The next inflation shock may not come from oil–it may come from chips
KEY TAKEAWAYS
The 1970s oil crisis showed how dangerous strategic dependence can become when a critical input is suddenly restricted. Gasoline inflation, rationing, and recession left a lasting lesson about supply shocks.
Semiconductors now occupy a similar role in the global economy. They are embedded in cars, appliances, medical equipment, power grids, industrial machinery, smartphones, and AI infrastructure.
The world’s most advanced chip production is heavily concentrated in Taiwan, while China holds influence over older power and analog chips. That creates a geopolitical choke point with real economic consequences.
A Taiwan disruption would not merely raise prices; it could halt production across electronics, autos, defense, and AI. The Bloomberg-coined “golden screw” problem means one missing chip can stop an entire finished product from shipping.
Reshoring is real but painfully slow. Strategic supply risk belongs in investment analysis before the crisis arrives, not after everyone is stuck in the modern version of a gas line.
MY HOT TAKES
Chip investors are obsessing over the rally while underpricing the fragility underneath it. The same silicon powering the AI boom is also the market’s biggest hidden pressure point.
Semiconductors are not just a tech-sector story anymore. They are an inflation story, a national-security story, an auto story, a healthcare story, and a consumer-wallet story.
Globalization gave the world cheaper goods, but it also trained markets to assume everything important will always be available. That assumption is looking more fragile by the day.
The market does not need to panic about chip dependence, but it does need to stop treating supply-chain concentration like a footnote. Footnotes have a nasty habit of becoming headlines.
The 1970s oil lesson was simple: once a strategic input resets higher, it may never go back. Silicon could become the next version of that very expensive education.
You can quote me: “Globalization works beautifully right up until the morning it becomes a national-security emergency.”
Hard lessons from good times. My wife and I often reminisce about our glorious childhoods in the 1970s. I caught myself recently texting my children in the family group chat about how I feel bad that they didn’t have the 70s and 80s like my wife and I had. Of course, most of that is nostalgia—and of course, we only tend to remember the good stuff. No longer an innocent kid playing in the dirt with my GI Joe, I know that not all things were perfect. I do recall the long lines and red flags at gas stations. I remember learning how our even license plate number meant that we were permitted to get gas on only certain days—gas rationing. The lines were truly long and I do remember having to keep myself busy for what seemed like hours in the back seat of my parent’s gas guzzling Oldsmobile as we waited in a line that snaked for at least a mile down a major highway. Back then there were no seatbelts which made it easy to play in the spacious back seat—there was also no A/C, which added a bit of spice to the dish. The reality was far worse than a 7 year old’s boredom. The US was in a crisis that was sparked by an OPEC oil embargo. Gasoline prices went from $0.36—that’s 36 CENTS—to $0.53 per gallon. That’s a 51% increase. To make matters worse, it was a real supply crisis—there wasn’t enough gasoline! There was a recession! Not caused by, but certainly accentuated by the energy crisis! Another would follow. It was the era of inflation.
The US learned a valuable lesson during that chapter of history. Energy dependence was a dangerous game. Something had to be done. And it was, but it took a long time. By the late 20-teens, WHEN I WAS IN MY 50s, 🤯 the US finally became a net exporter of crude oil. Energy would no longer be the cause of America’s troubles. Or so, we thought. I am not going to get into it, but if we learned nothing in the past couple of months, the US is still energy-dependent on some level. There is no gas rationing—which is good because I have no idea what my license plate number is—but the price of gas has ratcheted higher by—er, some 50% since the Iran war—specifically the closure of the Strait of Hormuz. 50%! A strangely familiar increase.
My long-time followers know one of my favorite and now-famous lines: “oil IS the oil of all industry.” My friends, it’s obviously important—even if you own one of those fancy EVs. You might say it’s strategically important, wouldn’t you. Can you think of anything else that might be as important to your everyday existence? Something that if throttled back could cause widespread toil?
How about semiconductors!
Now, everybody and their cousin is watching semiconductors–and almost all of them are watching the wrong thing. The guy who sits next to me on the ferry can’t stop telling me about the chip rally, how the sector is on a one-way escalator to the heavens with no ceiling in sight. He’s not wrong about the momentum–the stocks are hot, frothy, gloriously overbought. But that’s the loud story, the one that fills the airtime and the cocktail chatter. It is not the important one. The important one is quieter, and it’s been sitting in the back of all our minds the same way that gas line sat in mine: just how completely the modern world has come to depend on a sliver of silicon manufactured a very long way from here. If oil is the oil of all industry–my old line–then the semiconductor is its central nervous system.
Here’s what escapes most people even though they know it in their bones. Semiconductors aren’t just in your phone, your laptop, and the AI servers everyone’s so excited about. They’re in your car–dozens upon dozens of them, running your brakes, your airbags, your engine. They’re in your refrigerator and your washing machine. They’re in the MRI machine at the hospital, the imaging gear, the medical instruments. They’re in the power grid keeping your lights on and the industrial robots stamping out everything else you own. They are in that stupid-looking watch that all the kids are wearing–the one that doesn’t tell them what time it is but rather reminds them of their mood. My wife and I had mood rings for that, lol. 🤣 Pull the chips out and you don’t get a slower economy–you get no economy. My super-smart friends at Bloomberg Economics have a wonderful name for this: the “golden screw.” Lose the single chip a product can’t live without, and you don’t ship a cheaper version, you don’t ship at all. And just like oil in 1973, demand for these things is inelastic–you can’t decide to need 30% fewer chips this quarter any more than you could decide to drive 30% less while baking in the back of that Oldsmobile.
So where do they come from? This is the part that ought to make you sit up straight. Pay attention now, this part’s important. 🧐 Taiwan–one island, perched in the most contested stretch of water on the planet–produces somewhere around 92% of the world’s most advanced logic chips. Not a third. Not half. Ninety-two percent! And a single company, Taiwan Semiconductor AKA TSMC, controls roughly 70% of the entire global foundry business. If you want the brains for an AI accelerator, a flagship smartphone, or a modern fighter jet, you are–pretty much–asking Taiwan for permission. And in case you assume this is only Taiwan’s problem, China holds the quieter cards: it dominates the older, unglamorous power and analog chips in your car and dishwasher. Beijing has already shown it will pull that lever with the recent Nexperia dispute which saw China halt some chip exports, and automakers were soon idling production lines waiting for parts. This is not theoretical. It was a dress rehearsal.
Now play it forward to the scenario nobody wants to picture: China moves on Taiwan. Taiwanese production stops, Chinese exports stop. The economists at Bloomberg ran the numbers on exactly that–a one-year cessation–and the figure belongs on every retiree’s radar: roughly $5.1 trillion of global GDP outside China and Taiwan put at risk. That’s 5.2% of everything the rest of the world produces, vaporized over a component the size of a fingernail. The electronics production powerhouses take it on the chin first–Vietnam, Korea, and Singapore. Then the carmakers–Germany, Japan, and Mexico. A car cannot ship without its safety electronics just as a server cannot ship without its processor. And the very AI boom my ferry friend is so giddy about? It runs on the exact chips that would disappear. The rally and the risk are carved from the same silicon.
And before anyone pipes up with “we’ll just build them here,” I admire the spirit, but the timeline is merciless. TSMC selected Arizona back in 2020. 2020, as in six years ago. High-volume production at its first fab didn’t begin until late 2024, and even by the end of 2027 that Arizona capacity is expected to be less than half of what’s planned. Re-qualifying a chip at a different fab typically takes more than a year. You cannot conjure a fab the way you turn a spigot. Which is the 1973 lesson wearing a new suit: a strategic input, concentrated in a fragile place, with inelastic demand and no quick substitute. That is not the recipe for a price spike, that’s the recipe for a price reset, the kind that doesn’t come back down, the kind that feeds growth-strangling inflation at the very same time. We have a word for the unhappy marriage of stagnation and inflation. 😉 We lived it in the ’70s. And remember–gas was never 36 cents again. 👈
Here’s the uncomfortable truth sitting underneath all of it. Globalization is a magnificent machine–the cheapest goods, the leanest supply chains, the highest standard of living we’ve ever built. But it runs on one quiet assumption: that everybody keeps playing nice. Single-source your most critical component from the far side of the world and it’s brilliant economics, right up until the morning it becomes a national-security emergency. That world of frictionless trade and zero geopolitical tension is shrinking in the rearview mirror a little more every day, and the market, busy bidding chip stocks to the moon, has scarcely glanced up from the smartphone.
So am I telling you to panic and dump everything? You know me better than that. The reshoring is real, even if it’s glacial. Awareness is the first line of defense, and the same mania pouring money into chips is, at least in part, financing the buildout that will someday dull this risk. The lesson here isn’t doom, it’s that strategic-supply risk belongs in your analysis, not buried in the footnotes, and that the time to think about it is before the line forms, not after. Because that was always the cruelty of that mile-long gas line outside my parents’ car: by the time you’re sitting in it, it’s far too late to wish you’d seen it coming. We learned what one throttled commodity could do to a country–and re-learned in the past several weeks. We’ve got a rare chance to learn it again on chips–with the benefit of hindsight instead of heartburn. For the record, my GI Joe did not have a semiconductor chip in it–though I am pretty sure it was manufactured in Hong Kong. 😳
YESTERDAY’S MARKETS
Stocks closed at fresh record highs yesterday, with the S&P 500 up 0.13%, the Nasdaq up 0.03%, and the Dow up 0.45% to 51,307. Chipmakers again led the way, as Marvell jumped roughly 33% on bullish comments from Nvidia's CEO and Hewlett Packard Enterprise rose about 19% on strong earnings, while Alphabet fell about 4% on news of an $80 billion stock sale. Crude held near multi-week highs on Strait of Hormuz supply fears, with WTI around $91 and Brent near $95 a barrel. The 10-year Treasury yield eased modestly, settling near 4.5%.
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