Rule Based International Order vs Governance For The People

The week ended on May 18, 2024. Interesting news items to look at this week are:

1. Rule Based International Order vs Governance For The People: 2024 is a period of awakening that some long held doctrines of international, national and economic management were overturned. Yes, we all know of The Thucydides Trap but the hypothesis of The Thucydides Trap is simply an observation of some human behavior. (Fig. 1).

 In this week’s Blog, I will present my understanding of the hidden economic drivers that caused the Anglo American/ China competition. In the following thesis I endeavor to avoid branding either side of the competition as good or evil and look purely from a context of cause and effect. In my humble assessment, good outcome must follow natural law and anyone who tried to violate natural laws over a sustained period is doomed for failure. No nation on earth has unlimited resources to continuously defy natural laws.

(i) Present Day US Economy: According to a Forbes Report, 78% of Americans are living paycheck to paycheck. (Fig. 2).

Yet at the same time, US Households allocated 48% of their financial assets to stocks. (Fig. 3).

It is quite obvious that wealth distribution in US is quite skewed. (Fig. 4).

The top 10% of Americans own 66.9% of total wealth. It was once thought a strong middle class provides a stable consumer base that drives productive investment. Beyond that, a strong middle class is a key factor in encouraging other national and societal conditions that lead to growth. Where has the US Middle Class gone ?

(ii) Marginal Cost of Production: Economics 101 tells us that Costs of Products tends to come down with increased unit volume. (Fig. 6).

As more units are produced, fixed cost (Research and Development, Organization and Administrative Overhead) when spread over more units must mean lower Average Fixed Cost (“AFC”). Because of initial high fixed costs, companies like Apple and Tesla all target their first innovative products to the top tier of a society who can afford very high prices. The first celebrity buyers are also trend setters and with help of advertisiing and increase in sales and production volume, Average Fixed Cost (“AFC”) and Average Total Cost (“ATC”) will come down and then a lower selling price regime can be introduced to attract second tier customers. However as volume expand beyond an initial capacity set up, additional capital expenditures is required which will drive up Marginal Cost (“MC”). With national and international expansion, the distribution and marketing cost also tends to drive up  Average Variable Cost  (“AVC”). Most companies are fearful if they do not protect their market share by expansion, their unit sale price may be forced to come down by new entrants.

(iii) Rule Based International Order: The Rule Based International Order (“RBIO”)was initially set up following the rules of Marginal Cost of Production as described above plus the Theory of Trickle-Down Economics. Trickle-down economics refers to economic policies that disproportionately favor the upper tier of the economic spectrum, comprising wealthy individuals and large corporations but eventually the policy will benefit people at lower strata. (Fig. 7).

Following these Economic dictum and for a period of time, there were some progress and development in third world countries. Internationally countries were hence stratified by a division of labor and resources. (Fig. 8).

RBIO came about after WWII because both Europe and Asia were devastated by war and the rule has certain logic during a period of recovery. However a predatory food-chain like hierarchy of countries rigidly and permanently set by Trickle-Down Economics is against the human spirit by the principle of “All men are Created Equal”. (Fig. 9).

When domestically applied within the shores of the United States, Trickle-Down Economics failed miserably  in terms of social division and class struggle.

(iv) Present Day Chinese Economy: There are two characteristics that made the Chinese Economy very unique. The first is China’s Poverty Reduction Program which lifted 800 million people out of extreme poverty between 1970 and 2021. (Fig. 10).

The other, based on Pew's income band classification, China's middle class has been among the fastest growing in the world, swelling from 39.1 million people (3.1 percent of the population) in 2000 to roughly 707 million (50.8 percent of the population) in 2018. (Fig. 11)

(v) Involution and Disruptive Market Penetration: Few people outside of China appreciate a phenomenon of a homogeneous body of 707 million consumers would turn well trodden economic thinking upside down. Instead of initial high pricing aimed at the top tier consumers, Chinese manufacturers of new technology products like cell phones and EV would go strict to the Middle Income segment. These tech folks determine a price which the middle class Chinese consumers would accept and find a means to manufacture products at a cost below the acceptable price band. As competition is extremely fierce in China, the quest for cost reduction and innovation is embedded into the entire product life cycle. After correctly executed a product for the mass market, the Chinese manufacturers then upgrade product features for the tier one consumers and further streamline cost savings for the lower end markets. Today China offers both cost and feature advantages against all established sophisticated manufacturers in the Industrial West and within an extremely compressed time frame. There is no over-capacity or Central Government subsidy. There is no dumping prices for exports because profit margins on exports is much better than domestic margins. It can be said China offers the same competitive price across all national boundaries and differentiate only according to model features. The same price goes to Brazil as to the United States. When a consumer in the United States pays a higher price, it is solely dependent upon added US import tariffs, added Super 301 penalties and added costs of sanctioned components, e,g, a Qualcomm Chip instead of a cheaper SMIC (Semiconductor Manufacturing International Corporation of Shanghai) chip. In the consumer passenger car category, I counted BYD is offering 58 different body models and within each model still further differentiation on features. Tesla offers only six models. Iphone 15 has no note worthy upgrades. Imagine in the long run a scenario of countries in the Global South sharing innovative products at universal low prices against closed protectionist markets with limited choices at high prices, then multiply this spectrum of competition to digital intelligence, the new energy and transport infrastructure and one can only conclude where the pendulum will end. This is the scariest part of China and cannot be countered by simple political hurdles.

All natural laws are God’s laws and I can see another fall of the Tower of Babel coming.

2. Flower Arrangement and Chinese Diplomacy:  On April 28, 2024 I posted the following picture and interpretation of flower arrangement at the Blinken China’s visit. (Fig. 12).

Readers may be interested in my assessment of the Flower Arrangement at this week’s meeting with Putin. (Fig. 13).

Financial Market performance to mid Q2 2024 as follows:

A. Stock Market:  Dow Jones Industrial Average rose by 2,288 points or +6.07%. (Fig. 14). 

Performance of the Magnificent 7 as follows: Nvidia +91.99%, Meta +32.68%, thanks to legislation to kill Tik Tok; Amazon +23.19%, Microsoft +13.3%,  Google +27.03% despite disappointing Adv revenue, Apple +2.28% and Tesla -28.56%.

B. Debt Market: Yield on USGGYR10 jumped from 4.206% at end of 2023 to 4.422%  or an increase of 21.6 basis points to mid Q2 2024. (Fig. 15).

The Fed has announced a tapering of QT by slowing down Balance Sheet Contraction from $95 billion a month to $65 billion. Inflation in US still above target and interest rate pivot is uncertain. All refinancing of US Treasuries is currently done on a short term basis, a very risky posture. The market is awaiting for something to break before a Fed’s pivot.

C. Commodities and Precious Metals: Trading results to mid Q2 2024 (Fig. 16) as follows: Bitcoin (+59.38%), Silver (+32.43%), Gold (+17.06%), S&P500 (+11.18%), NASDAQ (+10.22%), Oil (+8.75%), Uranium (+8.56%), DJI (+6.14%), GBP (-0.19%), Eur (-1.54%), CNY (-1.75%), Russian Ruble (-1.79%), and JPY (-9.38%).

In-spite of higher for longer USD interest rates, breakout of Precious Metals is most notable. Crypto after the price ramp up on introduction of Spot Bitcoin ETF is slowly drifting down on choppy moves. The bulk of Bitcoins (92.85%) is still in the hands of a few (1.88% of holders). (Fig. 17).

The intended distribution from the whales to the shrimps had not happened despite the pump up in prices from $42,000 at end of 2023 to over US$70,000 with the Spot Bitcoin launch. Guess quite a few have learnt their lessons not to chase after the wind.

Ecclesiastes 2:1  I said in my heart, "Come now, I will test you with mirth; therefore enjoy pleasure"; but surely, this also was vanity. 2  I said of laughter—"Madness!"; and of mirth, "What does it accomplish?" 3  I searched in my heart how to gratify my flesh with wine, while guiding my heart with wisdom, and how to lay hold on folly, till I might see what was good for the sons of men to do under heaven all the days of their lives. 4  I made my works great, I built myself houses, and planted myself vineyards. 5  I made myself gardens and orchards, and I planted all kinds of fruit trees in them. 6  I made myself water pools from which to water the growing trees of the grove. 7  I acquired male and female servants, and had servants born in my house. Yes, I had greater possessions of herds and flocks than all who were in Jerusalem before me. 8  I also gathered for myself silver and gold and the special treasures of kings and of the provinces. I acquired male and female singers, the delights of the sons of men, and musical instruments of all kinds. 9  So I became great and excelled more than all who were before me in Jerusalem. Also my wisdom remained with me. 10  Whatever my eyes desired I did not keep from them. I did not withhold my heart from any pleasure, For my heart rejoiced in all my labor; And this was my reward from all my labor. 11  Then I looked on all the works that my hands had done And on the labor in which I had toiled; And indeed all was vanity and grasping for the wind. There was no profit under the sun.