Weekly Wisdom – October 19, 2022

By Hightower Great Lakes on October 19, 2022

Hints of Continued Onshoring

A post-COVID world has brought many new challenges, highlighted by energy shortages, higher transportation costs, labor challenges and increased geopolitical risk.

Globalization is facing its biggest test yet, as the multi-decade process of free-flowing goods and services has been challenged, at first by a global pandemic, and now rising geopolitical tensions.

The disruption of the global supply chain has left many to wonder, how will supply chains be redrawn in the future?

The year 2022 has been filled with enhanced risk, whether Russia’s invasion of Ukraine, U.S. and China’s technology battle, global impacts from a strong U.S. dollar or the continuance of cyber-attacks on global companies.

These ongoing risks will change the dynamic of how corporations and governments interact with one another. As we know, conflicts as such produce winners and losers, and they can take many shapes.

The writing on the wall is suggesting that the onshoring theme, a result of supply challenges and geopolitical risk that is leading companies to shift supply chains into the U.S. and closer to the consumer, will be a huge benefactor. This has created opportunities to invest in companies that are a step ahead of their competition.

We have seen new policies enter the landscape as governments and corporations look to reduce supply chain risk.

The White House announced the beginning of the Freight Logistics Optimization Works (FLOW) initiative earlier this year, which addresses supply chain vulnerabilities and congestion.

The White House is partnering up with 18 different participants, highlighted by private businesses, warehousing and logistics companies, port authorities and more to achieve these objectives.

Competitive Tactics The competition is picking up across the globe. Earlier in the year, as Russia invaded Ukraine, we saw an exodus of companies abandoning their Russian businesses to unite around the Ukrainian people.

In a similar fashion, the U.S. and NATO enacted sweeping sanctions on Russia. In addition, Congress recently passed the U.S. CHIPS and Science Act, which will provide $52 billion for U.S. companies producing semiconductors and 25% in tax credits for investments.

While it is true that there is a chance this bill could wind up funding company excesses, the reason for the legislation is to encourage capital spending on new U.S. plants and equipment. Currently, Asia is responsible for 75-80% of global chip manufacturing, mainly in

Taiwan, South Korea, Mainland China and Japan. The imbalance of such a key industry has forced the hand of the United States to make a change and promote investment on U.S. soil. Micron (MU), Advanced Micro Devices (AMD) and Intel (INTC) are a few names that have committed to growing U.S. capacity as a result of the passed bill.

Chart 1: New Spending Is Two Thirds Direct Assistance and One Third a New Tax Credit¹

The pressure hasn’t slowed. As of last week, the Biden administration published a set of export controls, including a measure to cutoff China from certain semiconductor chips made anywhere in the world with U.S. equipment.

This has a direct impact on firms like ASML, who told their U.S. employees that, “they must refrain – either directly or indirectly – from servicing, shipping, or providing support for any customers in China until further notice.”

This has a strong impact on the industry since ASML is one of the most critical members of the semiconductor supply chain.

The firm is the only company in the world that makes extreme ultraviolet lithography machines, which are used to create advanced semiconductor chips. These specialized chips are used by China for military capabilities.

Examples of Continued Onshoring

There is more evidence of companies looking to strategically place themselves in the United States to mitigate supply chain risks.

Just a few days ago, there was news from Micron (MU), in which they discussed their plans to invest up to $100 billion in a semiconductor factory in Upstate New York.

This plan will take course over the next 20 years, and Micron has taken aim at creating the largest semiconductor fabrication facility in the world.

This move could create upwards of 50,000 jobs in the area. It is not just the semiconductor industry that is bringing its manufacturing onshore.

There are also examples in the auto industry, as General Motors (GM) and Ford (F) announce new projects. General Motors announced in September that they plan to invest upwards of $760 million at

their Toledo, Ohio factory to build drive units for electric trucks. This will mark the automakers first U.S powertrain facility repurposed for EV-related production.

In a similar fashion, Ford announced last month that they will invest $700 million and add 500 jobs to their Kentucky plant to support production.

Labor Showing Strength

With the increased capital flowing to the United States, it’s important to acknowledge how this will impact labor. The labor market in the U.S. remains very tight, with the unemployment rate still sitting at 3.5%.

The amount of job openings is still 4.3 million above the total number of the labor force. Job growth in September grew to +263,000, which only 8,000 above consensus, and the smallest gain since April 2021.

Payroll growth has been supported by continued strength in sectors such as health care, leisure & hospitality, and retail seasonality. While there has been evidence of job cuts in the technology sector, there are pockets of the economy that still demand more labor.

These numbers continue to make the Fed’s job harder, as their rate increases have the goal of slowing demand down, which will be a challenge if the unemployment rate stays at 3.5%.

It may prove to be true that increasing supply could be more beneficial than decreasing demand, but we are still playing the waiting game as it takes anywhere from 6-9 months to feel an economic impact of interest rate increases.

The Fed has raised their fed funds target rate to 3.0-3.25% this year, with another 150 bps expected before year-end.

While the Fed is moving to decrease demand and slow the economy to bring down inflation, subsequently the Chips Act is attempting to do the opposite.

The domestic effects of this act are meant to incentivize semiconductor manufacturing and also mitigate future disruptions caused by the concentration of production in Asia.

The act includes an estimated $79 billion spent over 10 years, which is equivalent to 0.04% of U.S. GDP per year (GS Research).

Over time, this will also provide a boost to U.S. labor through the use of higher skilled jobs and companies outperforming in their sectors. While we still believe that markets will continue in a choppy trading range, it remains important to take note of developing themes.  

Click here to read last week’s Weekly Wisdom (10/14).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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¹ Source: GS Research (Chart). October 19, 2022.