China says it’s going to take over Taiwan…

But could it be a “soft invasion” rather than a shooting war?

And what happens if China takes over Taiwan’s semiconductor industry?

Taiwan Semiconductor Manufacturing Company (TSM) is Taiwan’s largest chipmaker.

And it’s arguably the most important company in the world when it comes to our modern technological civilization.

It controls about 55% of the global market for contract chip fabrication.

That’s more than OPEC’s 40% market share for oil.

And Taiwan is home to 90% of the world’s advanced chip production. These are the chips you need for self-driving cars… artificial intelligence (“AI”)… supercomputers… and the military.

Our tech expert Jeff Brown weighs in below.

You’ll also hear from our resident “Fed watcher” Nomi Prins on what America’s central bank did with the more than $100 billion in profits it earned last year.

But let’s get started with a question for friend of Legacy and income investing expert Brad Thomas.

As regular readers will know, we’ve been working extra hard this year to bring you ideas you can use to move the needle on your wealth in this bear market.

And that led us to income investing… and Brad.

He’s an expert in finding America’s best dividend paying stocks. And right now he says he feels like a kid in a candy store.

That’s because the lower stock prices go, the higher the yield on stocks, all else being equal. That’s why he’s been urging his readers to create rising streams of lasting income right now. Because thanks to the bear market, you can buy the world’s best dividend payers at a discount.

Brad calls his strategy SWAN investing because it helps him and his readers sleep well at night.

But at least one Brad reader is wondering whether an ETF is the way to go…

Reader comment: In general, I like your SWAN approach. But I don’t like taking on the risk of individual companies in my portfolio. So, I vote for more coverage of ETFs.

– Joan F.

Brad’s response: Thank you for your feedback, Joan. I’ve had too many sleepless nights over the years to ever want to trade my SWAN (sleep well at night) strategy.

ETFs – or exchange-traded funds – typically give you exposure to a basket of companies instead of just one stock. That has the potential benefit of diversification. Just remember that any basket of stocks will contain the good, the bad, and the ugly.

A big part of what my team and I do for our subscribers is to filter out the bad and the ugly so you can focus on just the good. That’s the best path to building lasting wealth.

Many ETFs also come with fees. You don’t pay these separately to the manager. The manager deducts these fees from your investment in the ETF. These are known as “expense ratios.”

Typically, these are less than 1%. So, for every $1,000 you invest, you pay less than $10 a year in expenses. Just be careful. With a large enough investment, over a long enough time, these expenses can eat into your returns… especially if we’re talking about an expensive ETF. Some ETFs have expense ratios as high as 10%.

It’s another reason why I focus on individual stocks at my income investing advisory, Intelligent Income Investor. We’re trying to maximize the income we haul out of the stock market. And any fee is a drag on returns.

But if you want just one ETF for income, I recommend the Schwab U.S. Dividend Equity ETF (SCHD). It tracks the total return of the Dow Jones U.S. Dividend 100 Index.

As of this September, the Dow Jones U.S. Broad Market Index contained 2,524 stocks, excluding real estate investment trusts or REITs.

The Dow Jones U.S. Dividend 100 Index filters out the income payers by way of three primary screens. To make the cut they must have…

  1. At least 10 straight years of paying dividends

  2. A minimum market value of $500 million

  3. A three-month average daily trading volume of $2 million

This ensures stocks in SCHD have dependable dividends, sufficient size, and good liquidity. Next, they’re ranked on four fundamental criteria…

  1. Free cash flow to total debt

  2. Return on equity

  3. Estimated dividend yield

  4. Five-year dividend growth rate

Free cash flow to debt shows the fraction of all debt that would be repaid in one year if all the free cash flow went to repaying debt. The higher the ratio, the more financially stable the company is.

And return on equity is a key measure of profitability. It shows how efficiently the company is using shareholder capital. Again, you want to own stocks that rank highly on this metric.

This is how SCHD dives deeper into quality, focusing on strong balance sheets, good profitability, and strong – and growing – dividend yields.

Next up, some questions on the Fed and its relationship with the government.

It’s for our resident “Fed watcher” here at Legacy Research, Dr. Nomi Prins.

She’s an investigative journalist, bestselling author, and former global investment banker.

And she heads up our Distortion Report advisory. It’s where she shows folks how to profit from the distortions caused by all the central bank stimulus we’ve been living through.

A lot of people don’t know it. But the Fed pays any profits it makes on its bond-buying to the U.S. Treasury. These profits are a result of the income it earns on those bonds.

Last year, in fact, the Fed paid $107.4 billion out of its annual net income to the Treasury. That’s roughly how much the Inflation Reduction Act could end up directing to the electric vehicle battery industry. So we’re talking real money.

And it’s set off a lively debate in Nomi’s reader mailbag…

Reader question: The Fed is a non-profit that pays its net income to the government. Have you calculated the difference between these payments and the interest the government pays the Fed?

Those who speak of the cost of the federal government’s borrowing don’t consider the income from the Fed.

The net cost is much lower than the apparent cost. But I got lost trying to figure this out on the Fed’s website. Thanks for your work.

– Tom S.

Nomi’s response: Hi, Tom. Thanks for your question and your observations. You touch on an interesting topic.

The Fed is indeed a non-profit. It returns the income it earns from holding Treasury bonds back to the U.S. Treasury. The Fed sends earnings to the U.S. Treasury only after backing out expenses and dividends, among other things.

But the difference between these payments and the interest the government pays the Fed isn’t what we should be paying attention to here. It’s the cash moving from one government pocket to another.

Congress created the Fed in 1913. Among other things, it’s the federal government’s payment arm. When Congress spends money, it does so via the Fed. So if the Treasury pays the Fed interest on the bonds it owns… and the Fed returns that income to the Treasury… the government isn’t getting any richer or poorer.

Finally, that question on China and Taiwan for Jeff Brown…

Reader question: Several comments about Taiwan:

  1. The situation here is very different from the one in Hong Kong in 1997. There was a handover from the British people to China at a very specific date. Here there is no handover and no specific date.

  2. In my opinion, the most likely scenario would be for China to make a maritime blockade around Taiwan and wait for the Taiwanese government to capitulate. It can be done without loss of lives.

  3. China may forbid TSMC to sell chips to specific U.S. companies like Nvidia, the same way the U.S. government does not allow Nvidia to sell its chips to China…

What do you think?

– Paul B.

Jeff’s response: Hi, Paul. Thanks for reading and writing in with your thoughts.

The topic of Taiwan and China has been an ongoing discussion in the pages of our mailbag. Recently, I shared my thoughts on what a “soft invasion” of Taiwan might look like. And I’ll share my thoughts here on your comments.

It’s true the handover of Hong Kong from British to Chinese rule was predetermined. But that wasn’t the point I was making. After the official handover, we had the “one country, two systems” principle. Hong Kong would still operate as a semi-autonomous province. And to the West, the Chinese government appeared to be abiding by this.

But slowly, the Chinese Communist Party (“CCP”) began placing its people in positions of influence and power. This came to a head in 2019 and 2020. Today, Hong Kong is almost entirely under Beijing’s control.

I believe something similar will play out in Taiwan. In fact, it already is.

Taiwan held local elections last month. The Democratic Progressive Party (“DPP”) is Taiwan’s leading pro-independence party. It suffered its worse election defeat in 36 years to the Kuomintang. It’s Taiwan’s main China-friendly party.

The DPP, which has governed the island for six years, appears to be losing power. It won only five of the cities and counties in the archipelago of 23 million people, its worst performance since its founding in 1986.

The CCP has interfered in U.S. elections via fake social media accounts that attempt to drive wedges between American voters. And Taiwan has accused China of repeated efforts to sway the results of its elections, whether by online disinformation campaigns or overt military threats.

Slowly but surely, the CCP can establish control over the island via a party that’s more friendly to reunification.

A Chinese naval blockade of Taiwan is possible. But it’s unlikely. It would be so provocative as to almost require some form of military response from the West.

And as I shared the other week, all-out war is the last thing China needs right now. Chinese leader Xi Jinping gets this. It would cause massive instability. So, he’ll go with the “soft invasion” I just outlined.

As for your third point about a chip ban. Again, it’s possible, but unlikely. Controlling Taiwanese policy would be a bargaining chip the CCP could use.

If China is in control of Taiwan’s economic resources, it has the power to hold the global economy hostage. Taiwan is that strategically important to the world because it’s the source of about half of the world’s chips… and 90% of all advanced chips. Just about any electronic device you can think of – from your smartphone… to your car… to the high-tech military kit – has ties to Taiwan.

This would put China in a strong negotiating position with its geopolitical rivals. I suspect the government there would use its leverage to force the U.S. to lift its bans on chipmaking exports.

That’s all for this week.

If you have a question for Jeff, Nomi, Brad… or the other experts we feature here at the Cut… shoot us an email at [email protected].

Have a great weekend.



Chris Lowe
Editor, The Daily Cut