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Trinh

@Trinhnomics

Dec 31, 2021 • 25 tweets • 10 min read • Read on X

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https://twitter.com/SenWarren/status/1476327168833581056

Ok, this is my last thread of 2021 & I'll talk about something that is MOST valuable in global exports - semiconductor - or chips, that powers the modern world. This is also very topical as we use it in our daily lives & at the center of politics & geopolitics given its shortages

https://twitter.com/SenWarren/status/1476327168833581056

In case you are wondering why we should know more about this most valuable global export item (worth about USD1trn & more valuable than oil), then we must not forget that in order for me to tweet this, we need chips. If we use the body analogy, chips = brain & oil is like blood.

Let's start with definition:
a) Semiconductor or in UN classification is known as cathode values & tubes & USD949bn was traded in global exports
b) It's a manufactured good & an INTERMEDIATE
c) U don't see it in the final product but products like CARS & laptops & mobiles need it

So the most valuable item in global trade is something you DON'T SEE as it is an intermediate product. You only see the final products such as cars/laptops/etc.

Chips are one of the US top exports (airplanes, oil, chips). China is a net importer of chips. Has a deficit of chips.

Meaning, money flows from China (USD350b) to chip exporters (North Asian countries like Taiwan (TSMC), South Korea (Samsung) & the US (Intel, Global Foundry). Let's talk about chips & its supply chain & why this is the US China trade-war & key to our national security (CHIPS ACT)

Chips were invented in the US & the US has 47% market share, Korea has 20% and Japan 10%, Europe 10%, & Taiwan 7%. China 5%.Now u may ask, well, why is the US fretting over chips if it DOMINATES. Because wants to retain the lead & this 47% includes design & manufacturing is less.

Before you say, "I'm so proud to be an American" and bask in your glory (well, I am rather proud), let's look at the value added by activity or supply chain of chips. And this is where the Biden administration (Trump before it) & Senator Warren are having issues: MANUFACTURING.

Let's put it a different way: American semiconductor firms are doing the R&D intensive part of the supply chain & they have OFFSHORED most of the manufacturing to Asia in various places in various segments of the supply chain, from Taiwan to Malaysia & Vietnam. India wants in too

Note that the US still remains MOST OF THE VALUE CHAIN but increasingly LESS. Consumes 25% of global semiconductor while China 24%, so the same. Europe about 20%.

So where's the beef? The issue is that we DON'T manufacture most of it in the US so have little control over supply.

I won't go into the R&D part of the US supply chain & go straight into the heart of the matter & why I quote Senator Warren's tweet, which I think is simplistic but sets the tone of the hour.

The USA lead in R&D but LAG in manufacturing. Who leads? Taiwan! Specially, TSMC.

To understand this chart, you need to understand a bit about chips but let me, a non engineer explain what this means: Foundries are where chips are manufactured. Manu of chips are capital intensive & very high tech. Basically u want smaller & faster chips & TW dominate < 10nm.

This chart shows u by region (basically we only have a few firms here so this is where Senator Warren goes off about too much concentration but the consolidation is necessary as it's EXPENSIVE to build a foundry).

TW & SK lead or TSMC & Samsung.
US has Intel + Global Foundry.

TSMC is ahead and DOMINATES <10nm & the US lags in this point. If u read the March 2021 US National Security Commission on AI paper, then it's all about the LACK OF MANUFACTURING in ADVANCED CHIPS that's a huge liability.

TMSC manus 54% of global chips.
nscai.gov/wp-content/upl…

Btw, the former CEO of Google is a key author of this report that calls for more support of US manufacturing of chips because it is the support from other governments that has allowed them to thrive.

Anyway, key pts are: we are good at R&D & bad at manu

nscai.gov/wp-content/upl…

Okay, let me wrap this up on why it matters to you, first, u use semiconductor as it is an input into electronics (the brain). U want a faster brain that is not too heavy right to help u with ur whatever tasks. Anyway, below is where the usage of chips is as a share of total. So?

Well, u know the SUPPLY of chips demand on INVESTMENT & it's capital intensive (at least 10bn for a decent foundry) & takes about 2 years. Plus we got Covid-19 related disruptions like Southeast Asia shutting down in Q3 2021.

Demand is HIGH & even acutely higher because Covid!

Note that I'm saying the following: we got supply that is relatively INELASTIC in the short-term for chips because of capacity constraints & time lag in investment & the fact we depend on TSMC for <10nm size. Second, operations were hit (remember my ASEAN note?) 3rd, demand high

@intel

Ok, so what happens now? First, the US will try to retain its lead. The Biden Administration has the CHIPS Act that has 52bn passed by the Senate waiting for the House to pass that gives incentives. Btw, @intel is basically the last American manu at the size that can compete. So?

Given that there is so much emphasis on getting US manu up to speed, one an reckon that more support will be lobbied by American firms, and specifically 2 left that manufacture & specially Intel to get it to the competitive level or the US won't have any (if can't compete, exit).

The US isn't the only country. EU has a similar strategy but the US has more to lose & what the supply shock crisis shows that we have too much concentration risk to East Asia & in some sector Southeast Asia for manufacturing in general & that means more diversification needed.

Arizona has emerged as a place where Intel is adding additional foundry (basically connecting to its existing). But TSMC is not silly. It is smart. It knows where the game is headed & building there too. So is Samsung.

In fact, TSMC also looking into the EU given policy shift.

Note that American firms such as Intel have a global footprint. Specifically, it has investment in Vietnam and just added USD7bn to Malaysia.

India just passed 10bn bill to attract semiconductor (it wants in too on the supply chain). Diversification will include ASEAN + India.

Hope I got u excited about semiconductor & know a bit more about the product that U DON'T SEE BUT SHAPE YOUR LIFE, CPI, INTEREST RATES, DOMESTIC POLITICS, GEOPOLITICS & geeky & cool at the same time.

And yes, I think the US SHOULD support the sector, both R&D & manufacturing.🙏

I have more too add but my threads always end up so long & let me end it by giving you the sources I used for this rant:

*Book: amazon.com/Fabless-Transf…
*The BBC video on semiconductor: bbc.com/reel/embed/p09…
*Policy paper: semiconductors.org/wp-content/upl…
*nscai.gov/wp-content/upl…

HNY!

@Trinhnomics

Have a happy new year! This was my way of saying thank u for being with me on Twitter Land. No matter how good/bad life is, key in my opinion is to focus on learning & processing what we learned to understand more about our world & each other!

See u in 2022!

💃@Trinhnomics

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Trinh

@Trinhnomics

Jun 20

Good morning,

Happy to be back in Hong Kong! The world is on fire, this time, the threat of war widening beyond just Israel and Iran but to the US and that means the gulf.

Meanwhile, Japan sees core inflation rising to 3.7%YoY and this forces the BOJ to hike (it really doesn't want to for many reasons) as it struggles with policy response - note that inflation has been higher than 2% for so long while policy rate is only 0.5%.

So who is most affected by this whole conflict? Well, we all in different ways but the most obvious outcome is oil. Let's take a look.

We Asians IMPORT 69% of oil going through the Straight of Hormuz and the Saudis export the most.

First, let's go through what's happening. Iran has been attacked by Israel and has shown that it is weak. Now that it is weak, it will have to fight back strongly or risk being seen weak.

So it's a question of how it will surrender not whether and when. Will it do that to the US or Israel? It will fight first. Second is the US, will they take this opportunity to wipe out the threat of Iran nuclear power?

If the US is involved, there is a chance of this widening out as US assets in the region will be targets.

Hence the question of the Straight of Hormuz.

20% of global oil consumption flows through the Strait of Hormuz. It is a narrow channel so if that gets choked up, we're looking at a big oil supply shock.

Who's affected? Producers - the gulfs like Saudi, Kawait, UAE.

Who are the importers? Asians, namely China, India, Japan, South Korea. They make up 69% of total imports.

eia.gov/todayinenergy/…

Read 5 tweets

Trinh

@Trinhnomics

Jun 9

Good morning Hong Kong,

Happy to be back in Asia. Paris was great for many reasons - but mostly because the vibe in Europe is much better as people feel more empowered by change that allows people to zoom out from usual distress over political stalemate, even if challenging.

What do I tell clients? Well, the same as I usually do. When you look at data, don't get fixated on a point in a series. Non-farm payroll/jobs data is an example. Markets get so fixated on what the expectations are & whether results are a beat or not. But what we should look at is a trend over time. Revisions happen. Downward revisions or upward. Seasonality happens (strikes/weather/etc). But what does the trend tell you & what does that mean for policy reaction function?

Well, if you zoom out, then what we see is that job gains are SLOWING in the US. And labor market data is lagging.

The ISM, both manufacturing and services, both point to slowing activity.

Meanwhile, we have CPI coming out in May - markets expect 2.5%YoY from 2.3% in April.

So what? What will le Fed do?

Inflation is an interesting figure. Why? Because it mirrors what Trump's doing on tariffs and also the dollar going lower, which means imports cost more now.

Both tell you that US goods inflation should rise over time. But what does that mean for US CPI? Well, most weights for US CPI is housing/services, which are non-tradeable in nature.

So while US CPI is rising, the Fed will want to see if core PCE is rising. Anyway, if employment is softer over time, and inflation is rising, doesn't that constraint the Fed from seeing through the fog and know what to do?

Read 15 tweets

Trinh

@Trinhnomics

May 29

Trump tariffs. Where are the powers coming from? Well, he has a menu of tariff options. It's the only tax that the president can incur without congress.

For Reciprocal Tariffs, he used the International Emergency Economics Power Act (IEEPA), which has an advantage of SPEED and SCOPE but disadvantage in FOUNDATION or legality.

Why? Well, he declared that the TRADE DEFICIT is the national emergency.

The US Court of International Trade said that he MISUSED the IEEPA, as in the foundation of the "emergency" is not right.

Trump team knew this. They know the laws. They decided for SCOPE and SPEED. What happens next?

Well, they appeal. And eventually, it will be the Supreme Court that will decide. But the foundation of his "emergency" was always being questioned.

Irrespective, for markets, there was already a Trump put, and a clear one. He himself sees these "reciprocal tariffs" as maximalist positions anyway.

Remember that he has other powers to choose from. Section 232 has a STRONGER FOUNDATION but takes a while. You need consultation and etc so it takes time.

The +25% steel & aluminum tariffs for example is from Trump 1.0 and he's just removing exemptions + raising alum from 10% to 25%.

Auto tariff is new.

There is a few others that are being "consulted".

Read 4 tweets

Trinh

@Trinhnomics

May 26

Happy Memorial Day to Americans! And good morning to Asia!

Let's talk about something very topical. Debt. Yes, it has risen. How much debt do we have really? Who owns it? Why is cost of debt an issue?

Can the US solve its debt crisis?

This chart is my fav chart. I show stock of debt & then flow of debt (change since 2019 in orange bubble). Debt matters in terms of who owns it, which sector, etc.

Who is the biggest debt of them all? Well, Japan. It is also the biggest creditor to the world (lending money). Japanese debt is unique in that because of weak private sector, the government has been just expanding like crazy because the households and corporates just sit on savings.

Okay, why is this important? Well, those savings traditionally invested in their own debt (used to be very low yielding on the longer end) and also OTHERS' debt, USA + other emerging markets, also Europeans etc.

The Japanese sovereign yield curve is interesting not just for Japanese lifers, banks & JGB strategists but also for everyone else.

What has happened? Well, per usual they will run fiscal deficit. Nothing new. But the BOJ also owns like 48% of this debt and wants to reduce, but very hard because lifers etc don't want to buy so much more of this supply.

So what happens? The yield curve steepens. What is a yield curve? Well, you can borrow short-term (overnight) or for a long time (30 to 40 year in Japan) at a set rate. Japan has been running very close to zero rate for a long time.

So debt is not an issue if your servicing costs were close to zero.

But the longer, esp the 40-yr is now 3.5%. Yep!
The shorter end, which is policy rate is 0.5%.

This curve is STEEP!

Read 13 tweets

Trinh

@Trinhnomics

May 14

Good morning,

US April inflation came over night softer, and that's no surprise really - we knew that energy, food and service costs were going lower. Everyone said, well, what pain for China if April exports were strong, not to the US of course, but to the world (+8.1%)YoY. The same is said about US CPI. It's actually slower to 2.3%YoY despite a very soft USD & tariffs that started since February.

What does that mean? Why did the the US-China both come to the table to stop the embargo of trade?

Can both of these arguments be true? Of course. First, we must talk about these different balance sheets. They are one and the same. But they interact differently.

CPI is a domestic phenomenon. US inequality/lack of affordable housing/high costs of college/healthcare/etc are DOMESTIC IN NATURE. We call it NON-TRADEABLE. Sure, higher steel & timber make building a house more expensive. Higher appliances also make it expensive. But let's be honest here, the biggest costs of the house is the land & next costs is the regulations and the permits and the actual time and capital erecting it.

California/NYC/Seattle where the jobs are all have regulations that make it very expensive to build. And that has been the case during LOW TARIFF REGIME.

So listen, just think if you live anywhere. When you get a paycheck, where does your money go? Well, if you rent or mortgage, then it's HOUSING.

Next, if you live in the US and send your children out of state or private for education, it's not a rounding error on two middle class incomes.

Of course, another essential - FOOD.
Another one is transport - that includes FUEL + Car (and indirect cost is TIME).

Goods, while you know, nice to have, durable goods you buy once and hopefully last you a decade or two, like a washing machine or a fridge or a microwave.

Toys, definitely like you buy according to age and once & don't repeat and prolly can get used because everyone disposes of this once the child is done.

So when you look at US inflation, the largest weights aren't GOODS or IMPORTED goods for a consumer.

It may be a very big part of a producer that imports intermediates. Say an oil driller that needs steel to build infra to drill or a domestic producer of appliances that need parts that are cheaper to source, say China.

Irrespective, an AVERAGE American person isn't going to feel tariffs. They will feel it via the news, via tiktok, via social media, via the financial markets that have exposure to the higher costs, but they are not feeling it much if they don't have a lot of financial assets.

So the reality is that inflation in the US is GOING DOWN for core goods. Egg inflation is lower after a flu supply shock. US food exporters will sell more domestically if selling abroad faces tariffs. But food isn't the bulk of inflation.

It's the services like housing etc. And they are going down.

Read 9 tweets

Trinh

@Trinhnomics

May 13

Of course - China would say it didn’t care that there was an embargo on Chinese goods by it’s #1 customer but a 1trn surplus country with manufacturing share of GDP key to investment and consumption & indirect sector like services would care.

Why? Factories shut first (impact on China), shortages/empty shelves later (impact on the US & due to front loading much later & most goods are discretionary), & so the pain that China feels from trade war is real while the US is expectations of pain via financial assets movement, which may or may not come.

And the reality is who blinked/caved first doesn’t matter. But anyone who laughed at this & said China can just hunker down & accept massive unemployment of 5 to 8millions is not realizing the importance of jobs, especially manufacturing job.

It anchors the entire economy, including services.

Like people that lose steady paying jobs that pay for pensions etc will not want services like restaurant, movies, haircuts as often, nails, music lessons for kids etc.

Not all services are equal. Services were lost during COVID & never recovered & anyone who has lived in a country with high services & informal jobs know that u cannot steadily gain income on gigs.

U need a steady pay check. At the national level, it is millions & hundreds of millions account compounding to give national savings and investment.

Read 5 tweets

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