#90 - Wartime Stocks (China vs. Taiwan) - Transcripts

September 12, 2022

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Another global conflict is looming. With tensions continuing to rise between China and Taiwan, we break down how to position your portfolio correctly to protect your wealth in the event of another war. We study past periods of conflict and what industries would be affected most to create a strategy moving forward.

Transcript

this could cause the next massive market crash,

China could invade Taiwan. And this is what it means for your portfolio, This episode of the bean pod is sponsored by Khyber swap

swap is a dex and dex aggregator which is built to facilitate all your defi needs in one single platform,

fast, cheap and

safe user experience is Khyber swap sole focus to make everyone's life better. In defi Welcome to the Bean pod. This is Shane A k the jolly green investor

and this is josh, the nifty investor,

we've discovered something that might cause the next humongous market crash.

There's a lot of talk right now that china could invade Taiwan and it's gonna have some massive implications for the stock market, the crypto market and ultimately your portfolio.

Yeah, for sure. So this could be the next black swan and if you look at how the market reacted to the Russia Ukraine crisis and as we're going to go through in this episode, if you look at how you know how much impact china Taiwan situation could have in the world, there's some things you could potentially do to position your portfolio to act defensively if slash when the day comes.

So if you haven't seen that episode yet, it's entitled wartime stocks, we released that about a month prior to the war actually occurring. So we're pretty bang on with a lot of our calls in that one. You know, we went to the commodities, we noticed that Russia and Ukraine were massive exporters of natural gas. We made some plays into like comstock resources, Southwest Energy and a few others and they did really, really well. So if you haven't check that episode out yet, check that one out, hit the like and subscribe button helps us a lot. And then we're gonna dive into this one a little bit further and kind of see if we can find some similarities between the recent war that just occurred. Yeah, for

sure. So on the surface you can look at the Russia Ukraine conflict and how it impacts the global economy is basically, you know, trade is being restricted, right? So as you said, all the commodities, you know, natural resources, energy and stuff us trades $36 billion per year with Russia. Trade with Ukraine is four billion a year. So a total of about 40 billion in direct trade jeopardized by that conflict right away. When you look at those same numbers with china as you would expect, they absolutely blow them out of the

water six

156 billion per year in trade with china including which is imports of, you know, all the consumer staples, food manufacturing, clothes, electronics, you name it. Right? So right away we know that if this conflict does play out the implications will be much more severe.

Yeah. And with this one to the interesting thing is is that they have such a larger population, right? China's got this huge population over a billion people and they do really cheap labor with what's going on in terms of inflation jobless claims. You know companies laying off where is massive consumer like the U. S. Going to get their part so we're gonna get you know whatever components they need to build their laptops etcetera.

Exactly. And that's that's I think one um aspect of this potential conflict that a lot of people are overlooking is where Taiwan plays into the global economy and as you just mentioned components. Right So the US trade with Taiwan currently is 100 and 15 billion, that's still three times more than Russia. And people are just like you know obviously if something happens with China there's gonna be a lot of fallout from that. But you have to also look at what Taiwan is producing and manufacturing and how those industries can potentially be affected. So I mean there's there's a lot to uncover here.

Yeah so with the Ukrainian Russia war we've we've now seen a massive energy crisis. They were massive exporters of um natural gas, oil etcetera so that it's now affecting europe and affecting other parts of the globe with such a huge supply and demand issue with energy when you look to Taiwan and china you're looking at more like actual goods um you know like semiconductors, microchips, stuff of that nature. Right?

Yeah for sure. So you know companies like a. M. D. NVIDIA I think it's Taiwan microchip company or Taiwan supercomputer company or something like that. They produce like 90% of the world's Um chips. Taiwan semiconductor company supplies nearly 90% of the world's chips. So if something happens with them, I mean that industry alone is the lion's share of Taiwan's exporting economy. So if you know, all things considered a violent invasion of of of Taiwan from china is seems unlikely just because of the massive global fallout. But they could do other things to kind of put the clamps down on them. They could do a blockade around Taiwan which limits imports and exports. Which would effectively impact these sectors in a similar way to if there was a full on conflict.

Right? So these semiconductor companies, I think, you know, as unfortunate as it is for the world, these american semiconductor companies could see a massive boost if the entire world is forced to rely on them. If this Taiwan, you know, if they get a blockade and no one can get semiconductors from there.

Exactly. So the way I tried to play this uh in terms of this episode is the exact same way you kind of looked at from the previous episode, the wartime stocks is looking at what are the export the most and if they do go to war, the rest of the world is not gonna be able to obtain these parts or whatever it is the export. So if that's the case it's gonna drive a ton of demand to some of these other countries and companies so export from Taiwan rose 14% from previous years. Um they primarily export, you're lucky at semiconductors computers, they actually have 47 corporations that rank in Forbes Global 2000. So they have uh so a lot of really big companies, Advanced semiconductor, uh Acer which does computers, Taiwan Semiconductor, Delta Electronics. So it's all like electronic components that you need for. But you hear like semi it's like what the hell do you need these for? I don't use them, but it's like, well they're in your phone there in the bad

cars,

cars like your TVs, laptops, anything that's electronic, you kind of need these semiconductors for the for it to work.

Yeah. So right away you want to look at the semiconductor companies

and I'm Doing that because just recently biden passed the Chips Bill, which was a $53 billion dollars in increased domestic semiconductor production. That's right. How convenient.

Yeah, no, I mean with the risk of that happening, you'd have to think that other countries are making plan Bs. So I think that's the first sector you want to look at 100%. What are the other main main exports that you found?

Well, I'm gonna I'm gonna keep going a little bit more into into this sector for multiple reasons. And I kind of stayed with this one in addition to a couple others that we can dive into a little bit later, but I just want to stay on this one because I find

the

Main one. so just because of this biden's bill, it's actually quite interesting. He's trying to do it to bring down inflation as well. So if chips are a major component cars and they're unable to get chips they're not able to make the cars so the price is gonna go up. But if you can do it in house shouldn't inevitably bring the prices back down. Um Yeah but

there would be a large you know it's

gonna take some time

Decade a decade to get up to that if it's 90%. Right.

Exactly. So this is where these are the this is why I wanted to look at these few stocks here. So you have one like micron. Uh

You

Um you yeah so they just announced a $40 billion dollar investment in memory chip manufacturing. Uh they're gonna create 40,000 new jobs doing this. Um the investment alone will bring the US market share of memory chip production from less than 2% up to 10% over the next decade. So that's a pretty freaking substantial increase. Uh Another one you want to look at maybe is Qualcomm and their partners partnership with Globalfoundries. The $4.2 billion manufactured chips expansion. Globalfoundries upstate new york facility. Um And the Qualcomm is like one of the largest in the world. What I really liked about them is that their price to earning like when you're comparing other Semiconductor microchip manufacturers you kind of need to compare the price to earnings ratio otherwise it's not a fair comparison. No video is sitting at 45 and qualcomm sitting at 11. Yeah

for sure it's a big difference.

Yeah so it's a lot cheaper from a comparison standpoint to another major player in the space

definitely. NVIDIA is like the kind of the sexy name of the micro microchips semiconductor space. You know because they make the high end ones that are used in like gaming gaming and you know high performance cars and you know great laptops all that kind of stuff. A. M. D. Is more of like a mass market and then you know once like Micron and Qualcomm are they kind of fall by the wayside But that's potentially where the value is. Right?

Yeah and they're they're planning to increase US production by 50% over the next five years. Right? So that's a huge increase in production. They're expanding their facilities. You have the microchip bill from Biden's new the new bill that he's introducing. So it's a lot of headwind tailwind. If you block off Taiwan and China manufacturing moves to the U. S. This may be the US becomes the new hub for it. Yeah

100% like that.

Um So I tried to find like a little like some smaller companies in the space too because obviously Qualcomm like. Yeah we know in video but there's some other interesting ones like Alpha and Omega has only $200 million market cap price to earnings ratio of two super tiny. And then the last one I want to highlight is STM microelectronic. It's 11 price to earnings ratio. But the revenue grew 30% year of a year, their net income doubled. Um so

are they knew, is that why they're going so fast? They

Know they've been around for actually a really long time since like the 1970s or something. Um but I'm not sure if you're aware of but there was also this blockade that was just put in where I guess and video can't sell their chips to china. Have you seen that? So that just was announced today. But so I want to look what is this company export primarily to? And they primarily shipped to europe, the Middle East and Africa. So they're not really affected by the shipping to china.

Yeah there's some good some good semiconductor place in there for sure. I think um if there is any sort of rising, I mean we saw the thing with Pelosi going over there and you know that was kind of just a bit of like parading their doing their military drills. But if there is any sort of escalation I think you're going to see that that that sector is probably the first one to rip. So definitely put those names on your watch list.

So that interesting. You mentioned nancy Pelosi actually the sex that was the first was U. S. Policy bank or whatever to go over there in like 25 years or something. Somebody else just went over there from Arizona over there again. The governor. Right? And Arizona is like the leading area of um semiconductor manufacturing. The U. S. Who's the company said? Taiwan Taiwan

semiconductor company.

Yeah they're building a $12 billion dollar facility in Arizona now. Right. So I think that's a really good player. The Taiwan semiconductor manufacturing company.

It's I mean the writing's on the wall and they're making all these moves for a reason. They can see the potential risk of some sort of um disruption of the supply chain for semiconductors and all that kind of parts. So that's those are some names that you definitely wanna put on your watch list. If you think that this conflict is a possibility.

Absolutely.

Um One of the other sectors that we looked at in the last episode when we did wartime stocks and this one isn't really a a regional like a geographic specific sector but it's one that's proven to always outperform the rest of the stock market in times of conflict. And that's defense stocks. You know equipment providers,

the

companies that are making the tanks the bombers, the missiles. You know war is war unfortunately is a great business and companies make billions if not trillions off of war because they have to manufacture all these parts that companies need or they may not even end up using them. They just need to stockpile these things in defense. Right?

And they get these long term government like tenure contracts with X. Amount of like you have to spend X. Amount of dollars.

Yeah. So there was this stat that I found Um and it was, I'm not sure if it was from the Afghanistan War, the Iraq or one of those recent fairly recent modern conflicts. There's a basket of equipment providers, these war stocks. If you if you would have put $2,000 into a bunch of these companies to say about 10 grand. Five companies You would have had a balance of $100,000 by the end when the US troops left Afghanistan, if you put that same amount of money into the stock market, you would have had $60,000. So the defense stocks outperform the rest of the market by 40%. Which is significant when you're talking about stock market returns, right?

Yeah. And you look at these charts and there just seems like they're just always on the rise.

There's always conflict going on, right? But even though they're always is conflict going on something like a china Taiwan conflict would be probably the worst and most devastating one for the global markets that we've seen in our generation. For sure.

I think so. Yeah. I mean when you look at the microchips semiconductors are used in absolutely everything. Yeah, our communications would start to go down. It's

pretty brutal. So you know, just to list off some of the equipment providers, the companies that build war stuff. Um so I look at General Dynamics tickers G. D. They, they're probably the world's largest manufacturer of tanks. Um You have Lockheed, Lockheed martin. LmT, they do global security, aerospace stealth fighters, all that kind of stuff. Uh Northrop Grumman, N. O. C. They make bombers, planes and jets. You have Raytheon, R.

T. X. Who make cruise missiles. And even maybe boing boing taker B. A. They build helicopters and jets for the U. S. Army as well. So all of these stocks could see potential massive tail winds if there is more rumblings about a conflict. So you look at those names that I just mentioned and the run up to the Russia Ukraine conflict and they all ran before the conflict starts. Right. People know the insiders are always know, so keep those names in the back of your pocket.

If you start to hear some rumors.

So we have the true war stocks. The defense stocks with like the Lockheed Martin's, the L- three Harris's etc. And we have, you know what China and Taiwan export, which is primarily the um semiconductors. I was thinking, I'm like okay, this one's kind of like out there a little bit. Let me just find out my notes here. I'm thinking netflix because

people are netflix and chills,

It sounds really strange, but hear me out. I like it. I like

it.

So okay. Think about, you know the natural gas issue, the oil exports, all the stuff that occurred in Russia and Ukraine. You have the semiconductors, massive components, you have China who you look at any component in your house, you know, your glassware, your plates, everything's been over their cheap labor, right? You have all these supply chain issues. You have nobody going to work all these things. Right? But everybody can afford a little $12 a month or $10 a month subscription to watch some TV. Alright, Netflix took a massive beating. They took this huge beating because it was the post pandemic. People were starting to go outside and all this stuff. Right? But people getting laid off jobs again, you know, because of the recession and whatnot.

They're gonna be going back on their TVs. It's a cheap, cheap thing to do and we have the winter approaching, right? They don't rely on supply chain. So now, like you're you're just making films and putting them on the screen. You're not really relying on a lot of, you know, shipments and all this other stuff. Right? What I what I've noticed is that they're now charging $65 per 1000 views on netflix for additional revenue sources, right? And they've also eliminated, eliminated uh, people sharing passwords.

Yeah, they're cracking

down. They're cracking down,

but

honestly netflix is, but they've also just hired to snap executives or a social media company to really drive advertising. So to start bringing in more users or viewers, I think it's the perfect storm for a company that just is 60% down from their all time high to be a really good player

right now. It's an interesting one. I think it's probably the second most left field prediction you've made on the show. Number one. Remember when we were doing the conspiracy episode about who started Bitcoin? You're like, it's the

electric

Company, the electric company, they invented Bitcoin to raise electricity prices. That was my favourite one. For sure. But yeah, look, keep netflix. That's that's an interesting player for sure. Just

because they're not relying on parts.

I mean what are people gonna

Chilling? Yeah, for sure. 10 bucks a month. Easy.

Um, netflix actually trash these days, but that's a, that's a story for another day.

You get VPN, you can watch anything.

Yeah, I like, I like the other services better. I don't know how they're gonna compete. There's Disney plus there's google amazon but

Disney's got all these other netflix is like, it's a brand name. It's just so hard to kick out of your head. Yeah, I try to, I try to watch some series on some other um, networks and it's just not that great. And what I think netflix is going to do is what they're gonna have to do to compete with amazon whatnot. It's just start bringing in a little bit more to the viewers. Yeah, they're

definitely lacking something. Yeah. Anyway, to go back on topic, um one thing one thing we should mention when we're talking about wartime stocks and how it affects the markets is how the market reacts to war. And we touched on this last time and it played out exactly as the Russian Ukraine war um kind of unfolded during the pre war phase, stock prices kind of declined due to uncertainty and then once the war starts at bottoms, right? Because as we always talk about in the show the market hates uncertainty, whether it's the Fed raising rates and you don't know if they're gonna pivot or where is the cp I numbers, the market just hates uncertainty. So when when the potential conflict is looming, stay between China and Taiwan, the markets are gonna be selling off, selling off, we don't know what's gonna happen. But then say the uncertainty is lifted because china puts a blockade in or they actually invade Taiwan. God forbid. That's when potentially if you look at the past of the market that could be the bottom, it goes massive, it'll it'll you know, it'll sell off into it and it will massively sell off and you know people there's a kind of unfortunate saying which is by the invasion, the invasion is typically marks the bottom of the stock markets. So I think there's a couple of stats here. I can pull up, you know, going back all the way to World War Two, um minus 34% at the start, Six months after that, it was already up 25%. Um the Iraq war minus 15% right away and then six months after the low up 27%.

So you buy the invasion as far up as it sounds, um that's, it's, it's something to keep in mind because again, the uncertainty is lifted and then, you know, you just have to look at what's going with Russia and Ukraine. That was being shoved down your throat with every news piece

for two,

three months when it happened and now you don't hear a thing about it, it's still going on, it's still as bad as ever. But the news doesn't care anymore. So now the market doesn't care anymore because there's no more fear in the market because that's, that's a lot. Yesterday's news, right? So as messed up as it is, maybe by the invasion is a strategy to keep in the back of your pocket.

Now, the question is, when did they invade?

That's a tricky one. I, you know, when I, when I think about if I was in china situation, which is not a cool thing to think about,

but the

World, I think as we talked about in other episodes, I think the world is going to be in a really tough place in 2023, I think economies are going to be hit the hardest corporate entities are way low, the markets are gonna be crashing energy crisis, supply chain shortage, I think it's all gonna really come to a capitulation in 2023 and that could be the time when China would say look the world is down right now. They can't do anything about this there. They have to figure out the issues domestically within their own borders. That would be the time where they would strike.

Kind of feels like the world is at its you know bottom right now in a way, you know with the interest rates increasing inflation super high people getting laid off from their jobs right now it seems like a really tough time and they can really just get inflation even higher if they just decided to block all the like they kind of get into that little war where you just saw the U. S. You know, stop the chips being sent over there, then they're like well we're not sending you anything, you know, and then if that's the case now all of a sudden you have this, you have no inventory and now you have this huge, you saw the demand but you have no supply, what's that gonna do to inflation?

So you're thinking sooner rather than later, perhaps

sooner than later,

right we'll keep an eye on the semiconductor companies then right

netflix,

there's also you know the old adage is gold and metals is a risk off play. So if you think that, I mean gold has not been performing well lately at all. But in times of serious crisis, people do flee to these old school assets. You know, you sell your growth stocks, you sell your tech stocks and you buy gold. That was the old adage. So, you know, you could have a look at a company like barrick, gold, corp, tickers gold or Newmont corp particular any m or even a gold shares E T F G L. D. Um as a potential risk off play for a very severe conflict where risk off assets will be sold off into billions and people will park their money in gold, which is seen to be a safe or Bitcoin, maybe, you know, Bitcoin is a new goal, right? What

happened to that as an inflation hedge?

Yeah. As inflation soars. Bitcoin tanks

made these fucking narratives. You

know what, maybe 100 years, it'll be right now. Sure as hell is not,

I'm also looking at um like commodities, I think food and energy, you know, you got the staples stuff that people are going to need every single day. You know, uh whatever we had an episode on that one as well, you know, I bought a lot of bungie take a with B G. And I bought some wheat, the E. T. F. As well,

W. E A T. The wheat.

Yeah, so those are the two that I currently have. I know there's also bear, we talked about

bear bear, I've got some of that one and then also I think Arthur arthur Daniels Midlands, it's like one of the world's top corn production companies. I've got some of their shares as well, that one's been performing well. And then as you mentioned before earlier in the show like occidental and comstock resources for gas, like energy in times of crisis, I feel like has a tendency to fly again because it's just you know, people are selling growth, growth tech and all that and what are they buying their buying commodities? Oil, energy, gas, food, that kind of stuff. So keep those names in mind as well.

So that's kind of what I'm looking at. Did you have anything else to cover on there?

I mean honestly, you know, we don't want this conflict happen, but we make these episodes for a reason and as we said, we we kind of nailed it with the previous one. So put these names on your watch list. If the unfortunate situation occurs where china invades Taiwan, some of these companies could be a good hedge for your portfolio so you don't get absolutely wrecked.

Absolutely, we don't want anybody to get wrecked and makes you guys tune into the next episode,

hey that one's gonna be a fucking banger.

All views expressed by speakers on the bean pod are solely their opinions. You should not treat any opinion expressed on the bean pod as a specific inducement to make a particular investment or follow a specific strategy, but only as an expression of their opinion. This podcast is for informational purposes only.

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