Pro Perspectives 8/3/22

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August 3, 2022

Yesterday we talked about the noise surrounding Pelosi's trip to Taiwan.
What was the geopolitical strategy behind it?  
Beyond all of the speculation about the signaling involved, there was good reason to believe there was a practical purpose to the trip.  
Again, it came on the heels of the passage of the Chips Act (which came just this past Thursday). 
And who is the most important chip producer in the world?  Taiwan Semiconductor (symbol TSM).  
Given the timing of it, we discussed the likelihood that this trip could mostly be about negotiating the building of more productive capacity, of the world's most advanced microchips, in the U.S. (via U.S. government subsidies).
Indeed, it was reported by Nikkei news that Pelosi met with both the founder and Chairman of TSM.  
Why does the U.S. government care so much about a Taiwanese chip maker that they would send the number three person in government, under the threat of Chinese aggression, to (likely) offer them (more) direct U.S. taxpayer money?
Because TSM has become critical to U.S. economic and national security.  Equally, it is critical to China's economic and national security. 
TSM is the world's chip manufacturer.  They manufacture 90% of the world's "advanced" microchips, which power the cutting edge digital technology, critical infrastructure and weaponry used today.  Most of the chip makers we know by name, have over the years become just designers, and have outsourced manufacturing to TSM.
That makes everyone vulnerable.  Thus, the Chips Act.  And thus the importance of protecting the global supply coming from Taiwan, until manufacturing and the technological leadership can be diversified (i.e. onshored to the U.S.).
TSM is already building manufacturing in Arizona.  And Intel is making strides to catch up to the sophistication level of TSM chips, while also making big investments to build manufacturing, including foundry business (where they produce competitor chips, too).
With the above in mind, most of the key chip stocks are down more than 30% on the year, yet are in the pipeline to get significant government money.  Institutional money tends to follow government money.
We own the cheapest (by far) of these chip stocks in our Billionaire's Portfolio, yet one that may be the biggest beneficiary of government subsidies.  It's among the highest conviction positions in the portfolios of two of the best value investors of all-time (both self-made billionaires).
If you're a reader of these daily notes and you have not yet subscribed to our member's only portfolio service, if you do so now, I'll send over all of the details on this chip stock.  Just click here, subscribe and join us.