Hello everyone and welcome to “Financial Insights.” First, we have some good news. The week-long strike by dockworkers on the U.S. East Coast, which had been causing concerns, finally ended last Thursday ahead of schedule.
Today’s focus: the escalating tensions between the U.S. and China, forcing Western consulting companies to tread carefully to make money! The short-term frenzy in the Chinese stock market, where will the momentum go from here? The bright September nonfarm payroll report, is the Fed taking big steps? The dockworkers end strike, with a 62% raise over six years! OpenAI sets a record with a $6.6 billion financing round!
According to insiders, the proposal put forward by management to the workers was to raise the base hourly wage of union members from $39 to $63 over the next six years. Although this raise is below the 77% demanded by the union, it is still significantly higher than the increases in major labor contracts in other industries. As a result, many U.S. dockworkers’ annual incomes will exceed $100,000.
President Biden praised the agreement, stating in a declaration that collective bargaining is effective and crucial for building a stronger economy from the middle out and the bottom up.
After news of the strike spread, many supermarkets in the Eastern U.S. were tense as it was expected to impact logistics, causing delays in delivering goods. Therefore, when the news of the strike ending was heard, everyone breathed a sigh of relief.
It is reported that the cost of the wage increase for dockworkers will be shared by major freight companies, cargo owners, and shipping companies managing port docks. It is foreseeable that this cost will ultimately be passed on to consumers in the form of higher prices.
By the way, even though this lightning strike did not cause significant losses, the U.S. economic sector has truly learned the power of dockworkers. As the leader of this strike, 78-year-old International Longshoremen’s Association President Harold Daggett gained significant fame. This elderly man with a gold necklace and rough speech had threatened a few days ago that he could “paralyze the U.S. economy” with a single command.
Media investigations found that this relatively unknown figure previously had a surprising amount of wealth. He owns mansions in upstate New York and Florida, as well as a yacht. He and his son hold various positions within the ILA, earning significantly higher annual salaries than ordinary workers could imagine.
Daggett himself receives a salary of up to $902,000 per year from the union, while his son Dennis, who serves as the Executive Vice President of the union, earns $703,000 annually.
According to Wall Street analysts, there are increasing signs that Warren Buffett will invest heavily in Japanese stocks by purchasing shares in major Japanese banks and shipping companies. Buffett’s investment company is currently raising funds through the issuance of a series of yen-denominated bonds to invest in Japanese stocks.
According to Bloomberg, Berkshire Hathaway started a yen-denominated bond sale action in April this year with a scale of 263 billion yen (approximately $17.1 billion), the largest yen-denominated bond sale action by the company since 2019.
The mainland Chinese stock market has indeed shown a frenzied surge recently, with Goldman Sachs even raising their rating on “Chinese stocks” to “overweight,” boldly declaring expectations of a further 15-20% increase in the Chinese stock market, causing an explosion of optimism in the market.
However, almost all professionals are likely to have a question in mind: what comes next? Where is the follow-up momentum?
Raymond Ma, Chief Investment Officer for Hong Kong and China at investment management company Invesco, stated: Market sentiment may be over-exuberant in the short term, but people will ultimately return to fundamentals. Due to this recent uptrend, some stocks are already overvalued.
He added that there is no rush to increase positions at the moment.
Similarly, JPMorgan takes a cautious approach, believing that the key lies in waiting to see if more relevant policy measures will be introduced.
Tai Hui, Chief Market Strategist for the Asia-Pacific region at JPMorgan, said: More policy steps need to be taken to boost economic activity and confidence. Although the policies announced so far can help smooth the deleveraging process, balance sheet repair still needs to be done.
Tai Hui also believes that the uncertainties in the global economy will have a certain impact, such as the U.S. election being only a month away.
Regarding this wave of manic surges in the Chinese stock market, it will soon become clear how much wealth and lives will ultimately be cut, the optimism in the market may soon face a reality check. Hopefully, investors will rationally evaluate the Chinese stock market.
Last Sunday, Trump stated that he would impose tariffs as high as 200% on cars imported from Mexico. Trump had previously promised that if re-elected, he would impose a 100% tariff on imported cars to help the U.S. domestic auto industry. However, during a rally in Wisconsin on Sunday, he doubled that number, saying: if necessary, we will impose a 200% tariff. He said: We won’t let it happen. We won’t let these cars enter the U.S.
Unicorn company OpenAI recently completed a record-breaking round of financing, valuing the company at $157 billion and raising $6.6 billion in financing. The lead investor in this round remains existing shareholder Thrive Capital, investing $13 billion, while co-investors include Microsoft, Nvidia, SoftBank, Tiger Global, and others, with Microsoft once again contributing $750 million.
Following the completion of the transaction, the $6.6 billion figure directly surpasses Musk’s xAI created earlier this year to become the largest venture capital investment in history. If this figure is compared to the year 2014, ten years ago, it would be equivalent to the total venture capital investments in the states of New York, Florida, and Texas combined.
It was previously mentioned that Apple was also one of the players in this round of fundraising, but withdrew at the last minute. As for why Apple exited, the mainstream view is that it is likely related to their cooperation with OpenAI reached in June this year. At the developer conference in June, Apple officially announced a partnership with OpenAI to integrate ChatGPT into the iOS system. Additionally, Siri will also be integrated with ChatGPT, allowing Apple users to flexibly use the functionality of ChatGPT without switching between tools.
At the time, the media reported that this collaboration would not incur any costs or profits, and would not generate any revenue. More importantly, Apple believed that by integrating the system, they provided a promotion of substantial scale reaching millions of terminals for OpenAI, providing significant exposure value. That is to say, although they did not contribute financially, Apple felt that they had brought substantial cash returns, coupled with Apple’s historical lack of interest in venture capital, leading them to make a rational decision to withdraw from this round of fundraising.
Also, I would like to specially mention a curious viewpoint that since OpenAI’s valuation has exceeded $150 billion, there is a warning to be cautious of this “$150 billion” figure.
Why is that? In 1999, the total amount of funds managed by U.S. venture capital institutions was $150 billion. This money directly fueled the formation of the Internet bubble the following year, followed by several years of a devastated aftermath after the burst of the internet bubble.
Don’t think this viewpoint sounds far-fetched. Currently, almost all Wall Street institutions are talking about over-investment in artificial intelligence. According to data compiled by Crunchbase in August, out of the total global financing of $79 billion this year, over $35.5 billion was invested in the artificial intelligence industry. A somber editor concluded this report with a serious headline “Is the momentum of AI startup transactions beneficial?”
Regardless of whether this theory sounds divine, the principle of “extremes beget reversals” should be effective at that level.
Last Friday, the U.S. Labor Statistics Bureau released the September nonfarm payroll report, with a significantly bright number exceeding expectations, indicating that the U.S. labor market remains robust. However, it also sparked discussions about whether the Federal Reserve’s decision to cut rates by 2 basis points in September is too aggressive.
As we step into October, the U.S. labor market has achieved a major victory, with the latest report from the Labor Statistics Bureau showing an addition of 254,000 nonfarm jobs in September, significantly higher than the numbers in July and August, and marking the largest increase since March this year.
White House National Economic Adviser Bernard: “We are seeing a decline in inflation, a drop in interest rates, and now we see the labor market continuing to expand. This is very good progress.”
U.S. Acting Labor Secretary Suvas: “The real wage growth continues to exceed the rate of inflation, and interest rates have been lowered, these are all signs of a historic and unprecedented economic recovery.”
Not only has job creation seen a robust recovery, but the unemployment rate has also dropped slightly from 4.2% last month to 4.1%, hitting a low point in three months.
U.S. Acting Labor Secretary Suvas: “When workers are doing well, the economy becomes stronger, and the nation becomes stronger. This jobs report is an example of that.”
However, the new jobs report has once again sparked discussions about whether the 2-basis-point rate cut by the Fed last month was too aggressive. One of the main reasons for the rate cut was the weak employment situation, but the latest data suggests that the U.S. labor market may not be as weak as previously thought.
Lawrence Summers, a former U.S. Treasury Secretary under the Obama administration, believes: “The new jobs report confirms speculation about the U.S. being in a high-neutral rate environment, and responsible monetary policy makers should exercise caution when cutting rates. It now appears that the 50-basis-point cut in September was a mistake, although the consequences were not too serious. Based on this data, ‘soft landing’ and ‘hard landing’ are both risks that the Fed must consider. Wage growth remains significantly higher than pre-pandemic levels, with no signs of slowdown.”
However, there are also differing opinions. Eric Beane, partner and labor lawyer at the Foundation Law Group, believes that with current inflation under control, the 2-basis-point cut is a necessary precaution to prevent a significant drop in employment in the future.
White House National Economic Adviser Bernard Lael Brainard expects that even with positive job report performanace, the Fed may continue cutting rates.
Lately, we have often heard the term “American Dream.” Former President Trump promised to revive the “American Dream” at the Republican National Convention, Democratic presidential candidate Hillary Clinton mentioned it during a TV debate, and Republican vice presidential candidate JD Vance mentioned it six times in a TV debate last week. However, what conditions are needed to achieve the “American Dream” for ordinary Americans? Let’s quantify it.
Financial news website Investopedia recently released a report calculating the ultimate cost for all American families to achieve the so-called “American Dream.”
Firstly, what is the typical “American Dream”? Owning a home and a car, raising children, affording a decent wedding, going on vacation yearly, having a lovable pet, retiring comfortably, and being able to afford a decent funeral.
Then, Investopedia put a price tag on the typical “American Dream”: $1.6 million is needed for a comfortable retirement, $930,000 for a good property, $832,000 to raise two children, $811,000 for a new car including maintenance and fuel costs, $179,000 annually for vacations, $44,000 for a wedding, $37,000 to raise a pet, and $8,000 for a decent funeral. The total sums up to $4.4 million.
Now the question arises, $4.4 million is not a small amount. How many people among ordinary individuals can earn this much money over their lifetime? According to the 2022 Federal Consumer Financial Survey, the average net wealth of the wealthiest 10% of households in the U.S. is $3.8 million.
However, Investopedia believes that achieving the American Dream is still possible. Firstly, it’s important to find a partner. In the U.S., those with a bachelor’s degree have an average career income of around $2.8 million. If there are two individuals with this income in a household, reaching the target of $4.4 million is quite feasible.
Secondly, and most importantly, creating a comprehensive financial plan and having good savings habits is crucial. Many financial advisors agree that the advice provided in this report will make it easier to achieve the “American Dream.”
Of course, the “American Dream” is not a one-size-fits-all model. For different people, the definition of the “American Dream” may vary, and as long as one leads a prosperous and happy life on this land of freedom, their version of the “American Dream” can be simple and pure.
If you find talking about the “American Dream” somewhat distant, let’s discuss something closer to home. As we discussed recently, the price of eggs in the U.S. has been skyrocketing, prompting discussions on how to eat eggs more frugally.
According to data from the U.S. Labor Statistics Bureau, from August last year to this year, the prices of groceries have been relatively stable, with an average increase of less than 1%. Among them, fresh fruits, vegetables, and bread had the lowest price increases, while meats and milk prices rose by about 3%. However, egg prices have seen a significant spike of 28.1%, with the average price per dozen eggs reaching $3.20.
Phil Lempert, founder of Supermarket Guru: “Egg prices have risen over 28%, but frankly, what we are seeing now may be just the beginning of the egg price reaching record levels.”
Experts believe that the primary reason for the surge in egg prices is the avian flu, which directly led to a decrease in egg production.
Phil Lempert, founder of Supermarket Guru: “Egg production decreased by about 2.5% in July, causing a ripple effect on our supermarket shelves.”
Meanwhile, the American Egg Industry Association stated that consumer demand for eggs has been increasing for the past 18 months.
Emily Metz, President and CEO of the American Egg Industry Association: “Any economist will tell you that there is a tense relationship between supply and demand, and we are entering the highest demand period in history.”
Facing the escalating supply and demand conflict, experts suggest that consumers make smarter shopping choices to save costs, which is the best option.
Phil Lempert, founder of Supermarket Guru: “Forget brown-shell eggs, buying white-shell eggs can save you money.”
Whether in the East or the West, people have a kind of ‘fascination’ with brown-shell eggs, resulting in their prices often being higher than white-shell eggs. However, from a nutritional perspective, there is no significant difference between brown-shell eggs and white-shell eggs. Therefore, with egg prices soaring today, eating white-shell eggs is a good way to save money.
Moreover, freezing eggs before they reach their expiration date and promptly storing them is a way to avoid waste.
Emily Metz, President and CEO of the American Egg Industry Association: “In fact, you can freeze eggs. If you can’t finish them before the expiration date, crack the eggs out of the shells and put in special Tupperware containers and freeze them.”
Lastly, it’s time to talk about the stories of Western major consulting firms in China that revolve around business. Western consulting and auditing firms, such as PwC and Boston Consulting Group, who have been deeply rooted in China for many years, are in a delicate situation due to the increasingly intense geopolitical tensions between the U.S. and China, and are forced to tread carefully to maintain their business.
In recent years, China has implemented stricter confidentiality measures in the name of national security regarding economic activities, resulting in some Western consulting advisors being interrogated and detained. These companies also have business dealings with Chinese state-owned enterprises considered sensitive by the U.S.
Last month, a regulatory authority in China fined PwC $62 million for its operations in China and ordered a six-month suspension of business operations. The reason was related to Evergrande. However, according to The Wall Street Journal, during this audit, another PwC company in China obtained a $200,000 contract with a local government in Xinjiang. The U.S. is accusing China of human rights violations in the Xinjiang region, but PwC disregarded this and pursued the contract.
According to another contract, during a time when the U.S. was trying to restrict China’s progress in sensitive technology areas, Boston Consulting Group signed a contract worth about $530,000 last year to provide consulting services for setting up an AI center for the Beijing municipal government. The bid requested that Boston Consulting Group must declare its support for the principles of the Communist Party to take on the project.
It is reported that from 2017 to 2023, the Big Four accounting firms—KPMG, PwC, EY, and Deloitte—along with McKinsey, Boston Consulting Group, and Bain have seen a 53% increase in consulting service revenue in China, ranking at the top in all regions.
By referring to bid documents, company press releases, and other records, these firms have undertaken a substantial amount of work for Chinese government departments and state-owned enterprises, signing over a thousand contracts since 2017. At least 100 contracts were signed with the subsidiaries or affiliates of companies sanctioned by the U.S.; dozens of contracts were with companies identified by the U.S. as being associated with the Chinese military.
Monash University’s Mansfield Center’s China Affairs Director Dexter Roberts stated that as China tries to reduce its reliance on the West, they also need help from abroad to overcome the barriers set up by the U.S. and other Western countries in order to maintain connections with overseas markets.
He said: In some ways, Chinese government departments and companies now need foreign consultants more than ever.
This contradiction is vividly illustrated in the two major Chinese telecommunications operators, China Mobile and China Telecom. Earlier this year, Chinese officials requested these two operators to gradually phase out foreign chips in their core systems. However, since 2017, subsidiaries of these two companies have signed over 60 contracts with Western consulting companies, including Deloitte and Boston Consulting Group, covering brand planning, investment consulting, annual audits, and risk identification, among other areas.
The U.S. Department of Defense has determined that these two telecom companies have assisted the Chinese Communist Party in military research and development efforts, violating the rules prohibiting American investment in these two companies.
A former Deloitte partner revealed that in recent years, as the Chinese government increased restrictions on Chinese companies sharing information overseas, things became more tense between Deloitte’s Chinese subsidiaries and other business units. Deloitte is one of the most developed Western consulting firms in China. A former partner stated that last year, Deloitte’s Chinese partners stopped carrying laptops abroad, and the presentations they did for colleagues in other Asian regions also became much shorter.
In 2018, McKinsey took on a three-month, $1 million project for a Science City project for Beijing officials in Haidian District. The Science City is a scientific hub project in Beijing.
In 2022, Deloitte signed a $1 million contract for a project involving the construction of a department of China National Offshore Oil Corporation. China National Offshore Oil was sanctioned by the U.S. in 2021, after U.S. officials accused the company of collaborating with the Chinese government to engage in illegal operations in the South China Sea.
Experts believe