interest rates and monthly payments. But, you may need to pay closing costs and other fees.
Pros of HELOCs
- Flexibility: HELOCs offer flexibility in terms of how you can use the borrowed funds. You can use the money for various purposes, such as home improvements, education expenses, debt consolidation, or emergencies.
- Lower Interest Rates: HELOCs often have lower interest rates compared to credit cards and personal loans because they are secured by your home’s equity.
- Interest-Only Payments: During the initial draw period (typically 5-10 years), you can keep your monthly payments low by only paying the interest owed.
- Revolving Credit: Like a credit card, HELOCs are revolving credit lines. As you pay down the balance, the available credit gets replenished, giving you ongoing access to funds.
- Tax Deductibility: In some cases, the interest paid on a HELOC may be tax-deductible, especially if the funds are used for home improvements. However, tax laws can change, so it’s essential to consult a tax professional for the most up-to-date information.
Cons of HELOCs
- Risk of Losing Your Home: A HELOC is secured by your home’s equity. If you default on the loan, you could face foreclosure, putting your home at risk.
- Variable Interest Rates: Most HELOCs have variable interest rates tied to an index, meaning your monthly payments can fluctuate over time. This can make budgeting challenging.
- Interest Costs Over Time: While interest-only payments may keep monthly payments low during the draw period, they can result in higher overall interest costs over the loan’s lifetime.
- Fees and Closing Costs: Like other mortgage products, HELOCs may come with fees and closing costs, which can add to the cost of borrowing.
- Market Dependent: The amount of equity you can access through a HELOC depends on the current market value of your home. If your home’s value decreases, your available credit may also decrease.
How to Manage HELOCs
- Understand the Terms and Agreement: Before opening a HELOC, carefully read and understand the terms and conditions, including interest rates, draw period, repayment terms, and fees.
- Track Your Spending: Keep a close eye on your spending and borrowing activity. It’s easy to lose track of how much you’ve borrowed or spent using the HELOC, so regular monitoring is crucial.
- Avoid Borrowing For Short-Term Expenses: It’s best to avoid using HELOCs for short-term, everyday expenses like groceries or entertainment. Reserve the credit line for significant and planned expenses only.
- Prepare for Interest Rate Changes: HELOC interest rates can change over time so be prepared for potential rate increases and budget accordingly.
- Avoid Maxing Out the Credit Line: It’s generally advisable not to max out your HELOC’s credit limit. Maintaining a reasonable credit utilization ratio (the ratio of your outstanding balance to your credit limit) can help protect your credit score.
What Else Is New?
- Apple debuts the iPhone 15 and iPhone 15 Plus, which comes with USB-C.
- Climate startup Coral Maker partners with Autodesk to use robotic automation to revive coral reefs.
- A masked individual in San Francisco used a hammer to give a self-driving Cruise car a beatdown.
- North Korea’s Supreme Leader Kim Jong Un arrived in Russia to meet with President Vladimir Putin. They are expected to hold a weapons talk, drawing concern from the U.S.
Personal Finance Resources
🚀 Check out our collection of personal finance resources on Gumroad, featuring both free and paid options:
Stay tuned for updates! In the meantime, if there’s any other product you’d like to see, feel free to suggest it here.
If you liked what you read, subscribe to our weekly newsletter here!