Blain’s Morning Porridge, August 10 2022 – The Geopolitical No-See-Um threat posed by Chips may be less than that posed by Trump.
“You cannot be serious..…”
This morning: Chips are a critical component of global supply chains – there are significant geopolitical risks inherent in the concentration of semi-conductor production in Taiwan. However, an even bigger geopolitical risk may have been triggered by the FBI raiding Trump’s lair in Mar-a-Lago.
The trick to being a market strategist is to pull information together to discern probable outcomes. Whether it is raw data, behaviours or events – there is plenty of information out there – often too much. If you can interpret it, then aspects of the market gradually start to make more sense. The trick is not to be distracted by the noise, and avoid drawing all the wrong conclusions.
At least, that’s what I try to do each morning. The Morning Porridge is basically informed guessing.
From a purely Macro perspective; the looming threat of global recession, and spiking inflation/stagflation will have critical market consequences. Prices will be volatile, there will be crashes, rallies and bear-traps, but I’m not panicking. That’s what markets do! The strength of Western Capitalism is the ability of industry, commerce, and businesses to adapt and thrive however the circumstances develop.
I was chatting with a leading investor yesterday, discussing Risk On/Risk Off events, and how best to insulate and hedge – our conclusion being US Treasuries will remain the core risk mitigation strategy. What could possibly undermine the mighty dollar… ?
I also spent time in the London office y’day, discussing the Semi-conductor market with colleagues for this week’s Shard Market Lightbite – which will out later this week.
Perversely, the global chip business seems in short-term trouble. Investors are focused on declining demand for chips as post-pandemic shortages ease, and the rapidly escalating costs of new Chip foundries. Even as some of the major manufacturers have seen their stocks tumble, global demand for chips is set to double in the next decade – hence the need for investment.
While the current market is all about macro themes (like inflation and energy security), and micro realities (demand for chips), what does scare me is increasingly chaotic Geopolitics. There is a rising potential for “events” to completely destabilise economic activity.
Here’s some points relating to semi-conductors to think about. (Credit to my co-worker Julian Wheeler – who pulled together the numbers confirming the vulnerabilities of the entire global manufacturing system to a very small island in the South China Seas!)
- Chips are ubiquitous, and probably the most important strategic component in global supply chains.
- The US has just approved a $53 bln Bill to boost semi-conductor R&D – President Biden promises it will cut costs and create jobs.
- China has just revealed a state investigation into how money has been siphoned off from a $100 bln state effort to build and upgrade its semiconductor sector as part of its $3 trillion plan to move China into the top league of global tech.
- Chinese chips are still a generation behind.
- It takes 3-4 years to build a new chip foundry –- there are critical machines to source and install.
- It takes far longer to acquire the expertise to run it and produce top end designs.
- Taiwan produces over 65% of global chip supply. It has a monopoly on producing the most complex chips.
- Both the US and China are heavily reliant on Taiwan manufactured chips.
- Nancy Pelosi’s most important meeting last week wasn’t with the Taiwan president, but with the mighty Taiwan Semiconductor Manufacturing Company (TSMC) – trying to persuade them to expedite the establishment of US production sites.
- Sophisticated modern weapons rely on chips. US and Nato stockpiles are being run down to supply Ukraine. China stockpiles remain intact. Raytheon recently reopened the Stinger production line – but could take years to deliver 1200 new missiles.
- Bloomberg reports wargames modelling a Taiwan invasion and US intervention suggest a war could cost the US Navy and Air Force over 900 aircraft (half the US inventory) and the bulk of the Pacific Fleet. The Chinese would not win, and would see their amphibious forces destroyed – read it here: What-if DC War Game Maps Huge Toll of a Future US-China War over Taiwan.
Chips are a key strategic resource. No one wants a destructive, costly war over Taiwan, or to wreck global chip supply. The Chinese have enough on their economic plate – property fallout, the domestic loan market, plus the ongoing damage of Covid restrictions to contend with. Conflict would simply exacerbate their economic weakness ahead of critical party meetings.
But… If China wanted to inflict economic self-harm by inviting Western Sanctions and lost manufacturing orders, then they could.
The Chinese don’t actually need to invade to thoroughly destabilise the West. All they would need to do is institute a blockade of Taiwan. The West would not be certain of global support against such a move. If the Chinese frame it as domestic police action, the same countries that failed to rally against Russia’s invasion of Ukraine – critically the Gulf States – may decide to withhold support and wait and see how it plays out.
A global shortage of chips will swiftly impact the West’s manufacturing capabilities – closing down the auto sector, causing Chip rationing towards defence spending. It would be dangerous – a blockade would raise the likelihood of mistakes, miscalculations and raise the risk of confrontation turning a cold war hot.
But, perhaps the biggest Geopolitical threat to global peace and stability isn’t in the South China seas, but from developing events in the US.
Millions of Americans choose to believe the BIG LIE; President Trump’s claim he won the 2020 election. It is their right to believe whatever they wish to believe. Millions believe the FBI’s raid on his Mar-a-Lago home earlier this week is a deliberate political act, designed to humiliate and embarrass the rightful leader of the country. It appears to be boosting his political standing. The fact he has classified documents he was told were illegal to remove from the White House is dismissed as “fake news” designed to cover up illegality of the raid.
Millions of Americans sincerely believe Trump was a great president. They don’t believe the stories they read in the Left-leaning press. One such piece I would urge you to read is Inside the War Between Trump and His Generals – a fascinating article on how Trump tried to have the US Military dance to his tune.
Since Jan 6th 2021, I have been repeatedly advised and assured by very senior Republicans how Trump’s grip on their party is over, and he will not be standing again. They look wrong. The last days of Trump were chaotic, yet he is now emerging stronger than before, hid power and prestige being fuelled by the raids and his capture of the Party. The public defenestration of Liz Cheney by the Party, a whole stream of Trump sceptics being forced to resign or defeats in primaries by Trump supporters confirms Trump’s dominance.
Does it matter?
Of course. A new Trump administration will likely unravel the Western Democratic Alliance and break Nato. Trump had his successes, but his first presidency was an unmitigated disaster in terms of America’s international standing and relationships. He offended US allies and diminished the reputation of the Bastion of Democracy as a reliable partner.
We will see in November just how successful the new Trump Republicans are at the polls. There is a chance there will be a backlash against Trump’s capture of the party, but it more likely Biden will lose control of the Senate and Congress, triggering Republican revenge on Trump nay-sayers. Effectively government will stop till the next election – opening doors to all kinds of opportunism. It has massive implications for the dollar, global trade and growth.
Should Trump be re-elected, it will likely spell isolationism and the end any Western Democratic hegemony against Chinese and Russian expansionary policies. Trump will likely pull the US out of Nato and climate change treaties. It will further polarise left vs right in the US, and bring the threat of internal civil war closer.
Global Geopolitics will be changed for ever…
Five Things to Read Today
Businessweek – Stagflation Puts Stamp on Earnings of US Consumer Giants
Out of time and back to the day-job
Strategist – Shard Capital