Silicon Rally

“It would take a large demand shock to push the prices of silicon to high enough levels to make it economical for refiners to bring more capacity online.

“This is the fundamental idea behind a commodity super-cycle. In a commodity super-cycle, getting additional supply online to meet growing demand takes time and money. The market needs to be assessed, funds need to be raised, permits need to be obtained, and finally, the project needs to be started and completed. The time lag consists of a supply shortage met by higher prices. The shortage and price increase can also be judged or predicted by the size of the demand shock. And the demand shock for silicon is one of great significance.

“The obvious question that follows is why is this demand shock going to be so noteworthy? It’s very simple. Where renewable energy goes, the footsteps of government subsidies can be heard close behind.”

And now over to Short Fuse, on a rain soaked day in Baltimore…


Views from the Fuse:

When the builders start dropping like flies…that’s when you know you have real trouble in the housing market, our friend Mish, over at The Survival Report, always warns.

That’s not to say that withering mortgage application rates, skyrocketing foreclosures and falling home prices weren’t enough of a tip-off…but the demise of the builders is disconcerting to say the least.

Like most things in the world, the connections here tell the story. Think about it. The demand for new homes has been unprecedented for the last few years, and in order to create these new homes, you’ll need…builders. And those builders will need supplies. And stores that sell those supplies will need more help. And so on and so forth. Millions of jobs were created in this boom. And millions will be lost in the bust.

The AP reports: “Builders constructed more than 2 million housing units nationwide in 2005, the year the boom peaked. So far this year, housing starts have fallen to an annual rate of 1.2 million units through September, and economists expect the number to drop to an annual rate of 1 million by mid-2008.”

Now that lenders aren’t so quick to lend, unsold homes are piling up and home values continue to plummet…and homebuilders are feeling the squeeze.

The AP continues: “To move unsold inventory quickly, builders are staging flashy sales promotions of the kind common at used car dealerships. In particularly hard-hit housing markets, such as California and Florida, and even in less-devastated regions, such as the suburbs around Washington, D.C., developers are resorting to auctions to sell new houses, townhouses and condominiums.”

In addition to slashing prices, some of the builders are cutting down on closing costs and throwing in things like golf carts with the purchase of a home. Yikes. Does anyone recall how ineffective these sorts of incentives were for GM? Sure, they moved some inventory, but saw very little profit doing so.

But the faltering market, lack of buyers and chance of facing bankruptcy have some builders undeterred – they still think the market will see a rebound soon.

“A[n] executive with Miami-based Lennar was quoted this week in The Wall Street Journal saying the company plans to finish more than 200 homes in Irvine Calif, but will hold off on selling them until the market improves. A company official declined further comment.”

This sort of thinking has Mish scratching his head. “There is no rational basis for anyone to suggest the worst is right here right now. But that does not stop anyone from trying -and they have been trying for months on end,” he says.

“Subprime resets peak this year, but Alt-A and option ARM problems are just as big. Those waves do not crest until 2011.

“In addition, the overall economy is slowing dramatically. There is going to be a consumer-led recession to deal with. Unemployment has bottomed this cycle and is bound to rise dramatically. This will further pressure housing prices in a very significant way.”

Mish has his Survival Report readers positioned to profit from the housing market – while everyone else is losing their shirts. You can read how in this month’s issue of The Survival Report.

The dollar is quickly becoming the red-headed stepchild of the currency world. First, supermodel Gisele came out saying she didn’t want to be paid in dollars for her latest campaign. Then, rap superstar Jay-Z released a video in which he was doing something very odd – flashing money around.

For anyone who has happened to stumble across a rap video on MTV, (which does, on occasion, still play music videos) you will know that flashing money, or throwing piles of it gleefully in the air is a basic element in a video. What was interesting about Jay-Z’s video was this: he was flashing large stacks of euros.

If that’s not a sign of the times, I don’t know what is. Although one blogger made a good point: “When I start seeing rap stars throw around the Canadian loonie, then I know our economy is really in trouble.”

Jim Rogers (who may be a bit more qualified to speak on currencies than a rapper or model) has been urging people to dump their dollars, saying it’s “not a currency to own.”

He also took a swipe at Helicopter Ben’s recent comments on the falling greenback, saying, “He is a total fool,” Rogers said. “He said Americans who buy only American goods are not affected if the value of the U.S. dollar goes down. I was terrified.”

“If you only buy American products and the dollar goes down, the price of oil goes up, copper goes up, wheat goes up,” he said. “That affects you. He doesn’t understand the economy as far as I can see.”

“Way to take Big Ben to the woodshed!” cheered our currency counselor, Chuck Butler. “I saw those comments and thought the same things Jim Rogers thought: this guy doesn’t understand!”

“There’s another story this morning about the U.A.E. considering changing its peg to the dollar to a basket of currencies. This has been discussed numerous times now…so either get do it or stop talking about it!

“I do think that we’ll continue to see the countries that have pegged their currencies to the dollar come up with new plans and scrap those pegs. Just another in the laundry list of reasons for the dollar to continue to weaken…”

One final thought…the price of gold has corrected in the past week – but that doesn’t mean we don’t think it’s still a strong investment.

“The trend in gold is still in place…and that is for a stronger gold price. You can’t get caught up in the daily noise here,” advises Chuck.

We say: take advantage of this lower price and add some of the yellow metal to your portfolio. We know of a way you can get gold out of the ground for just a penny per ounce.

Inflation is not supposed to be a problem. If it is not under house arrest it is at least wearing an ankle bracelet. But there is growing evidence that it is on the loose.

As to why it is supposed to be under control, the usual explanation is that the entry of Asia into the world economy has reduced labor costs. Since labor is such a big part of both manufactured goods and services, it is reasonable to think that lower wages will lead to lower prices.

As to why inflation may now be at large, we offer the following: the Asians have to eat too.

Wages in mainland China are said to be going up at nearly 20% per year. In other words, the cheap labor is not as cheap as it once was…and getting more expensive each year. And now that these wage earners are coming up in the world, they want a little more meat in their soup.

Money, as we all know, practically grows on trees. But food does not. (Readers can try to fix that metaphor on their own time.) And putting more Asians to work does not automatically increase the supply of farmland…or what grows on top of it…or what lies underneath of it. So, what we’ve been seeing is just what you’d expect. While increased industrial output has managed to hold prices down for manufactured goods, the rising supply of money has forced up prices for things that don’t come out of factories. Gold, contemporary art, land, and cooking oil come to mind.

Cooking oil comes to mind because it was in the news this week:

“…this past Saturday in Chongqing,” reports the New York Times, “people began lining up before dawn when a Carrefour store offered a discount on large jugs of cooking oil, an essential for a lot of Chinese cooking. When the doors opened, a stampede ensued, killing 3 people and injuring 31. China’s commerce ministry responded on Monday by ordering a ban on limited-time sales promotions.”

Officially, prices are rising at a 6.5% annual rate in China. Even at the official rate, the Chinese have not seen so much inflation in nearly 11 years. But food is rising faster…at a 17.6% rate. This is a big problem in China – because people don’t earn much money; they have to spend a lot of it on food. That’s why people got killed trying to get a good deal on cooking oil.

We recall what Jacques Diouf, director general of the UN’s Food and Agriculture Organization had predicted only weeks ag “If prices continue to rise, I would not be surprised if we began to see food riots.”

Well, there you are, Mr. Diouf. You were right.

Meanwhile, let us turn back to the big picture. This from the Financial Times…

“‘The mortgage black hole is, I think, worse than anyone saw,’ said Tony James, president of Blackstone, the big private equity firm. ‘Deeper, darker, scarier. [The banks] are now looking at new reserves and my sense…is they don’t have a clear picture of how this will play out and confidence is low.'”

It looks to us as if there has been a big sea change in the world’s markets. Yesterday brought more evidence…

Housing prices in Southern California have now fallen back far enough to erase the last two and a half years worth of gains, says the LA Times.

In Atlanta, 5,244 houses are going on the auction block next month…already, 53,365 houses have been auctioned this year…a total that is rising at about 36% per year.

And the Chicago Tribune reports on a study by the Center for Responsible Lending that predicts a ‘foreclosure hit’ equal to $223 billion.

A hundred billion here…a hundred billion there…pretty soon you’re talking real money.

Americans are the world’s biggest spenders – with a 20% share of total global consumption. They are the world’s biggest users of oil. They are also the most indebted people in the world. And now, Americans are running out of money. Their houses are sinking in value. Their wages are stagnant or falling. Their dollar is so depressed it can’t get out of bed in the morning.

Again, yesterday, the buck took a beating. When is it going to get a break?

On Tuesday, it looked like a correction had begun…gold and oil were going down…stocks and the dollar were going up. But then, Wednesday came. The Dow went down 93 points. Oil rose nearly $3. And gold added more than $15…putting it back over $800.

Not much of a correction, in our opinion…not enough of a correction. We would expect a bit more…

“You are either a contrarian, or you are a victim,” we said to Elizabeth, quoting our old friend Rick Rule.

Rick uses the expression to describe how the resource markets chew up trend-following investors. We use it in a broader sense. What follows seemed like such an interesting conversation; we decided to pass it along:

“The average person spends, votes, invests, and signs up for military service driven by the same impulse…” we said, “…to do his duty…to take his place in the great mass of his brethren…to fit in…to go along. Typically, he spends money he doesn’t have on things he doesn’t need – just because everyone else is doing it. He wastes his time in the voting booth, because the candidates are usually as hollow as an empty jug; and the odds that his vote will determine the outcome are vanishingly small, anyway. Then, investing along with everyone else, he is a chump for the financial industry, the insiders, and the hustlers. He comes too late, stays too long, and pays too much.

“But it is in war where he really suffers. England [we were watching the old veterans go by] hasn’t faced a serious threat of foreign invasion for 1,000 years. But millions of English, Scottish, Welsh and Irish soldiers have served and died in countless wars…all pretending to protect the homeland. Everyone would have been better off if they had stayed home and delivered the milk. But to do that, they would have had to be real contrarians… And even if you don’t pay with your life…you pay with your time, your money, your attention, your emotion. Either in war or in the investment markets, or in trivial consumption…you get caught up in the spirit of the thing…and pretty soon, you’re in it. It is you; you are it. You’re wearing a Che t-shirt and standing in line at the polling station. You care. It’s a part of your life…”

“I see your point,” said Elizabeth. “But I also see the danger you are running. By alienating yourself from what you consider the fads and fashions of group thinking, you are alienating yourself from the group itself…from feeling like a part of it…from being a part of it. I understand; you don’t want to buy a Ralph Lauren shirt because you don’t want to be a victim of the fashion industry…or pay more than you have to for a brand name. Maybe you don’t bother to vote.

“You invest as a contrarian, of course…doing the opposite of what everyone else does. And you don’t want to get caught up in some great, patriotic war that you think is a fraud. Of course, some of that may be commendable. But you run the risk of alienating yourself too much…of becoming a victim of your own contrarianism…a man without a country…without a people…without a vote…without a say in how things work out…a man without a home. You run the risk of becoming marginalized…a permanent outsider…an outcast. Maybe it makes sense intellectually…but we were not meant to live that way. We have instincts and emotions, not just a brain. And those instincts and emotions are what make us what we are. They make us part of a group, not solitary animals. You can deny those emotions and instincts…but you can’t escape them.”

Until tomorrow,

Bill Bonner
The Daily Reckoning