In his annual letter to stockholders Jamie Dimon, CEO of JPMorgan, highlighted several items that worry him. He included inflation, AI, and weak allies, among others. I’m no Jamie Dimon, but this article covers two concerns that are on my radar.
China Invades Taiwan
China believes it owns Taiwan based on history, similar to Russia’s view on Ukraine. An invasion would immediately lead to a global crisis and a bear market for U.S. stocks. Why? Computer chips.
Taiwan manufactures more than 60 percent of all semiconductors and about 90 percent of the most advanced chips (think AI). Without those chips AI development would stall and smartphones and car manufacturing would halt. Chips are even found in household appliances like refrigerators. Nvidia, the largest company on the planet, has about 90 percent of its chips produced in Taiwan.
Our last two presidents understood our vulnerability and created incentives to move chip manufacturing to the U.S. But chip development is complicated and building factories here will take time.
U.S. Debt Crisis
During the 2008 financial crisis the Fed was forced to act quickly to save the economy. One day, the Fed will need to act again but printing money won’t work. That will happen when the U.S. debt is so high that investors will refuse to buy Treasuries until interest are higher.
How crazy high is today’s government debt? Debt as a percentage of GDP is at World War II spending levels even with today’s growing economy. What will happen during the next recession?
The U.S. spends more on interest payments than it does on defense spending. The higher the debt the less is available for social safety net spending. This year, the U.S. will spend $7.45 trillion and run a deficit of $1.85 trillion. Total debt, including each year’s deficit plus interest cost, is $39 trillion.
Every once in a while, an administration tries to lower the deficit by reducing the size of the government (think DOGE). But that is pocket change compared to the biggest drivers of long-term deficits: Social Security and Medicare. No one is willing to touch those. There isn’t much of an appetite to raise tax rates either.
Debt is a rare bipartisan issue. Both Democrats and Republicans add to debt when they are in office. This is an issue that no one is talking about until when the next debt crisis is triggered. When a debt crisis is triggered stocks will suffer. Holding bonds will provide little protection.
David Vomund is an Incline Village-based fee-only money manager. Information is found at www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
