The Latest in the 'Chip War'

The latest move in the 'chip war'... China bans some U.S. products... The newest Fed buzzword... A hop, skip, and a jump... Another take on the debt ceiling... Last chance to hear Joel Litman's latest message...

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The latest move in the 'chip war'...

I (Corey McLaughlin) wrote to you last week about the recent moves in the geopolitical chess match between the U.S. and China with Taiwan floating somewhere in the middle of the board. As I explained, the escalating conflicts are a big deal for major microchip companies — and Warren Buffett's investing plans.

The story continues...

The Chinese government on Sunday all of a sudden deemed that products made by U.S.-headquartered chipmaker Micron Technology (MU) pose a security risk and announced it wouldn't allow infrastructure businesses in China to buy Micron chips moving forward.

Of course, the Cyberspace Administration of China, a regulatory body that announced the decision, offered no details about what risks were actually found. Such is the way of a communist regime. But it's safe to say the risk was simply that a U.S. company makes them.

This comes a few days after the Japanese government – the U.S.'s biggest ally in East Asia – said it would invest roughly $10 billion to boost its nation's chip industry. Micron was expected to get $1.5 billion from Japan to help it make next-generation chips. (Yes, you read it right: That's a U.S. company getting incentives from a foreign government.)

At the same time, we've learned in the past few weeks that Berkshire Hathaway (BRK-B) sold its entire multibillion-dollar stake in Taiwan Semiconductor Manufacturing (TSM) just a few months after buying shares because Buffett doesn't like "the location" anymore. He has instead been buying Japanese financial stocks... and more of Occidental Petroleum (OXY).

The battle lines keep being drawn...

Or more like drawn over and over again in marker...

Micron shares were down today, but only by around 3%. That might be less than you expected, given that the government behind the world's second-largest economy is essentially banning doing major business with the company.

In actuality, Micron's chips aren't used in a ton of Chinese infrastructure anyway, but more so in consumer goods like phones and computers made and sold in the country.

So this ban might be more symbolic or saber-rattling than anything tangible... But it does set more precedent in the escalating tensions between the U.S. and China, with both saying more frequently (especially since Russia's invasion of Ukraine): You're either with us, or you're against us.

What's new in Fedspeak...

'Tis a skip, not a pause...

The Federal Reserve trotted out some more public speakers today to spread its monetary-policy word... And we've picked up on a new signaling buzzword...

Neel Kashkari of the Minneapolis Fed, and a voting member of the rate-setting Federal Open Market Committee ("FOMC"), said on CNBC it's a "close call" on raising rates again in June or "skipping." Either way, he said...

Important to me is not signaling that we're done. If we did, if we were to skip in June, that does not mean we're done with our tightening cycle. It means to me we're getting more information.

That sounds a lot like someone who is trying to explain what the market shouldn't think if the Fed decides not to raise rates for the first time in 10 policy meetings next month, which to me means that it likely will do just that.

The central bank's benchmark lending rate is in a range of 5% to 5.25% today, and we noted after its last meeting in May that Fed Chair Jerome Powell was talking like the central bank would pause rate hikes.

But in the exercise of delivering and interpreting Fedspeak, apparently some central-bank officials don't like the word "pause" to describe the concept of pausing rate hikes... So expect to hear "skip" a lot more now. This suggests that the Fed is ready to raise rates again later in the year if its beloved inflation numbers woo it to do so.

The hawk's message...

St. Louis Fed President James Bullard, a non-voting FOMC member this year and noted central bank policy "hawk" – meaning he's typically in favor of tight policies – spoke separately at the American Gas Association's Financial Forum in Fort Lauderdale, Florida. Bullard said he would like to see two more 25-basis-point hikes in 2023 because inflation remains much too high...

I think we're going to have to grind higher with the policy rate in order to put downward pressure on inflation... You want to get the downward pressure while you can.

This might sound like "higher rates are coming!" But consider the source here: Bullard has been of the view to raise rates higher, earlier through the entire past two years. In the middle of last year, I remember him saying he didn't want the Fed to have to raise rates at all this year. But obviously that didn't happen, even when he was a voting member in 2022.

Such is life in a central-bank world... Different opinions are supposedly encouraged, and then when the decisions come out, everyone voted in "consensus" – to show some kind of unity, I guess.

That said, Bullard ultimately ended up correct... The central bank has continued to raise rates for longer than a lot of folks in the market have anticipated. And today, the Fed's most hawkish talker is in favor of another hop.

Meanwhile, Kashkari is giving warning about a skip, and everyone else is wanting stocks to jump.

Finally, today, another take on the debt-ceiling 'debate'...

President Joe Biden and House Speaker Kevin McCarthy were scheduled to meet again just as this Digest was going to press... after they ordered their lackeys to restart debt-ceiling negotiations on Capitol Hill this morning.

As we wrote last week, a "default" is off the table now. McCarthy and Biden both made public comments to that point, and it looks like progress continues to be made on some kind of resolution before Janet Yellen's "X date" of June 1.

All that said, I want to close things out today by sharing a different take on this whole story...

We've said for months and months that the resolution of this "debate" would be the same thing Congress has done dozens of times over dozens of years: raising the government's borrowing limit to cover spending that Congress has already approved. And for this reason, any talk of crisis in the markets would be overblown.

This morning, we read with interest a similar conclusion – with a reason we haven't mentioned here yet. It comes via Joel Litman, founder of our corporate affiliate Altimetry...

You and me, the taxpayer...

Joel pointed out to readers of his free e-letter today that the U.S. can handle its current debt obligations, even if the ceiling isn't raised. That's despite the fact Uncle Sam has run deficits for more than a decade, now at more than $1 trillion per year, and total debt is greater than U.S. gross domestic product ("GDP").

As Joel wrote, U.S. tax revenue continues to rise, hitting $4.9 trillion in 2022, and...

It can easily afford the annual cost of its debt. In 2022, that number was $770 billion. And even if the U.S. did struggle to make its debt payments, it has hundreds of trillions of dollars in assets that it could sell.

For this reason, he said the entire debt-ceiling story is mostly a game of political chicken. (We've called it political football in the past.) As Joel wrote...

The U.S. has to raise its debt ceiling in order to pay for bills it already agreed on (it's not about future spending). Congress is using this as an opportunity to discuss the government's accounting responsibility... and to score political points...

Each side is using the issue to try to get something they want. They'll both make a point of showing the effort they're putting into negotiations... a "good faith" gesture to win over U.S. voters.

Eventually, one side will jump ahead in the public opinion polls. The side that's behind in the polls will cave at the last moment. And the entire process will almost certainly continue until the eleventh hour.

That's a decent bet on the timing. In fact, we're already at the eleventh hour. The Senate is "off" this week, Monday is the Memorial Day federal holiday, and the House is "off" next week, which includes June 1. Any agreement would have to be made among the Biden-McCarthy Gang and voted on outside of a regular pre-scheduled session.

But maybe the inevitable will arrive sooner than later, or at least the sides will agree upon a stopgap measure before the unofficial start to summer arrives. I can't imagine anyone in Washington wants to work the week after Memorial Day either, and you might (or might not) be surprised how many things in D.C. revolve around politicians' vacation schedules.

Whatever the case may be, Joel is more focused on another market event...

As we've shared recently, he says this one will impact 20 times more money than the collapse of Silicon Valley Bank. And it will send some stocks soaring while crushing others by up to 90%.

Joel recently went on camera to explain all the details... and we encourage you to hear him out. For those who may not know, Joel is a world-renowned professor who called the 2008 and 2020 crashes months in advance, among other things.

In this presentation, he will also share how his proprietary Altimeter technology can spot the winners and losers of the event he's talking about... And he'll explain how it can give you the chance to double your money, every three months, following one simple strategy.

Joel will also present an exciting offer to follow his research... and share the name of a popular stock that he believes will go bankrupt this summer, just for tuning in. This message expires tonight, though, so click here now to hear it before it's too late.

New 52-week highs (as of 5/19/23): Apple (AAPL), ABB (ABB), Broadcom (AVGO), Berkshire Hathaway (BRK-B), Eli Lilly (LLY), Motorola Solutions (MSI), Flutter Entertainment (PDYPY), and Verisk Analytics (VRSK).

In today's mailbag, feedback on Dan Ferris' Friday essay about why the debt ceiling isn't the real problem... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"[The problem is not the debt ceiling] is totally correct BECAUSE the problem is WE DO NOT HAVE A DEBT CEILING! We have a pretend debt ceiling or a pseudo debt ceiling, but in any case it is NOT A DEBT CEILING. At age 71 I've been around long enough to have heard all the terms leading up to finally calling it debt. Remember 'forward funding'? What a joke!

"Debt is debt and it has the same effects world-wide. It has placed our grandchildren into slavery just so we can live in luxury. It is that simple. When they grow up and realize what we have done to them they will hate us for it even more than I hate our leaders now for what they are doing over and over." – Paid-up subscriber Larry L.

"Why doesn't Congress increase the debt limit as a normal part of approving expenditures? Granted, that only accounts for one side of the fiscal equation but providing for an automatic increase, if required, to the debt limit for previously approved expenditures solves the panic issue. It also exposes the NIMBYness/hypocrisy of the politicians not wanting to spend money today on someone else's project to which a majority previously agreed." – Paid-up subscriber Carl C.

"Because of his fame [hedge-fund legend Ray] Dalio will go down as the Cassandra of our time re: the collapse of the dollar and world financial system. Almost everyone with the ability to fix the problem doesn't care to do anything about it because the system has enriched them, and the politicians have their power secured under the system, and figure it won't collapse until after they've gone." – Paid-up subscriber Robert B.

"I feel a couple of thoughts I'd like to add to Dan's commentary. First, 34 TRILLION is our national debt. That is 124% higher than our yearly GDP... If we aren't at the tipping point then what is the number? Inflation doesn't seem to want to get down to this fictional 2% that is thrown around as some savior to our economy. There are much bigger other worldly factors preventing that from happening anytime soon. China is the biggest culprit there and the world seems to be eager and helping them ruin us. That being said you can see all the factors at play and the dancing and word play trying to get everyone to believe these bankers have the answers.

"The answer IS Bitcoin. I will concur with how it trades is crazy but why I'd run to own as much as possible is because NO country can own it which means it can't get manipulated the way fiat money does... For me if somehow the debt ceiling didn't get raised and the U.S. defaulted I'm either a gold/silver owner or Bitcoin..." – Paid-up subscriber James S.

All the best,

Corey McLaughlin
Baltimore, Maryland
May 22, 2023