JULY 9
Most developed countries have terrible demographics, putting enormous pressure on pension and healthcare spending. Then add low GDP growth, higher interest rates, growing immigration backlash, high existing debt/GDP, and voter opposition to tax increases.
The social safety net was based on a growing working age population. That's over. This is the fundamental economic problem of coming decades and it has no politically viable solution. Things that cannot last forever won't. The only way to get the necessary voter and political will for fundamental change would be an extreme crisis. The reforms at that point would fundamentally change the social contract, and hence living standards. The only hope I see is if technological advancements can significantly increase productivity growth. Society has essentially made a huge bet that tech will bail out the political system. It better. https://x.com/JohnArnoldFndtn
The U.S. is the best of a bad lot. That is not something to shout about.
The Wall Street Journal says: New governments in Europe are being handed a poisoned chalice. They are being elected with mandates for change, but only limited means at their disposal to enact it.
Public debt is close to multidecade highs on both sides of the English Channel, where voters this week were electing new parliaments. In both France and the U.K., government spending and budget deficits as a share of gross domestic product are significantly above prepandemic levels. Economic growth remains lackluster, borrowing costs have surged, and demands on the public purse are rising, from defense to old-age pensions.
All that means fiscal restraint—less spending or higher taxes—will be necessary, economists say. But politicians haven’t prepared electorates for that. On the contrary, they have signaled bold new spending plans.
https://www.wsj.com/economy/global/crushing-debts-await-europes-new-leaders-c2b31138
See more under Politics.
Markets and Stocks
TSMC reports next week. The quarter should be outstanding.
Nvidia cannot meet demand for its newest generation GPUs, the Blackwell. Nvidia is sold out for another year if not longer. I like the stock right here.
I am sticking with Dell, HPE and Micron as derivative plays on AI.
Though management is suspect, Corning Glass is seeing a surge in AI related demand. GLW popped yesterday.
And of course the biggest technology stocks continue to look great.
ASML is another must own name.
JP Morgan should report a good quarter on Friday.
Goldman Sachs reports on July 15. I anticipate a fabulous quarter.
The economy is slowing down at an accelerating pace. The Fed will tee up rate cuts at the July meeting on the 30th and 31st. The Fed will cut in September.
Total card spending per HH was up 1.4% y/y in the week ending Jun 29 ... Retail ex auto spending per HH came in at -0.5% y/y." - BofA
The labor market is softening.
Wage growth is slowing.
The market expects two rate cuts this year.
Oil is overbought. I would be a buyer of FANG when the price of WTI is below $75. Currently, WTI is trading around $83 a barrel.
Economics
NBER working paper 32651 discusses semiconductor subsidies.
The resurgence of subsidies and industrial policies has raised concerns about their potential inefficiency and alignment with multilateral principles.
Critics warn that such policies may divert resources to less efficient firms and provoke retaliatory measures from other countries, leading to a wasteful "subsidy race." However, subsidies for sectors with inherent cross-border externalities can have positive global effects. This paper examines these issues within the semiconductor industry: a key driver of economic growth and innovation with potentially significant learning-by-doing and strategic importance due to its dual-use applications.
Our study aims to: (1) document and quantify recent industrial policies in the global semiconductor sector, (2) explore the rationale behind these policies, and (3) evaluate their economic impacts, particularly their cross-border effects, and compatibility with multilateral principles.
We employ historical analysis, natural language processing, and a model-based approach to measure government support and its impacts. Our findings indicate that government support has been vital for the industry's growth, with subsidies being the primary form of support.
They also highlight the importance of cross-border technology transfers through FDI, business and research collaborations, and technology licensing. China, despite significant subsidies, does not stand out as an outlier compared to other countries, given its market size.
Preliminary model estimates indicate that while learning-by-doing exists, it is smaller than commonly believed, with significant international spillovers. These spillovers likely reflect cross-country technology transfers and the role of fabless clients in disseminating knowledge globally through their interactions with foundries.
Such cross-border spillovers are not merely accidental but result from deliberate actions by market participants that cannot be taken for granted. Firms may choose to share knowledge across borders or restrict access to frontier technology, thereby excluding certain countries.
Future research will use model estimates to simulate the quantitative implications of subsidies and to explore the dynamics of a ``subsidy race'' in the semiconductor industry.
https://www.nber.org/papers/w32651
I guess the researchers believe subsidies are a good idea. I am puzzled why they went to so much effort without having a substantive conclusion.
Politics
So around we go. Republicans tried to impeach Clinton. That started the nonsense.
The New York Times reports: Senator J.D. Vance of Ohio, a potential running mate for former President Donald J. Trump, said on Sunday that he supported Mr. Trump’s vow, if he won in November, to appoint a special prosecutor to investigate President Biden.
“I find it interesting how much the media and the Democrats have lost their mind over this particular quote,” Mr. Vance said on NBC News, referring to Mr. Trump’s saying that he would “appoint a real special prosecutor to go after the most corrupt president in the history of the United States of America, Joe Biden, and the entire Biden crime family.”
“I think what Donald Trump is simply saying is we ought to investigate the prior administration,” Mr. Vance said. “There are obviously many instances of wrongdoing. The House Oversight Committee has identified a number of corrupt business transactions that may or may not be criminal. Of course you have to investigate to find out. So I think Donald Trump saying, ‘Look, let’s do the basic work of investigating wrongdoing,’ is a totally reasonable thing for him to do.”
https://www.nytimes.com/2024/07/07/us/politics/vance-trump-biden-special-prosecutor.html
My words: so here we go, tit for tat politics. Moreover, this is why the Supreme Court ruled that Presidents have immunity when acting on official matters.
France
Gridlock will be the order of the day in France.
France looks headed for political instability after a surprise win by a left-wing coalition in Sunday’s legislative election left no party able to claim the majority needed to govern.
The New Popular Front — which includes the Socialists and far-left France Unbowed — is poised to get between 171 and 205 seats in the National Assembly. Marine Le Pen’s National Rally, which pollsters last week had seen winning the most seats, is expected to come third, getting between 130 and 152 seats, while President Emmanuel Macron’s centrist alliance is set to place second with 152 to 180.
Japan
Japan can’t afford to buy expensive U.S. weapons systems.
The yen’s collapse this year to a nearly four-decade low is undermining Japan’s plans for its largest military buildup in postwar history.
The government has slashed orders for aircraft, and officials warn that further cuts may be imminent. Japan buys much of its military equipment from American companies, in transactions done in dollars. The government’s purchasing power has been drastically eroded by the yen’s diminishing value.
“What we are achieving in terms of actual defense capabilities and our original target — the two are not lined up,” Satoshi Morimoto, a former Japanese defense minister, said in an interview. The value of the defense budget over five years “has effectively been reduced by 30 percent,” Mr. Morimoto said.
Japan’s currency headache comes at a critical juncture. The country’s large boost in military spending was intended to fortify defenses as Tokyo confronts mounting missile threats from North Korea and other challenges posed by China, including fears of a potential China-Taiwan conflict.
https://www.nytimes.com/2024/07/08/business/japan-yen-defense-spending.html
Sociology
Who populates our prisons?
“boys and men who are disinhibited and irresponsible...are most likely to act out...if you want to design a human being who will be trouble for the group, make him male and highly emotional, and deprive him of self-control, empathy, and intelligence" https://t.co/cCwC7bu2dShttps://x.com/robkhenderson/status/1787957531643461896?s=66&t=hi3LjJ8kVbN50WgSIEfnAg