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
WSJ – Chip Makers Expect Demand Slowdown to Expland Beyond PCs, Smartphones
FT – Why criticism of the Bank of England is largely misplaced
BBerg – UK Credit Deemed Cheap by Investors Who Say Worst is Priced In
Businessweek – Stagflation Puts Stamp on Earnings of US Consumer Giants
FT – Taiwan security officials want Foxconn to drop stake in Chinese Chipmaker
Out of time and back to the day-job
Strategist – Shard Capital
” the same countries that failed to rally against Russia’s invasion of Taiwan”
Did I miss something?
Oops… will rectify..
When did Russia invade Taiwan?
Does anybody else know or just Morning Porridge readers?
Interesting analysis of the chip issue. Seems pretty spot on. Time will tell. Way off the mark on the American/global political situation. What is Interesting is to see how Europeans view the American situation and how you are totally hoodwinked by the globalist media propaganda machine or you are part of it considering you some reach with your postings and knowledge of markets. I have to be honest this is the 1st time I’ve read one your newsletters completely through. A few times I’ve tried but didn’t finish because of this type of political commentary or just didn’t really get the point. After reading this one I understand now. You’re British. You have a completely diffrent perspective on government, at least for now. Not that I have the slightest understanding of the markets except buy low sell high, hence the subscription. After reading this commentary I was trying to decide whether or not to cancel the subscription. But then I struggle with it’s always a good idea to understand the masses and the group think direction. So I decided not to unsubscribe for now. Your perspective is interesting though, although completely off the mark.
A 50/50 result then? Right on chips, wrong on America. Time will tell I guess.
The world is a game of two places.
And yes, the Porridge is written in Europe (and often from the Middle East) by a Scotsman who is on planes too much.
I spent much time in the USA, but I now see globe from a very different perspective. Let me put it this way: when I was a boy, we loved America and trusted it completely. We knew America was there to protect us from the Red Hordes. Today.. we have a very different perspective and Trump was a shock. He still is.
I would be very sorry to lose you as a subscriber, but always your call.
Dear Mr. Blain, I hardly ever disagree with your very astute analysis. But if I may take exception today. The US election was stolen. As an example, Mark Zuckerberg a private citizen, dropped millions of dollars into the Wisconsin election. Much of this money was spent on “facilitating” votes at nursing homes. Many of these elder care facilities had 100% Biden vote counts. That is not statistically possible. Votes were also recorded for people with health care issues and dementia that were not capable of voting. This was documented by their families. There was not widespread voter fraud. There was targeted and intense fraud in key areas. And simply repeating it did not happen does not make it go away. Trump 2024.
Of course the election was stolen, the obese man in golf shirt said it was. Trump’s vitriol and negativeness is a reflection of the anger and dissatisfaction of his supporters . He conducts focus groups via social media and amplifies the incendiary comments that generate the biggest donations from his minions.
Nearly a century ago Benito Mussolini discovered the truth about campaigning for office”
“All people are shaken to their inner-most core by an irresistible desire to submit to a strong man and, at the same time, to hold sway over the defenseless. They are ready to kiss the shoes of any new master as long as they too are given someone to trample on.”
Soon after Sinclair Lewis wrote the epilogue:
“When fascism comes to America it will be wrapped in the flag and carrying the cross”.
2024 will be a demonstration of democratic dystopia.
Well, that reply will further embarrass my American family …. Any authoritative, credible sources (other than some obscure social media echo chamber) for this mindless drivel? It’s important as we need to determine whether you are one of the desperately needed “educated citizenry “ or whether you are just another tragically misinformed acolyte of tfg …
“…All (the Chinese) would need to do is institute a blockade of Taiwan. The West would not be certain of global support…”
Hard to argue the question of uncertain support, but remember a blockade is an ‘act of war,’ even if framed as domestic police action by the aggressor. Like oil in the mid-east, the US would be hard pressed NOT to defend its strategic interests in Taiwan. Then it becomes ‘in for a penny, in for a pound.’
BTW, the CSIS wargames were dominated by USAF strategists (who could also really benefit from a quick overview of Chinese demographic trends – separate tangent). The ‘automatic, immediate’ loss of two US carriers is in no way, shape, or form a foregone conclusion if war were to actually break out, a fact not lost on Xi Jinping or his more realistic generals.
Sorry for the out-of-the blue rant, but as a retired USN officer and Foreign Area Officer specializing in China, some assumptions get me unnecessarily riled. Having said that, great blog, as always.
Thanks – very happy to be corrected.
(Did you read that piece from the New Yorker on Trump and the Military. Frightning..)
Chinese demographics – they got old before they got rich!
It is just logistics. It took us 6 months for our last fruitless invasions of the Middle East to get ready. You have to take everything to China. They already have all their stuff there. I am ex Army so I will defer to your Navy commentary. But I do have friends with 35 year old kids in the Navy. They say the new recruits are dreadful. The deployment schedule has the Navy worn to a frazzle. And a lot of the new procurement boondoggles are maintenance nightmares. I am in no way as sanguine as you as to the outcome. And if we lose? Which is a chance. The only thing we have going on the world right now is a bluff. Russia has already showed the world the limits of US power when it is not confronted with a goatherder with an AK. We should enjoy the Chinese cowardice as long as it lasts, and then be ready to fold our cards in the Taiwan game. But respectful regards to a fellow service member sir!
Interesting perspective – but I tend to agree with comments that you have a misunderstanding of U.S. politics, one perpetuated by the MSM. As a resident in one of the fly over states in America, I can tell you that most citizens I interact with don’t care about Trump 2020 or even January 6th – we find the man repugnant. What we care about is the direction our country is headed – hence the 88 percent in a recent poll who think the U.S. is on the wrong path. Given the current choices in American politics, there is no one fighting the system that got us here, certainly not Mitch McConnell, Liz Chaney et al. And ‘Inflation Reduction Act’, do they really think we are that stupid? Thus, the enemy of my enemy becomes my friend, and Trump becomes a voice fighting the existing corrupt system, exposing its hypocrisy and its self-serving survival instincts.
Always an interesting perspective, especially from a non U.S. lense. However, I tend to agree with other comments that you have a misunderstanding of U.S. politics, one perpetuated by the MSM. As a resident in one of the fly over states in America, I can tell you that most citizens I interact with don’t care about Trump election 2020, January 6th or even Trump 2024 – we find the man repugnant. What we care about is the direction our country is headed – hence the 88 percent in a recent poll who think the U.S. is on the wrong path. Given the current choices in American politics, there is no one fighting the system that got us here, certainly not the feckless Mitch McConnell, et al. And ‘Inflation Reduction Act’, do they really think we are that stupid? Thus, the ‘enemy of my enemy becomes my friend’ and Trump becomes a voice fighting the existing corrupt political system, exposing its hypocrisy and its self-serving survival instincts.
Interesting comment Bill
I’m intrigued what could be done to energise and direct the US “flyover states”. Having travelled and found them friendly, hospitable and decent folk, I can’t understand why they’d want to pick up torches and pitchforks to march behind demagogs like Trump.
Morning Porridge is fast becoming Morning Indigestion. Stick to the market commentary and control your TDS (Trump Derangement Syndrome).
The Morning Porridge focuses on the events likely to influence markets. There is no point reading it if you simply want it to reflect your own beliefs. If you are not open to multiole interpretations of events and how they may unfold – don’t waste your time.
If you can explain why a second Trump presidency will boost global GDP, reivigorate global trade, and foster stronger relationships among democratic states likely to raise the sum of human happiness… I am all ears.
Otherwise.. accept it for what it is..
Here’s just a few: Try to follow, if for a very fleeting moment you can allow yourself a reprieve from the overwhelming, unrelenting Group Think that so permeates your Trump (Porn) commentary – first, the Abraham Accords – representing the first MAJOR geopolitical breakthrough in advancing the cause of Peace in the Middle East in over 50 Years! Second, the advocacy for European Nato members to pay their fair share resulting in tens of billions more contributions to fund such idiotic adventurism such as the “defense”
(slaughter) in Ukraine. Something you sound at least tangentially concerned about in so far you believe Trump will be the cause of the Western Alliance; Third, the blowing up of Obama’s Iranian Nuclear Advancement Accord (i also, like you, welcome an opportunity to be enlightened, a single coherent basis to explain what and how this piece of diplomatic nonsense will in anyway advance – “…the sum total of human happiness”? Please I’m all ears. I read just as much as you do and I have yet to hear a single meaningful rationale on how this does anything of the sort. Next, the very advocacy to on-shore industrial production for semiconductors – against what has been an ongoing assault on our industrial base by the so-called brahmins that your appear to be aligned with – leading us into what is now complete “supply chain” dependency on the Chinese , was first advanced by…right, DT! Of course I can go on and on and on, but it does seem that so much of what was either advocated, attempted or done by Trump (is) totally lost on your laughable mainstream point of view.
Gosh… you are so right.. anyone’s perpectives that don’t coincide with your perspectives must be “group think”, “idiotic”, “laughable” which all justify your right to call everyone else a fool, tool and accuse them of the ultimate crime of being mainstream.
News for you.
You read like a total plonker.
You read like a man who listens to too much vitrol tv.
You read like a man who belives Sandy Hook was a scam.
You read like a Trumptard.
Enough. Stop wasting our time.
I enjoy your content but I’m always disappointed by the condescending tone of your replies to those who disagree or respond with an opposing opinion. This is the very same attitude that contributes to the division in our society. Regardless of your opinion on DJT he tapped into the fact that the establishment and status quo no longer works for or represents the people who actually make the country work regardless of color or other moniker. Your own Russell Brand and others on the political left like Matt Taibbi and Glenn Greenwald also point this out. Just calling someone obese in a golf shirt doesn’t quite make the grade. There is also a serious dialogue that should be had about America’s place in the world and our penchant for being in a state of perpetual war. Before you insult me I would like to thank you again for your time.
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