A Tale of Two Cities

The week ended on November 30, 2024, interesting news items to look at this week are:

A Tale of Two Cities: Now and then I have been asked the same question by family and friends alike as to “how long can the debt laden US economy sustain on its present trajectory”. The simple answer is January 20, 2025 because the US voters collectively have declared they want the establishment elites and  Deep State out. The 2024 US election was not a contest of Republicans vs Democrats nor Trump vs Harris/Biden but a revolution against the establishment as designed under the Round Table concept. The next question is can the New Administration succeed with its election promises of reducing government deficits and largess to cronies, streamline and revitalize US productivity and take down its arch rival China at the same time. Let’s spend the next few minutes to understand what and how it is to be done, literally and metaphorically speaking  “ To root out and to pull down, To destroy and to throw down, To build and to plant” (Fig. 1)

 (i) US Economy as Explained by a Bond Vigilante : I have previously reported that US GDP growth in 2024 of 2.8% was on the back of a Federal Deficit of 6.7% to GDP. The simple arithmetic is the US private sector has been forced to contract by 3.9% as a result fiscal dominance. With the Federal Reserve still on Quantitative Tapering, a lack of Foreign Buyers and flat Social Security Net Receipts, only the US public remained as the last Treasuries Buyers. (Fig. 2).

By mid November 2024, size of US Money Market Funds (parking lot for US Treasuries) have topped US$7 trillion and continued to significantly crowd out commercial bank deposits.(Fig. 3)

In 2021 US Money Market Funds (“MMF”) accounted only 4.7% of the combined Bank Deposits +MMF, but by November 2024, MMF grew to 28.2% of the combined total, a 7 fold increase within 3 years. Regional banks which have been plagued by their below water Treasury Portfolio and troubled Commercial Real Estate Loans are on the brink of wholesale collapse. (Fig. 4).

Instead of sitting on their low yield Treasury Portfolio of about 2.8% yield on book cost basis, many bank treasurers are selling them to realize a one-off accounting loss but double down to buy duration Treasury Bonds in the hope of a lowering of interest rates by the Fed would uplift their portfolio valuation and also a positive carry against short term interest rates. Sadly anyone who actually trusted the Fed’s Open Mouth Policy on Fighting Inflation would have been disappointed as Duration Treasuries rebelled against the Fed’s Rate Cut Reasoning and Decision. (Fig. 5).

Instead of a lowering of Bond Yield in line with a cut in Fed Funds rate, Duration Treasuries yields actually rose. In fact the latest 30YR Treasury Bond Auction of $25 billion saw a weaning of buyer’s appetite and Primary Dealers were stuffed with one quarter of the unsubscribed issue.  The lack of demand for Treasuries had been a lingering worry for Janet Yellen and practically the US Treasury were forced to finance the US Government on a very short term basis. In 2025 it is expected one third of all outstanding US Federal Debt would mature. (Fig. 6)

with a peak just around Trump’s Presidential inauguration on January 20, 2025 (Fig. 7).

Now you know why PRC USD Bond issuance in Saudi Arabia was oversubscribed by 20X. and the timing significance thereof (Fig. 8).

(ii) US Economy in Numbers: (Fig. 9)

gives a graphic picture of the constituents of the US Economy. Government, Healthcare, Real Estates and Hospitality is 71.4% of the economy. Can the remaining 28.6% of the “Productive” side of the economy carry the rest. Let’s examine how Trump’s election propaganda of tax cuts, spending tax, removal of illegal immigrants, high tariffs to replace income tax and defeating China can be effected.

(a) Trump Tax Cuts (Fig. 10):

In the campaign, Trump vowed to cut taxes for seemingly every group that caught his fancy. According to the Committee for a Responsible Federal Budget’s central estimate, Trump’s tax proposals imply $10 trillion in foregone revenue over the next ten years. Add to that an extra $1 trillion in interest accrued on the national debt, and the losses far exceed the $3 trillion in added revenue that would come from the sky-high tariffs that Trump has pledged to introduce. This will require the federal government to sell a lot of bonds – a practice that will keep their price low and interest rates high.

(b) Elon Musk $2 Trillion Cut in Government Spending: Whilst Musk may have been credited with firing 80% of staff in Twitter with Twitter’s core operations remained functional (Fig. 11),

Musk did not have to bear the social costs of generating huge unemployment. As government, however, the cost to carry the unemployed is not shifted elsewhere whether those got laid off directly or indirectly through the consequential economic impact. There is also the added internal security costs on possible chaos and civil unrest. Will Musk have the last laugh if after making 80% of Twitter’s staff redundant, he still have to foot the bill for their sustenance and healthcare payments?  It would have been a job well done if $100 billion can be cut in the first two years of Trump 2.0 before public dissatisfaction derail the midterm election in 2026. I will just take the whole Trump/Musk efficiency saga as a pretext to purge Trump’s opposition in the Deep State.

(c)  US Federal Tax Receipts and Tariff Receipts: The US annual goods import bill is approximately $3.8 trillion whilst Federal Tax Receipts is $4.9 trillion. (Fig. 12)

I found it strange that some academics would argue a high enough tariff could totally replace income tax, implying a 130% import duty on every good imported into US. Forget about consumer wishing to buy better products at cheaper prices. Forget about critical minerals, ingredients and components that are essential to domestic US manufacturing. Whereas in Trump 1.0, Chief Trade Representative Lighthizer, though a firm proponent to weaponize Tariff, Lighthizer’s real aim was using Tariff to push exporters to establish a manufacturing presence in the US. The new Secretary of Commerce, Howard Lutnick, however, views tariff as a revenue substitute for tax cuts. Let’s just see how cronies and allies of US would react to a universal tariff.

(d)  Trade War with China: Six years have come and gone since the first Trade War salvo against China fired by Trump 1.0. China is now ready and a tool box of counter measures will be show cased with proportional restraint. Export restriction of germanium, gallium and the latest antimony though not high in export value are all precision sorties targeting the US defence and high tech sectors. These materials would all create a snowball effect on US most valuable supply chain with no possible remedies in the medium term. Like EU tariff on China’s EV, an appropriate response would certainly draw both sides to the negotiation table very quickly. (Fig. 13).

With respect to onshoring and friendshoring, the experiment with the Chips Act onshoring ($8 billion funding to Intel curtailed Fig. 14)

and Apple’s friendshoring to India are expensive lessons on politically driven investments. (Fig. 15).

(iii) Make in China 2025: In May 2015, China announced her strategic plan of “Make in China 2025” which sets goals for advancement in key technological development and levels of self sufficiency. The goals in new energy, EV, semiconductors, AI and 5G are by and large achieved by the end of 2024. As Tim Cook, CEO of Apple said China has not been a low labour producer for a long time and China’s attraction is in its skill set. It is projected China’s trade surpluses would reach $1 trillion in 2024. (Fig. 16).

China is a world leader in renewable energy generation capacity, including solar power. The International Energy Agency (IEA) reported that China commissioned as much PV (Photovoltaics) capacity in 2022 as the rest of the world combined. In China, a Solar Energy Farm is much more than just hundreds of kilometers of solar panels. In the Talatan Solar PV Park in Qinghai China, the arid area is totally transformed into pastoral land for contract sheep grazing in support for the poor rural folks in the region. The presence of the solar panels had prevented desertification, improved rain retention and totally transformed the environment to productive use. (Fig. 17 & 18).

A good example of top down but down to earth approach to governance. For anyone who cares to study, perhaps one may just find the answer as to the rise and fall of a once mighty empire.

I named the title of this week’s Blog as “A Tale of Two Cities”. Washington and Beijing is certainly very different. In the end, there is no place for an apex predator within a human society because all men are created equal that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

John 1:1  In the beginning was the Word, and the Word was with God, and the Word was God. 2  He was in the beginning with God. 3  All things were made through Him, and without Him nothing was made that was made. 4  In Him was life, and the life was the light of men. 5  And the light shines in the darkness, and the darkness did not comprehend it.