Update on China-U.S. Conflict

Dear Reader,

Good morning.

Today I want to talk about what happened Friday and this breakdown in the China-United States trade negotiations.

The market got hammered Friday, and something seemed off about this breakdown…

Suddenly China’s pushing for a grand bargain with the U.S. …

And then just as suddenly they clamp down on rare earths - specifically magnets.

Remember how important rare earth elements are - they don’t just make EVs go - they power our computers, cell phones, all of our technology.

We’ve been watching this dance between Trump and Chinese President Xi Jinping over the past few months, with each side showing what leverage it has.

The side with the most leverage is going to win the negotiation.

Chinese President Xi Jinping has leverage with rare earths - that’s for sure.

They have 70% of that market.

We have leverage in areas like critical software.

Remember, much of China’s infrastructure runs on Windows and Apple.

We could stop exporting these and basically shut down their country, too.

So we both have ways to hurt each other.

There’s this kind of grand bargain that really is starting to get outlined.

Both countries want to avoid war.

Nobody wants war.

But China wants Taiwan.

Even though the People’s Republic of China has never had Taiwan, and Taiwan has been owned by different governments over the years, they want Taiwan.

Because they know - just like U.S. President Monroe stated in the Monroe Doctrine - basically, if you can’t take care of your neighborhood, you’re not a great power.

If China can’t take Taiwan, we block them in with that first island chain - Philippines, Taiwan, Japan.

If they’re able to break out of that first island chain, they can start to advance their forces into the Pacific.

Now, the Pacific is big.

You have the United States, you have China, and you have all these tiny little islands in the middle - Hawaii, etc.

In World War II we fought Japan over these islands.

Think of the Battle of Midway - you had 10,000 soldiers on these islands.

And China’s population is so big, they could have 100,000 soldiers on these islands.

So you don’t want China to break out of that first island chain.

If they took Taiwan, they’d be able to outflank Japan, which would be a big problem. They’d be able to outflank the Philippines.

So right now, they’re “hemmed in.”

Which has the perverse effect of pushing them inland towards Pakistan, India, Russia, for better or for worse.

From China’s point of view, Xi Jinping is like a James Monroe - let’s get this thing going; we want to be a great power, we’re not going to be a great power unless we own Taiwan and can break out of that first island chain.

The problem for us in letting China do that is that Taiwan, by controlling 90% of the advanced semiconductors we use in our phones and computers, basically controls AI. That is a serious problem.

If they are blocking us from rare earths, imagine what they would do with semiconductor chips if they owned Taiwan - come on - they’d be holding that over us every day to get what they wanted - unacceptable.

You can’t call yourself a great power if you don’t have power over a foundational technology - it’s just not the way the world works.

It’s like modern day oil. Critically important.

So this competition, I don’t really want to comment on, because China and the United States have both been in “Let’s make a deal” mode, and this was just such a break from that…

But we know behind the scenes, as reported in The Wall Street Journal and New York Times and Washington Post, China’s big ask is for us to walk away from Taiwan.

I’ll tell you what - if we don’t step away from Taiwan, I would not be surprised if China makes a move on Taiwan in 2026.

Especially after the midterm elections if the midterms swing in the democrats’ favor and there’s a divided American government. They could see that as an opening to push to make a move on Taiwan.

More will be revealed. There are so many things to talk about. This game is being played on so many different levels. It’s an interesting dance, an interesting chess game between the U.S. and China.

Hopefully we come up with a settlement that does not give away Taiwan, and avoids war.

That’s our ideal settlement.

And their ideal settlement avoids war and gets Taiwan.

So, it’s a bit of a pickle.

More will be revealed. We’ll see how all this works out.

I hope it doesn’t come to this, but the U.S. just codeveloped with Israel the most advanced weapon in the world…

The New York Times says it’s “impossible to defend against.”

CNBC says it will “open up a massive market for the defense industry.”

The U.S. Army says they’re “going to build a lot of them very quickly.”

And one tiny defense contractor won the contract to build these weapons.

The soaring demand will undoubtedly have a major impact on this defense contractor’s stock price.

“The Buck Stops Here,”