I’ll tell ya, for a guy like me who loves to write about geopolitics, macroeconomics and what they will mean for individual stocks and people’s investments and retirement savings, this is like some kind of Golden Age…
Almost a year ago, Russian president Vladimir Putin officially broke the globalized world economy when he decided to unleash hell on his neighbor, Ukraine.
Now it’s true, the fault lines of the quid pro quo economic system politely called globalization were laid bare by the COVID pandemic and the breakdown of the supply chain between the U.S. and China.
But when Putin’s tanks rolled into Ukraine, it was as if Putin wedged a giant spike into globalization’s fault line. And when China’s president Xi Xinping chose to back Putin’s murderous play, that was the hammer stroke to the spike that broke the global economy apart.
For more than a year, American companies have been scrambling to reroute their supply chains out of China and into countries who value their business relationship with the biggest economy on earth.
And at the same time, the federal government has been aggressively trying to facilitate this transition with incentives like those in the Chips and Science Act of 2022, that, among other things, encourages semiconductor companies to bring supply chains and manufacturing all the way back to the U.S.
We’ve talked plenty here at Pro Trader Today about how the Chips and Science Act will affect investments in semiconductor stocks as well as the U.S. economy in general. And we’ve talked a lot about the Biden administration's ban on sending advanced semiconductors and the equipment to make them to China, a move that I would characterize as short term pain/long term gain for semiconductor stocks.
But last week, holy moly, it was like the whole “end of globalization” newsflow got kicked into overdrive…
Tech Economies Align
To kick off the, we got word that both Japan and the Netherlands would join the U.S. ban on sending advanced semiconductors and semiconductor equipment to China. This is significant because in addition to the engineering to make the chips, Japanese and Dutch companies are the ones that make the lithography equipment that etches the circuits that make advanced chips work.
As we discussed, for its cooperation, Japan is being outfitted with Tomahawk missiles to counter the threat from China’s North Korean lackey, Kim Jong-un.
I haven’t seen any specifics about the bribe for the Netherlands, but with Germany and France motivated by Russia’s war in Ukraine to aggressively expand their military, we probably don’t have to think too deeply to figure out what the Dutch might be getting.
On Tuesday, the U.S. and South Korea announced that they would “expand military drills and boost nuclear deterrence planning to counter North Korea’s weapons development and prevent a war.” So I think we can expect South Korea to get on board with the U.S. actions regarding China…
And then on Friday, the U.S. and the Philippines announced an expansion to the 2014 Enhanced Defense Cooperation Agreement between the two countries that gives the U.S. access to 5 more Philippine military bases.
It should be pretty obvious that Philippine president Marcos wants to repair relations with the U.S. after former president and certified loony Duterte openly courted Chinese influence and investment.
But the bigger picture is all about the economic Cold War between the U.S. and China, and also China’s aspirations in southeast Asia.
China backed Putin’s murderous war and the freeflow of Russian oil is its reward. But of course, it wasn’t just about oil. China has ambitions.
Chinese President Xi Xinping wants to make Taiwan part of China again. And China would very much like to declare the South China Sea its own territorial waters.
Three of the new Philippine military bases the U.S. has access to are close to Taiwan. And another one faces the South China Sea, where Philippine fishing vessels get harassed by Chinese ships. The U.S. and Philippines have also announced that they will resume South China Sea patrols that were halted during Dutarte’s rule.
China Responds with…a Balloon?
In the midst of all this, Americans were treated to a steady stream of reports and video of a Chinese surveillance balloon moving over the continental U.S…
I gotta say, this is a bizarre move from China.
As a provocative move, a balloon just doesn’t rate that high. I mean, it’s to think of a balloon posing any kind of actual threat. But it is a provocation nonetheless…
Because China just violated U.S. airspace. And they did it in a very obvious way. And the timing – right before the U.S. Secretary of State was scheduled to visit China – is not a coincidence.
There could have been no hope or expectation that China’s balloon would go undetected or collect any valuable information. I can only think that China got exactly what I wanted: air time in front of millions of Americans on the nightly news.
Does China think that the American people would be intimidated or frightened by the sudden appearance of the Balloon Force in our skies? That perhaps we are now worried about our inviolable airspace? That this would encourage the U.S. to rethink its position with Japan, South Korea, the Netherlands and the Philippines?
Is China surprised that the Secretary of State canceled his trip?
It’s all very strange. But the one thing it shows is that China is not interested in trying to ease tensions with the U.S. through diplomacy. And if that’s the case, China’s next move will probably be another provocation.
I’ve told you before that I have a Zero-China Investment policy. I don’t own Chinese stocks and I don’t recommend them to anyone. And I’m worried about American companies that do a lot of business in China. I believe shares of such companies are vulnerable, and I think the events of last week should be concerned about their investment exposure to China.
That’s it for me today, take care and I’ll talk to you on Wednesday.
Briton L. Ryle
Chief Editor and Strategist
Pro Trader Today