It’s Friday. That means it’s mailbag day at The Daily Cut.
You send your questions to your favorite Legacy Research analysts… and we publish their responses.
So if you have a question for Teeka Tiwari, Jeff Brown, Nomi Prins, or anyone else on the team, send it to feedback@legacyresearch.com.
Today, we’ll look at why world-renowned crypto investor Teeka Tiwari warns against jumping back into crypto right now – despite the recent rally…
But first, we’ll explore China’s fierce response to Nancy Pelosi’s visit to Taiwan earlier this week.
The Chinese Communist Party (CCP) has claimed the right to rule Taiwan since December 1949.
That’s when the communists defeated the nationalists in the Chinese Civil War.
The nationalists fled to Taiwan and established a government there. China saw the nationalists as enemies of the state. And the CCP has wanted to take the island from them ever since.
Since Chinese leader Xi Jinping came to power in 2012, he’s made it clear that merging Taiwan and China is high on his agenda.
Then, all hell broke loose after Pelosi’s plane took off from Taipei on its way back to Washington, D.C.
The Chinese military ran a series of drills on August 2. This included firing 11 missiles into the sea near Taiwan and sending 22 fighter jets into its air defense zone.
Since then, China has sanctioned Pelosi… refused to speak with U.S. defense leaders… canceled talks with U.S. dignitaries… and sent ships and more aircraft to Taiwan despite criticism amid the rising tension.
Taiwan’s defense ministry called China’s exercises an aerial and maritime blockade of Taiwan.
And Jeff readers want to know what’ll happen if China goes through with its threat to invade Taiwan – and captures its chipmaking industry…
Reader question: Hi, Jeff. In your opinion, what are the odds of China invading Taiwan?
– Gordon E.
Reader question: Hi, Jeff. What will happen to chip technology if China takes Taiwan? The world’s largest chipmaker, Taiwan Semiconductor Manufacturing Company (TSM), is based there. It makes 92% of the world’s advanced semiconductors and 60% of less advanced ones.
– Mike H.
Jeff’s response: Hi, Gordon and Mike. Thanks for sending in your questions. This worry is at the top of my mind as I watch these events unfold.
China has been stepping up the number of military drills into Taiwan’s air defense identification zone – the airspace over the island and the waters around it.
In the first half of this year alone, the Chinese air force has flown 555 drills, 398 of which included combat aircraft.
And this week, it’s ramped up the pressure. This included firing ballistic missiles into the sea off Taiwan’s coast.
China sees an opportunity to assert control over Taiwan and its economic engine, which would give China even more power on the global stage.
Russia has kept Europe and the U.S. focused on Ukraine. So China couldn’t ask for a better time to strike.
I doubt we’ll see all-out war, though. It’s in China’s best interest to preserve Taiwan’s powerhouse economy – especially considering China’s own economic challenges.
China is reeling from a property crisis largely to do with some high-profile developers that have racked up massive debt. It’s also struggling with an economic slowdown from its draconian zero-COVID policy and continued lockdowns.
But China does have a clear interest in taking control of TSM.
And that’s a real worry. If Taiwan fell under China’s chokehold, this would give the CCP the power to alter or stop the supply of chips in the devices we use every day.
Taiwanese chipmakers make parts of almost all our electronics – from medical devices… to fridges and washing machines… to cars… to laptops, tablets, and phones.
So I’m happy to see U.S. chipmaker Intel (INTC) has invested $100 million in research and development to boost semiconductor manufacturing. It plans to build two new chip factories in Ohio.
We need a more decentralized manufacturing structure for national security as well as supply chain efficiency.
Even TSM gets this. It’s building new plants in the U.S. to de-risk its business. The CCP may gain control over Taiwan. But it can’t control TSM’s plants in the U.S. or Europe.
Switching gears, stocks and crypto have been rallying.
The S&P 500 is up 13% from its low. And the tech-filled Nasdaq-100 index is up 18%.
Meanwhile, bitcoin (BTC) is up 11% from its low. And Ethereum (ETH) is up 51%.
You may be wondering if it’s time to jump back into crypto.
It’s the question colleague Teeka Tiwari hears from his subscribers at Palm Beach Confidential more than any other. And he’s urging caution…
Teeka’s comment: Everywhere I go, people ask me, “Teeka, do we go all in?”
Let me tell you something based on my 30 years of experience in markets. Nobody is asking, “Do we go all in?” when we’re at the bottom.
They’re saying, “I feel like puking. Don’t talk to me about that market. I have no interest.”
We’re not there yet. Don’t confuse a bump with a trend change.
Nothing would make me happier than to be wrong about this. I have huge holdings in stocks and crypto. But decades of doing this tells me there’s more pain ahead.
The good news is there are signs the market turmoil may ease soon, at least with stocks.
There are still too many people waiting to buy the bottom. They’re just sitting on cash, waiting to put it to work. And that’s not how bottoms happen.
Bottoms form in complete despair. There isn’t enough despair in the stock market – or the crypto market – yet.
If you’re ready to start putting serious money into crypto, be cautious. I still think it’s too early. Better prices lie ahead.
The thing to do right now is enjoy your summer. Be patient and let the game come to you.
That’s all for this week’s mailbag.
Don’t forget, if you have a question for anyone on the Legacy team, send it to feedback@legacyresearch.com.
Have a great weekend.
Regards,
Chris Lowe
August 5, 2022