over 1 year ago • 3 mins
The US, Japan, South Korea, and Taiwan are forming chipmaking alliances in a bid to stay one step ahead of China.
What does this mean?
Chip shortages don’t refer to empty bags of Doritos – they’re what happens when clogged supply chains slow the distribution of oh-so-precious semiconductors or “chips”. The resulting scarcity has been a headache for loads of industries that need chips for their products. On top of that, tensions with China have raised the stakes. See, Taiwan is home to TSMC, the world's largest and most advanced chipmaker, and the US and its allies are terrified that China could wrest control of the firm through an invasion. So it’s no surprise that China’s rivals are discussing their options. On Thursday details emerged of a US-proposed alliance that would bring together four semiconductor powerhouse partners, strengthening the hand of China’s rivals.
Why should I care?
Zooming out: Pockets of power.
The problem with the chip industry is that there’s too much power in too few hands. TSMC dominates the manufacturing market, Dutch firm ASML is the reigning champ in advanced machinery, and Cadence Design and Synopsys have carved up the market for chip-design software between them. It’s A-OK for a few big players to rule the supply chain when all’s well in the world. But when geopolitical tensions start rumbling, semiconductor foundations start to look very shaky.
For you personally: Lessons for investors.
Every couple of years, a better chip hits the market – and if it happens to be yours, you’re onto a winner. Your market-leading chips will sell like hotcakes, netting you a tidy profit that you can re-invest, ensuring that the next chip’s even better. This pattern’s common in fast-moving industries, and explains the success of tech mega-corporations. But, although backing tech winners is usually a profitable strategy, canny investors know that innovative rivals and geopolitical upheavals are always lurking, ready to dethrone complacent reigning champs.
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The Bank of England (BoE) hoisted interest rates to a 14-year high of 2.25% and warned of more “forceful” action ahead.
What does this mean?
On the coattails of the Federal Reserve (the Fed)’s 0.75 percentage point rise on Wednesday, the BoE whacked up its interest rates by half a point. But it didn’t stop there: the BoE also announced plans to start selling the government bonds it’s accumulated over the last 14 years, in a move that’ll drain money from the financial system. This comes against a backdrop that was already pretty gloomy: Bank officials have lowered this quarter’s growth projections, predicting economic activity will shrink for the second quarter in a row. That, ladies and gentlemen, would be a technical recession.
Why should I care?
Zooming out: UK housing can’t defy gravity forever.
The UK’s housing market’s been flying pretty close to the sun, and it looks like it’s about to get burnt. The fact that most UK borrowers are on fixed-rate mortgage deals is delaying the pain, but every rate rise is like another tequila after midnight – brewing one almighty hangover that’ll hit with full force when refinancing time comes. Expect borrowing, home buying, and prices all to take a hit.
For markets: Is sterling a one-way bet?
The euro’s already arrived at the US dollar parity party, and it looks like sterling’s en route but fashionably late. This isn’t just a reflection of differing interest rates: the US is a safe harbor in stormy seas, which prompts investors to anchor their cash in dollars and dollar-based assets – further boosting the greenback. For sterling to steer clear of parity, either the BoE has to get more heavy-handed than the Fed or the UK economy needs to miraculously emerge from its current economic quagmire. Neither, to be frank, seems likely.
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