The Tech Wars Are Here

Dear Reader,

In January of 1942 – just one month after Pearl Harbor – President Franklin D. Roosevelt ordered the establishment of the War Production Board. The task of the Board was straightforward: Repurpose America’s manufacturing capacity to produce military equipment for the war ahead.

In 1941, close to 3 million new cars rolled off assembly lines in Detroit. That figure was only 139 once World War II started. Virtually the entire manufacturing capacity was devoted to building trucks, tanks, and aircraft engines.

During the entirety of WWII, the production figures were staggering:

• 297,000 aircraft

• 193,000 artillery pieces

• 86,000 tanks

• 2 million army trucks

The wartime economic output was so robust that American industry produced nearly two-thirds of all allied military equipment during the war.

By any measure, the program was a resounding success. And it set the bar for what can be accomplished when government and industry put their full weight behind a project.

Today, we’re on the verge of one of the largest government-supported booms since the establishment of the War Production Board.

But this time, it isn’t to prepare for war – at least, not in the traditional sense…

The Tech Wars

In some ways, the world is already at “war.” People aren’t calling it that yet. But that’s what it is.

But unlike the Second World War, this one won’t be fought with artillery shells, tanks, and planes.

Instead, it’s a war to determine who will gain economic superiority in the emerging technologies of the future. I’m talking of course about artificial intelligence and the hardware needed to power it, semiconductors. Case in point…

Last September, the Biden administration notified Nvidia and AMD that they would need to attain a license before shipping certain, powerful chips to China. In October, the administration revealed a list of sweeping export controls for companies like Lam Research, Applied Materials, and others.

The goal of both policies is to limit the flow of critical technologies to China. The United States wants these technologies to be designed and manufactured on domestic soil. And it’s easy to understand why.

During the lockdown years, the United States learned a tough lesson. For decades, the country had relied on foreign manufacturing for critical technologies. Chief among them is semiconductors.

In May of 2021, an ocean of F-150 pickup trucks was parked at the Kentucky Speedway in Sparta, KY. The trucks were unsellable. They were missing critical components from overseas that simply couldn’t be sourced.

The global economy is complex. Complex things are fragile. And fragile things break…

It was then that The United States – and the world – began to realize that a resilient supply chain was not only a matter of economic importance but could also be a matter of national security. And on August 9, 2022, the federal government began to do something about it.

That’s when the Chips and Science Act (known as the “CHIPS Act”) was signed into law. The legislation earmarked $278 billion in federal spending over the next 10 years to jumpstart a new high-tech manufacturing base right here in America.

And as the name suggests, the primary focus will be on semiconductors made in the U.S. In essence, it’s the modern version of Roosevelt’s War Production Board.

But since the passage of the CHIPS Act, one question has been lingering. When will the money be awarded? And to whom?

I believe I have the answer…

A $39 Billion Tsunami

The Wall Street Journal carried the story earlier this week:

Since the passage of the bipartisan Chips and Science Act last summer, the Commerce Department has been quietly building a small team of elite Wall Street financiers to help allocate $39 billion in taxpayer-funded manufacturing subsidies and other incentives to hundreds of companies. 

The Biden administration has tasked a handful of former Wall Street executives to help dole out the first slug of the CHIPS Act money. Many on the team come from private equity. In other words, they know how to get a deal done.

But just because something is inevitable doesn’t mean it’s necessarily imminent. So here’s my prediction: Most – if not all – of this $39 billion will be allocated by November 5, 2024. 

That may seem oddly specific. But some readers may already know why that date is important. It’s election day here in the U.S.

It’s the Economy, Stupid

James Carville might not have known he was creating a political North Star when he coined the term “it’s the economy, stupid” in 1992. But even today, it’s taken as gospel. And for good reason.

The most important issue to American voters right now is the economy. A recent poll from NPR shows that “The Economy” is the most important issue to 31% of voters. “Preserving Democracy” is a distant second at 20%. From there, no single issue breaks double digits.

Make no mistake: The coming presidential election will be determined by how Americans feel about the economy. The Biden administration understands this. That’s why it’s rolled out the “Bidenomics” tagline.

And if the economy will determine who is the next president of the United States, what better way to juice things than with a flood of government money? That’s what leads me to believe that most – if not all – of the $39 billion CHIPS allocation will be doled out over the next year or so.

And as investors, that has some important implications…

Policy Investing

One of the best ways to see outsized returns is to “hitch a ride” with favored government industries. As just one example…

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act. Most of us know this as “Obamacare.” Whatever we think of this legislation, there’s no denying the impact it had on favored industries.

Between March 2010 and December 2013, the Dow Jones climbed 52%. By comparison, the top nine health insurance providers in the United States soared 97%.

You don’t have to like a policy – or a politician – to understand the impact government money can have on individual stocks. And with a political incentive to roll out tens of billions of dollars to the high-tech industry over the next 12 months, we need to be paying attention.

Going forward, we’ll be tracking this trend and identifying likely beneficiaries of this government money. Stay tuned for more in the weeks ahead.

But what I’d ask you to understand is this: The Tech Wars aren’t years away. They’ve already begun.

Regards,

Colin Tedards
Editor, The Bleeding Edge