The Second Skyscraper Boom

The Daily Reckoning PRESENTS: Few people ever stop to think about the massive amounts of steel and cement that go into skyscrapers. But those who did – especially in the early 1900s – could have made a fortune, especially those invested in steel. According to Christopher Hancock, this opportunity has come around once again. Read on…

THE SECOND SKYSCRAPER BOOM

On the corner of Fifth and 34th Street rests the epitome of American progress.

Considered by some as the Eighth Wonder of the World, the Empire State Building was erected at the height of the Great Depression…pieced together with Indiana limestone and adorned with aluminum and chrome-nickel steel.

At the time, it stood as the tallest building in the world, at over 1,400 feet. Construction consumed 60,000 tons of steel…10 million bricks…1,172 miles of elevator cable…6,400 windows…60 miles of water pipe and over 3,500 miles of telephone and telegraph wire.

Even with all that, the building took only 14 months to complete, costing less than half of its original $50 million budget.

But the world’s tallest skyscraper is much more than the world’s top-quality office space. It symbolized the progress of a nation rebuilding – a beacon of economic growth.

The strength of its image became universal.

One could argue the construction of the Empire State Building was a turning point for the U.S. economy and morale during the heart of the Great Depression, ushering in the world’s first skyscraper boom.

Soon, skyscrapers began popping up throughout the American landscape: In Atlanta, Dallas, Houston, Charlotte…the World Trade Center in ’72…the Sears Tower in ’73. Every U.S. skyline you see today grew in a span of about 40 years.

These buildings required miles and miles of steel beams…hundreds of thousands of tons of cement…The IDS center in Minneapolis required enough reflective glass to provide two pairs of sunglasses for each resident of Minnesota and one pair for each resident of North and South Dakota.

The Sears Tower, the nation’s tallest building, contains 2 million cubic feet of concrete and 76,000 tons of steel. And its foundation spans two entire city blocks.

Few people ever stop to think about the massive amounts of steel and cement that go into these structures. But those who did – especially in the early 1900s – could have made a fortune, especially those invested in steel.

Between 1904-1930, shares of U.S. Steel rose an average of 66% a year! Of all the components used in skyscrapers, steel grasps my interest the most.

Steel products are used in everything from the construction of buildings, bridges, railway rolling stocks, industrial pipes and tanks to numerous automobile parts and Campbell’s Soup cans. So when a major macro-event like a building boom increases demand, supply becomes even tighter as other industries involved in general infrastructure and development compete for the same fundamental resource.

Right now, the world’s “second skyscraper boom” is currently under way, and to no one’s surprise, it’s happening in the newest region of massive economic growth…Asia.

If steel production per person in China were to climb to U.S. levels, it would mean that China’s aggregate steel use would double by 2031, to a level equal to the current consumption of the entire Western world. And when you add in developing countries like India, Malaysia, Indonesia and Vietnam, the numbers become staggering. We’ll get to the specific figures in a minute.

Unlike the general use we see here in the U.S., high-rise buildings in Asia will provide much more than Grade A office space…These buildings will be the bedrock for the region’s rapidly emerging middle-class housing.

Roughly 50% of the world’s population lives in the region of the world experiencing the most dynamic growth. Last year alone, these economies accounted for more than half the world GDP. They now churn out 43% of the world’s exports and hold 70% of the world’s foreign exchange reserves.

And while real wages in the developed West are either flat or falling, wages among the up-and-coming nations of Southeast Asia continue growing.

So the world’s latest member of the “middle class” will begin demanding spacious, convenient living in the immediate future.

Buying commercial real estate in Asia today is a lot like investing in American real estate at the end of World War II.

You may remember the Levittowns that shot up across the United States over 50 years ago. These carefully planned neighborhoods provided affordable housing for the thousands of young soldiers returning home from the war. But more importantly, these planned neighborhoods served as the new model for America’s booming middle-class suburban lifestyle.

The emerging markets of Southeast Asia are currently experiencing a similar transformation. Except they’re not peppering the landscape with tree-lined streets and 2.5-bedroom, 1.5-story ranch houses. High-rise apartment complexes are the new Levittowns of Asia.

You could easily move into one of these buildings and never find a need to leave. These buildings include everything from grocery stores and retail outlets to fitness centers with swimming pools.

Asian developers are utilizing this high-rise housing model for one specific reason: Land is scarce. Most Asian economies lack the expansive terra firma we in the West find so readily abundant.

Take Singapore, for example…It’s roughly 3.5 times the size of Washington, D.C., with an economy greater than New Zealand’s and a growth rate double that of the United States’.

Hong Kong is another example: It’s only six times the size of our nation’s capital, with an annual GDP on par with Argentina and Portugal.

The point is…land is, and always will, be the most valuable asset in places like Hong Kong, Shanghai, Tokyo, Taipei and Singapore. These Asian cities lack the land for urban sprawl we in the U.S. see in places like Chicago, Washington, Houston, Los Angeles, Charlotte and Atlanta.

So when you can’t build out, you build up. And that’s exactly how these Asian economies are making their magnificent growth possible.

I travel back and forth to Asia a couple of times each year. Whether I’m in Hong Kong, Bangkok, Shenzhen or Shanghai, the landscape is constantly changing.

It’s dynamic…exciting…like nothing the world has ever seen. You feel like you’re watching a flipbook in real time as thousands of cranes blanket the landscape lifting I-beam after I-beam to new heights. One ambitious plan calls for a 200-story high-rise on the edge of Hong Kong’s Victoria Harbor. That’s twice the size of the Empire State Building.

In Hong Kong, for example, prime locations in the coveted Central District are running so thin that the government has commissioned even more land reclamation, stretching the island even further into the blue waters of Victoria Harbor.

The need to build up instead of out also explains why seven of the world’s 10 tallest buildings are now found in Asia. And there is plenty of room and desire to build more.

More to come…

Regards,

Christopher Hancock
for The Daily Reckoning
May 16, 2007

P.S. Total steel production last year equaled 770 million tons. Asian steel production accounted for 66% of that total. Assuming every ton of steel produced in 2006 was set aside for high-rise construction, and assuming current production levels remained stable, it would take roughly five-six years of world production to supply Asia’s potential appetite for I-beam and rivet consumption.

One company that I’m recommending to my Free Market Investor readers is flying below Wall Street’s radar – for now – AND is positioned perfectly for major gains during the Asian steel boom.

This company has just implemented an even better, cheaper process for making its steel – and you can still pick up shares for below book value…but not for long.

Editor’s Note: Christopher Hancock has spent the last two years doing investment research primarily focused on emerging markets, specifically China and Hong Kong. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

Christopher’s desire to work for an independent firm led him to Agora Financial, where he now is the editor of Free Market Investor. Christopher travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world right now for his subscribers.

Go…go…go…go…

Mergers and acquisitions are booming – up to $2 trillion worth of deals this year.

Stocks are soaring – especially in China, where widows and orphans line up to put their money into the hands of people they don’t know, who run businesses they don’t understand.

The rich are getting richer. And as fast as people get money, nature creates ways of redistributing it. Luxury markets – watches, cars, houses, antiques and art – are all soaring. Even in unlikely places.

“Oh, yes…you wouldn’t believe the amount of money in India today,” says a colleague from Bombay. “There are just a lot of people with a lot of money. If you want to buy space in the good part of town, it’s going to cost you $1,000 per square foot.”

But pity the poor people. At least in America, they are getting poorer…but don’t seem to realize it. Instead, they buy more stuff! On credit, of course.

And in America, the People’s Market – the Dow – continues to rise. Some analysts – namely Richard Russell – have come to believe that we are at the beginning of a new phase, the final phase, of the great bull market that began way back in 1982. The NASDAQ crashed in 2000-2002, he notes, but the Dow never went below the critical 50% level – leaving the bull market trend intact.

But America’s widows and orphans are still a little chary of the stock market. And if they’re not in, he reasons, and the major bull market trend is still in force, it means the final phase (in which small investors rush to get into stocks just in time to lose their money) is still ahead.

When Russell speaks, we listen. He knows more about the stock market than we do. He’s a quarter of a century older, so he’s seen more of it than we have. Besides, he takes it more seriously. And maybe he’s right about what lies ahead. Who knows? It is not given to man to know his fate.

So we make our bets and we take our chances.

And when we bet, we do not try to predict the future. We try to find the bet that gives us the best odds. And for that we need to know what other bettors are doing. Investors, bettors, speculators – they’re all humans. And humans are not solitary animals. They live in groups…and act in groups. They look to each other for ideas, beliefs, customs, emotions, taboos, and values. The man who thinks for himself is as rare as an honest neocon.

Instead, whether they manage billion-dollar hedge funds, or manage their egg money, they look to see what each other is doing – and do the same thing. In the investment world, the effect is obvious: some investments are favored, while some are ignored. Other things being equal, the favored ones will be expensive; the ignored things will be cheap. Other things being equal, the favored ones will be the bad investments; the ignored ones will be the good ones.

Russell says he believes most investors now ignore the stock market. He says the average investor is not in it, because the negative press has driven him out. The news is so gloomy, he says, the average person is frightened.

Here is where we part company with the man. In a sense, Russell is probably right. There is a lot of ‘negative news’ – Iraq, mass murder, deficits, subprime, and so forth. But beneath the news is a blind faith in modern, American-led capitalism that borders on delirium. They fret; they worry; they gripe – but perhaps never before have so many people been so positive about money.

When you are really negative and frightened, you do not go further into debt – but Americans have never been so deeply in debt…and they’re still digging!

When you are really negative and frightened, you don’t buy stocks when the Dow is at a record high – but the Dow keeps going up!

When you are really negative and frightened, you don’t pour billions into highly leveraged private equity funds, hedge funds, M&A funds and other speculative investments – but the money is still gushing in.

When you are really negative and frightened, you don’t buy houses at record high prices when the market seems to be headed down – but people are still buying.

House prices are off 1.8% from a year ago, according to yesterday’s report. The head of the National Association of Realtors says ‘the worst is over.’ But we beg to differ – in fact, the subprime time bomb ticking away under Wall Street will prove that the worst is yet to come.

But that’s not what you say when you’re negative and frightened; it’s what you say when a major housing slump has begun…but you’re so fat and sassy you can’t believe it.

When you’re really negative and frightened…you look at the facts and draw the worst possible conclusion: “The housing slump will NEVER end,” you say. “Housing, as an asset class, is dead. Finished. Over. Kaput. People will never again buy houses expecting them to go up in price.” We don’t hear anyone saying that. As far as we know, we’re the only ones who believe it.

No, dear reader, we don’t see people with their heavy shoulders slumped in despair and their heads hung heavily in defeat. Instead, we see them as light on their feet…light hearted…and lightheaded. They open their wallets to every bounder with a story to tell. And look for financial traps…just so they can fall in.

More news:

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Addison Wiggin, reporting from Baltimore…

“Over the past 10 years, The surging Shangai index has encouraged Chinese farmers to swap their tools for trading accounts.

“Consequently, China’s farmland has been scaled back by almost 200%. A study released by Bloomberg yesterday, shows China had 321 million acres of farmland in 1996. And today? About 121 million acres.

“But that’s not all that’s been going up in China.”

To find what else is booming in China, see today’s issue of The 5 Min. Forecast

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And more thoughts…

*** There it is again today…our Crash Alert flag. How lonely it looks…but how charming and dignified, too. We wake up every morning, hoist it up the mast and stand solemnly before it, repeating our anthem.

Hail to our colors – black and blue!

Hail to the skull and crossbones!

Why do we bother? Not because we know a crash is coming this weekend – we know nothing of the sort. And if anyone DOES know when a crash is coming, he doesn’t work here at the Daily Reckoning headquarters.

What we DO know is that there is always risk…everywhere…all the time. And we know that the risk is greatest – and that the profit potential is at its height – just when people least appreciate it.

People talk about risk now…but it’s just talk; they don’t feel it grabbing at their throats. How do we know this? Because if they felt it they wouldn’t be throwing their money around so recklessly.

Where are the real risks today?

China: The market could easily crash…and drag down the rest of the world. (Find out what The Daily Reckoning’s best and brightest minds think about the Asian boom – and possible bust – at this year’s Agora Financial Investment Symposium in Vancouver, July 24-27.

American Consumers: The property slump is probably not over. Americans could run out of money…and out of credit. Then, the great consumer-spending engine would come to a stop.

Commercial and Speculative Credit: The same insouciance that marked the subprime mortgage market now infects the entire capital structure. Look for hedge funds, equity funds, and venture funds to blow up.

“Never have so many made so much money from junk bonds,” says a Bloomberg report, “and that worries Dan Fuss. Fuss, whose $10.7 billion Loomis Sayles Bond Fund has been the best performer among its peers the last 10 years, says high-yield, high-risk securities are showing unmistakable signs of a bubble. Yields are near record lows relative to government securities even though sales of the riskiest bonds increased 39 percent from last year, debt has grown faster than earnings and the economy is expanding at the slowest pace in five years.

“‘I haven’t felt this nervous about a market ever,’ said Fuss.

“‘The downside is likely to be very severe,’ adds Martin Fridson, who led Merrill’s high-yield strategy group until he left in 2003 to start his own firm, said in an interview from his office in New York. Fridson predicts that in the next few years the default rate may reach or surpass the 2002 level, when WorldCom Inc. in Jackson, Mississippi, and Adelphia Communications Corp., then based in Coudersport, Pennsylvania, filed for bankruptcy.”

We’re not nervous. We’re just cautious.

*** What a trooper Damien is. Our intrepid gardener disrupts every stereotype of the French worker. The French are notoriously pampered employees and very picky about labor relations. They insist on taking all the holidays…(tomorrow, for example, is a holiday in France; it is Ascension Day. Every saint, no matter how obscure, is cause for a holiday). Plus they get five weeks of vacation; and employers provide lunch. As a matter of principle, the French don’t let employers push them around. Just ask them to give up their benefits…or do something that is not covered in their union contracts…and they go on strike!

But they often work harder and better than they pretend.

Of course, Damien is an exception in many ways. He is an orphan, now in his 40’s. A simple man, who lives in a very modest little stone house not far from our farm, he nevertheless has a keen interest in Italian opera. And when he entertains, he insists upon doing it properly. So he invites his beer-buddies, and us, over to his house for an elaborate four-course meal.

Damien works half the day for the local government, cutting grass, cleaning gutters, fixing what needs to be fixed. And then, he works a few hours for us – taking care of the farm. But what is amazing about him is that he is ready to do anything, any time.

“I never sleep,” he explains. “I don’t know why. I just don’t sleep. Never have.”

Elizabeth called him and asked if he could come up to Paris to pick up a load of furniture and then deliver it out to Normandy. It was the sort of request that would make most workers hang up the phone. He would have to rent a truck…drive into Paris…organize a complicated set of pick-ups and deliveries…etc. etc. But Damien will do anything. So, he set off at 3 AM and arrived here in Normandy at 7 in the evening…after spending all day driving around.

“Damien…is it you?” we wanted to know.

The man before us was much smaller than the hearty Damien we used to know.

“Yes…I lost 30 pounds. The doctor said I had to go on a diet because my cholesterol is so high. So, I just stopped eating so much.”

We urged him to spend the night here; he must have been exhausted.

“No…I’m going home.”

He unloaded the furniture…and set off again – on a five-hour drive!

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