COVID had an extremely uneven impact on economies and societies, and it’s not over yet. That’s not a statement from me. It comes from Warren Buffett. But as COVID continues to ravage parts of the world with a new variant, one of the greater threats continues to manifest itself. A Technological Cold War.
This week, Scott Kennedy at the Center for Strategic and International Studies warned that China’s repeated crackdown on technology firms would hurt China’s economic growth. He said that China would likely deter private investment in innovation and new technologies. In essence, only state-led investments will pave the way for success, if that’s what you want to call it. The reality is that China’s state-led push in innovation will likely have another victim outside of its private sector: The United States.
As I’ve said, there has been a profoundly unsettling Technological Cold War brewing between the two countries. If China is raising barriers that affect its private sector, imagine how little regard they might show to Apple and Qualcomm. I have already stated on the record that I’m deeply concerned about U.S. semiconductor sales in China in the years ahead.
Technological Cold War
A stunning report from Boston Consulting Group suggested that U.S. semiconductor companies held 48% of the global market share in 2018 (total revenue was $226 billion). However, the consulting group said that this figure could fall to 40% (or $190 billion) due to China’s competition and U.S. export restrictions. And if a tech Cold War hits you know what – as in the Biden administration bans U.S. chip exports to China or Beijing boots American firms out of the market – that figure could plunge to $143 billion (or 30% market share around the globe). The question everyone should ask is: Why do we care?
Well, corporate executives are not stupid. They recognize that a significant cut to their bottom line creates a significant weakness for them. Less revenue means fewer dollars for research and development. Less money calls into question the U.S. ability to maintain dominance in both military and consumer technology. We’ll need to look for winners and losers in this story. It will likely take some time to shake out. But be aware that it continues to sit in the background.
Momentum Remains Negative
Yesterday was quite an odd day in the markets. The selloff just never wanted to come. Momentum is squarely negative. The VIX and the VXN (Nasdaq Volatility) were both up. But so too were the S&P 500 and the Nasdaq. There was a period in the day where the Dow Jones remained range-bound for hours.
It doesn’t look like the market is going to hold today. European markets have pulled back once again due to concerns about inflation and COVID-19. And a more than 1% drop out of Germany has me standing by for a potential pullback in the next 24 hours.
Futures markets were in the red before the bell. I think this market is looking for a reason to sell, but there has been just enough volume in the last 24 hours to keep the bottom from dropping out. There was a lot of money aiming shorting biotech, Chinese, silver, and silver. I’m expecting that investors will take whatever gains they’ve made out of natural gas very soon. Buckle up. This might be a rough day.