Investors crowd into soft-landing trade ahead of crucial inflation data
Silicon Valley’s surge in funding for U.S. defense and swing to patriotic ideals threatens a previous fixation for many of those investors: China. “Patriotic capital” can be found around the San Francisco Bay. The investment firms that helped launch Facebook , Google and Airbnb are backing startups building battlefield software, military drones and autonomous submarines. Venture capital powerhouse Andreessen Horowitz has labeled it “American Dynamism” investing.
As the investors target what they hope will be a huge business opportunity—bringing better defense technology to the U.S. and its allies—their new marching order is out of sync with Silicon Valley’s years of investing in China.
Government officials and researchers said many of these patriotic tech investors and their startups remain dependent on and benefit from deep connections to China, one of the main adversaries the U.S. military is looking to use defense startup technology against.
It is a sign of how entangled the two regions remain in finance and tech, said Nathan Picarsic, co-founder of Horizon Advisory, a China-focused research and consulting firm.
“Building a tech ecosystem, divorced from exposure to China—and fully aligned with American national interest—is a hard thing,” he said. “It requires more than narrative.”
Venture capitalists invested for years in a globalized tech industry , instructed by U.S. policies to build relations with China to encourage reform there. They are adjusting to the view that the Asian nation is one of the biggest threats to U.S. security.
Many technology companies say China is still crucial to their global operations and supply chain. Skeptics say that rhetoric aside, patriotic entrepreneurs and investors are chasing the latest market trend.
As once-hot sectors such as fintech, Web3 and the metaverse cooled, investors have sought new places to invest. Meanwhile, the wars in Ukraine and the Middle East , as well as China’s military buildup, have made selling to the military more palatable and potentially profitable.
“Will people invest solely in something because it is patriotic?” said Rebecca Gevalt , who helps run a venture fund, Dcode Capital, which has an advisory arm to educate startups and the federal government about how to work together. “The answer is no. The investment interest in this is people think they can make a good return on the money.”
Thus far, the patriotic investing efforts haven’t yielded large orders from Defense Department buyers.
Superpowers led by the US and European Union have funnelled nearly $81 billion toward cranking out the next generation of semiconductors, escalating a global showdown with China for chip supremacy.
It’s the first wave of close to $380 billion earmarked by governments worldwide for companies like Intel Corp. and Taiwan Semiconductor Manufacturing Co. to boost production of more powerful microprocessors. The surge has pushed the Washington-led rivalry with Beijing over cutting-edge technology to a critical turning point that will shape the future of the global economy.
“There is no doubt we’ve passed the Rubicon in terms of the tech competition with China, particularly on semiconductors,” said Jimmy Goodrich, senior China and strategic technology adviser to the RAND Corp. “Both sides have basically made this one of their top strategic national objectives.”
What began as concern over China’s rapid advances in key
Venture capitalists invested $42 billion into the top 100 national-security startups, ranked by size and growth, according to a report from Silicon Valley Defense Group, a nonprofit that tries to connect Silicon Valley companies with the Pentagon. The estimated total revenue those companies make from federal government contracts is between $2 billion and $5 billion, it said.
San Francisco organization Future Union, which promotes investing for the national interest , recently published an inaugural report listing a group of 100 venture capitalists it says are “working to preserve democracy.”
In 2023, Sequoia Capital, one of the early investors in Apple and Google, made its first defense investment— Mach Industries, which is building hydrogen-powered weapons systems. The firm has also funded military drones and battlefield simulation technology.
Startup accelerator Y Combinator in San Francisco, which helped launch Airbnb, has recruited defense-tech startups for the first time this year to join its program. It hasn’t funded China-based startups since 2019, said a spokeswoman.
Andreessen Horowitz, one of Silicon Valley’s biggest crypto investors , last month announced a $600 million fund for American Dynamism. The firm has made only a small number of investments in China.
“We are bringing our founders to Washington, and we are having conversations to explain, ‘We are building this,’” said Katherine Boyle , one of the firm’s partners leading American Dynamism investments.
Venture capitalists who long ignored electronics blossomed into a full-scale panic during the pandemic, as chip shortages highlighted the importance of these tiny devices to economic security. At stake now is everything from the revitalization of US tech manufacturing to the assertion of an upper hand in artificial intelligence (AI) to the balance of peace in the Taiwan Strait.
Chips spending by the US and its allies marks a new challenge to Beijing’s decades of industrial policy—albeit one that will take years to bear fruit. The rush of funding has hardened battle lines in the US-China trade war, including in places like Japan and the Middle East. It’s also giving a lifeline to Intel, the one-time global leader in chip manufacturing that in recent years has lost ground to rivals including Nvidia Corp. and TSMC.
Investment plans have reached a critical juncture in the US, where officials last month unveiled $6.1 billion in grants for Micron Technology Inc., the largest American maker of computer-memory chips. That was the final multibillion-dollar grant for an advanced chipmaking facility or resented Washington are now chasing contracts with the U.S. government. Silicon Valley investors are hosting events for senior defense officials, holding court with members of Congress and spending more on lobbying.
Sen. Lindsey Graham (R., S.C.) was a featured speaker at an event in Washington on technology and national security called the Hill & Valley Forum.
“I see people in Silicon Valley as patriots,” he told a crowd stacked with Washington insiders and tech investors at the event on May 1.
Some venture capitalists leading the charge toward patriotic investing were part of earlier waves of making big investments in China . Some are now rethinking their relationships with the country.
“The world was flat, and we always had the sentiment that economic growth would bring us all together,” Roelof Botha , Sequoia’s managing partner, said at the Hill & Valley Forum. “And that proved to not exactly be true.”
Sequoia’s U.S. fund is also an investor in ByteDance, the Chinese parent company of TikTok, which risks being banned from the U.S. for national-security concerns.
Investing in Chinese companies has been a common practice among investors, and while frowned upon by some in recent years, it isn’t illegal. Yet the stark pivot from China to U.S. national security leads some skeptics to question the staying power and sincerity of the patriotic wave.
Thomas Tull , a longtime technology investor and former Hollywood producer, sold his movie production company, Legendary Entertainment, to a Chinese buyer for $3.5 billion in 2016. in the US, capping a flurry of commitments nearing $33 billion to companies including Intel, TSMC and Samsung Electronics Co.
President Joe Biden opened that funding spigot with his signature 2022 Chips and Science Act, promising a total of $39 billion in grants for chipmakers, sweetened by loans and guarantees worth an additional $75 billion plus tax credits of up to 25%. It’s the heart of his highstakes bid to revive domestic semiconductor production— especially of leading-edge chips—and deliver a rush of new factory jobs to help convince voters he deserves re-election in November.
Those investments by the US seek to do more than just counter China, which still trails the rest of the world by several generations in advanced semiconductor technology. They also aim to close the gap on decades of state-directed incentives from Taiwan and South Korea that have made those places centres of the chip industry.
The spending spree likewise is fuelling rivalries among the US and its allies in Europe and Asia, all chasing a piece of the growing demand for devices
After leaving the entertainment industry, he raised a roughly $3 billion fund and began investing in defense companies, including Anduril Industries, which makes autonomous weapons, surveillance and counterdrone systems.
Some of his business ties with China linger. A former co-chairman and fund sponsor of IDG Capital—an investment firm recently designated by the U.S. government as a Chinese military entity— sits on the board of Tull’s company.
Andreessen Horowitz’s idea of American Dynamism is vast. It has given the label to Flexport, a San Francisco-based shipping and logistics company that is backed by Chinese and Russian investors. Flexport declined to comment.
Another American Dynamism company is Bright Machines, a San Francisco-based robotics company. It has a Chinese subsidiary and uses facilities in Mexico and Israel for manufacturing as well as research and development. A Bright Machines spokesman said the Chinese unit is no longer active and its international operations are helping the company meet U.S. manufacturing needs.
Sequoia was a focus of a congressional committee report published in February, blasting it for investments its former China unit made in Chinese chip companies and AI startups that supply the Chinese military and contribute to human-rights abuses. Four other venture-capital firms were similarly criticized in the report.
A Sequoia Capital spokeswoman said the China unit had been split off into an independent firm with a new name, HongShan. The congressional committee that probed Sequoia’s China ties said the split was insufficient. powering advances in AI and quantum computing.
“Technology is moving fast,” US Commerce Secretary Gina Raimondo, who’s leading the administration’s semiconductor charge, said at a conference in Washington last month. “Our enemies and competitors, they’re not moving slowly. They’re moving fast, so we have to move fast.”
Across the Atlantic, the European Union has forged its own $46.3 billion plan to expand local manufacturing capacity. The European Commission estimates that public and private investments in the sector will total more than $108 billion, mostly in support for large manufacturing sites.
Europe’s two largest projects are in Germany: an Intel fab planned in Magdeburg worth about $36 billion and receiving nearly $11 billion in subsidies, and a TSMC joint venture worth roughly $11 billion, half of which will be covered by government funds. Even so, the European Commission has not
Three straight months of hot inflation data dented Wall Street’s confidence that a series of interest-rate cuts is set to start at any minute. Investors are hoping the fourth time is the charm.
A mood of renewed optimism about a soft landing for the U.S. economy has swept across trading desks in the days ahead of Wednesday’s release of the consumer-price index. Federal Reserve Chair Jerome Powell kept hopes of rate cuts alive following the central bank’s latest policy meeting. Subsequent data showed easing pressure from job and wage growth , helping propel stocks back toward records.
Lingering inflation has been the main issue troubling investors in recent months. Traders came into 2024 betting on as many as a half-dozen rate cuts, and then had to scale back those bets rapidly when the
CPI kept topping expectations. That rattled stocks in April and sent bond yields, which rise when prices fall, to their highest levels since November.
Many investors said the April employment report eased some of their worries, because a cooler labor market should eventually lead to more-subdued price increases. Now, they just need actual inflation data to back that up.
“The CPI report could go a long way towards really furthering the narrative that rate cuts are coming this year,” said Gennadiy Goldberg , head of U.S. rates strategy at TD Securities.
Stocks and bonds are closely linked. Yields on Treasurys are heavily influenced by investors’ expectations for shortterm rates set by the Fed. Stock prices, in turn, are guided in part by investors’ weighing the risk-free return they can get from holding Treasurys to maturity.
The Dow Jones Industrial Average has already climbed 4.5% this month, bringing it to less than 1% below its record reached in late March. A rally in bond prices has driven the yield on the 10-year U.S. Treasury note down to 4.503% from 4.7% in late April.
Many investors believe the upside for bonds is larger than it is for stocks if inflation moderates. While stocks are already near records, the yield on the 10-year note remains well above the sub-4% level where it started the year.
Bond returns have disappointed over the past couple of yet given final approval for state aid to either, and experts caution that the bloc’s investments will not be enough to achieve its goal of making 20% of the world’s semiconductors by 2030.
Other European countries have struggled to fund major projects or attract companies. Spain announced in 2022 that it would put nearly $13 billion toward semiconductors but has only doled out small amounts to a handful of companies owing to the lack of a semiconductor ecosystem in the country.
Emerging economies are also looking to break into the chips game. India in February approved investments powered by a $10 billion government fund, including a Tata Group bid to build the country’s first major chipmaking facility. In Saudi Arabia, the Public Investment Fund is eyeing an unspecified “sizable investment” this year to kick off the kingdom’s foray into semiconductors as it seeks to diversify its fossil fuel-dependent years because interest rates climbed higher than investors had expected and then stayed at those levels for longer than anticipated. Nonetheless, investors have been quick to buy bonds at the slightest hint of easing inflation, anxious to lock in 4%-5% yields before the Fed starts cutting.
Ed Perks, chief investment officer of Franklin Income Investors, said he could see yields dropping as much as 0.2 to 0.25 percentage point on shorterterm Treasurys and 0.1 to 0.2 percentage point on longerterm Treasurys if data shows inflation moderating.
At the same time, he said, “It’s a bit more of a challenge to see a significant upward move in equities” given current stock valuations. For the same reason, he added, stocks probably have more room to drop if inflation is once again higher than anticipated.
Inflation has already fallen sharply from a peak in 2022. The question is whether it can get all the way back to the Fed’s 2% target, as measured by the central bank’s preferred personal-consumption expenditures price index.
Stripping out volatile food and energy categories, 12-month core PCE inflation dropped to 2.9% at the end of last year from 4.9% at the start of the year. But it has since stalled, standing at 2.8% at its latest reading in March.
Adding to the pressure on Wednesday’s CPI report: A quirk of the calendar means the report will offer investors a better-than-usual view of what PCE inflation will look like later in the month.
That is because the PCE index includes both CPI and data on supplier-level prices.
Typically, the CPI data is released before the producerprice
The funding rush has hardened battle lines in the US-China trade war, including in places like Japan, the Middle East
Bond returns have disappointed over the past two years because interest rates stayed higher for longer than expected
economy.
In Japan, the trade ministry has secured about $25.3 billion for its chips campaign since its inception in June 2021. Prime Minister Fumio Kishida is targeting a total $64.2 billion investment, including sums from the private sector, with a goal of tripling sales of domestically produced chips to about $96.3 billion by 2030.
Seoul, by contrast, has avoided direct financing and subsidies like those embraced by Washington and Tokyo, preferring to act as a guiding hand to its deep-pocketed chaebol. In semiconductors, the South Korean government plays a supporting role in an estimated $246 billion of spending—part of a broader vision for homegrown technology from EVs to robotics. That effort stands to get a boost from a $7.3 billion chips program that the finance ministry said on Sunday would be unveiled soon.
One potential danger overshadows the global surge of index report, leaving investors with some initial uncertainty about the Fed’s preferred gauge. But this month, PPI data will come first, on Tuesday, allowing investors to calculate PCE rapidly Wednesday morning.
Many economists remain optimistic that inflation will resume its downward trajectory. Inflation in goods, they note, has already slowed to about where the Fed would like. Official measures of housing inflation have remained stubbornly high, but economists still expect them to moderate to come more in line with private-sector gauges of new rent increases.
Inflation in other types of services tends to move slowly both on the way up and on the way down. But the recent report showing cooling in the labor market was a positive sign, since the cost of labor tends to be a major driver of price changes in this category.
In addition, economists note that inflation in some types of services tends to lag behind inflation in related goods. For that reason, many expect increases in the cost of insuring or repairing a car to ease in the coming months, given what has already happened with new- and usedcar prices. Still, few at this point are underestimating inflation’s capacity to surprise in any given month.
George Mateyo , chief investment officer at Key Private Bank, said it still makes sense to own unconventional assets—such as real estate, inflation-protected bonds or international stocks—to hedge against another hot reading, given that a bad report would likely hurt U.S. stocks and bonds alike.
“We think that inflation is going to be somewhat sticky,” he said. government support: creating a glut of chips.
“All of this investment into manufacturing driven by government investment and not primarily market-driven investment could eventually lead to a situation where we have more capacity than we need,” said Bernstein analyst Sara Russo. However, that risk is mitigated by the length of time it will take for the planned new capacity to come online.
For now, companies like Nvidia, Qualcomm Inc. and Broadcom Inc. lead the world in design of chips vital to key fields such as artificial intelligence. But there’s debate on how wide that lead is. Some experts argue that China is years behind, while others insist that the world’s secondlargest economy is on the cusp of catching up.
China now has more semiconductor plants under construction than anywhere else in the world, building production of less-glamorous legacy chips while amassing the expertise needed for a home-grown technological leap. It’s also working on domestic alternatives to Nvidia’s AI chips and other advanced silicon.
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