 | | The Daily Reckoning | Wednesday, September 15, 2010 |
- History's anti-dollar hedge rockets to a new nominal high,
- Four of the five lowest-cost plants in the world...and they're not in China,
- Plus, Bill Bonner on gold's record, hyperinflation on the horizon and the roads to Paris...
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|  | | | When Precious Metals Turns to Bubbles | | Thoughts on Recent Market Trends and Gold's All-Time High | |  | | Joel Bowman |
Reporting from Buenos Aires, Argentina...
What a wonderful time to be on the South American continent!
The cafés are filling up again after the early week slumber. The sun is back, peering through the clouds and pushing back against the stubborn winter chill. Songbirds in the courtyards sing a merry tune, oblivious as to whether the country around which they fly is destined to succeed despite its government's best efforts, or to fail because of them. Argentina's flamboyant capital comes alive late at night and late in the week. And spring is just around the corner...
In entirely unrelated news, stocks in the US went just about nowhere yesterday. Not so for gold, however, which scooted to a new nominal record. History's anti-dollar hedge is still only about halfway to its "real" record - adjusted for inflation, that is - but it's a start.
"Why now?" is the first question that might pop into a gold bug's mind. After all, the underlying market realities upon which gold buyers place their bets hasn't changed one iota; the west is still accruing debt faster than it can sell it; currency abusers at the world's central banks haven't budged from their inflationista tendencies (and, if anything, look set to soon redouble their efforts); and the stock market bounce, posing as it did for a short while as "genuine recovery," appears to be coming apart at the seams.
Why then should gold be shooting for the moon only now? And, if a lunar landing is on ol' Midas' medium-term "to-do" list, is there still time to buy?
Your editor has no firm answers to these questions, Fellow Reckoner...but we do have hunches, suspicions and two eyes wide open.
Market trends, for one thing, do not change overnight. It takes time for them to unfold and broken egos to nourish their metamorphosis. Fortunately for Mr. Market, he has nothing if not the length of days and the arrogance of man on which to feast.
Long time readers know the story already and may wish to skip ahead a couple of paragraphs, but for those unfamiliar with our oft-repeated themes, a quick macro recap...
For the better part of the last half-century, the world, particularly the western, "developed" hemisphere, embarked on a debt-financed party cruise. It was "full steam ahead" as credit expanded, the economy "grew," and consumers came to see the trappings of a sophisticated lifestyle as their God-given right. Pretty soon, everyone had a plasma television on their wall and a shiny new ride in their driveway. Folks came to measure their wealth by the thread count of their sheets rather than dollar amount in their banks. In other words, "stuff" came to replace savings, and the delusion of wealth - borrowed from today's foreigners and tomorrow's Americans - came to replace actual wealth.
By the time the ship hit the great iceberg of '07, welfare costs in both the private and public sectors had grown to such gargantuan levels that spaces for extra digits had to be added to calculators.
At the private level, companies like General Motors and Ford found themselves crippled by union-won legacy costs. In the days following the collapse of Lehman Bros., these giants of yore found for themselves new homes on the penny listings and in the arms of a mollycoddling, welfare-prone government. But this weight was nothing compared to the load with which the state had saddled itself.
What began as President Hoover's "a chicken in every pot and a car in every garage" had, over the course of the century, grotesquely morphed into "a non-worker for every house and an SUV for every non-worker." The terrible twins of mortgage lending, Fannie Mae and Freddie Mac, had, with governmental carte blanche, driven the cost of borrowing down and the price of homes to all time records. Sallie Mae, as Eric explained on Monday, did likewise for the education sector, sending the cost of obtaining a tertiary qualification higher even than the aspirations of the starry-eyed students in attendance.
Having gorged itself on the borrowed earnings of others for over five decades, it is little wonder that an overstretched, underfunded economic system should begin collapsing beneath the burden of its own obligations. Smaller wonder still is the fact that a handful of long- view investors should seek refuge from the inevitable fallout by purchasing the only investible currency that is, by its very nature, free of any such onerous obligation.
But at yesterday's nominal record of just over $1,270 per ounce, surely gold is approaching bubble levels, right?
Maybe...but probably not. As Adrian Ash, former correspondent for The Daily Reckoning'sLondon office and now head of research for the indispensible BullionVault (click here to lean more), puts it, "No one's obligation and no one's liability, gold owned outright is quite literally the opposite of debt."
"Gold from here is a speculation," Adrian wrote in these very pages last week, "but a speculation only on academics getting their inside man (whether Mervyn King in London or Ben Bernanke in Washington) to apply their latest hare-brained scheme - massive new money inflation."
More on gold's recent breakout and the brewing distrust in the bond market from Bill, below, but first, here's Chris Mayer with today's column...
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| | The Daily Reckoning Presents | | America Still Makes Stuff | |  | | Chris Mayer |
"This has always been a nation of builders. Craftsmen. Men and women for whom straight stitches and clean welds were matters of personal pride. They made the skyscrapers and the cotton gins. Colt revolvers. Jeep 4x4s... This was once a country where people made things. Beautiful things. And so it is again." - A commercial for the Jeep Grand Cherokee
It's a common lament to say that US manufacturing is in decline. It's received wisdom that the US doesn't make anything anymore. In fact, I myself have repeated it.
I am here to correct the error of my ways and to dispel this common myth. And I'm going to tell you about a company with four of the five lowest-cost plants in the world in its industry. These plants are not in China or India. They are in the US.
In truth, there is a lot of stuff made in the US, which is still a mighty giant in manufacturing.
The broom sweeping away the old cobwebs is research from a group called Turner Investment Partners. This is a firm out of Berwyn, Pa. It manages $18 billion. Turner put together the eye-opening report called, US Manufacturing: Still the One.
"The US remains the world's leading manufacturer, by far," the authors write. "Indeed, if the US manufacturing industry were a national economy, it would be the eighth largest in the world, worth $1.6 trillion." All by itself, the US is 22% of global manufacturing. As an exporter, it ranks third behind only China and Germany, with an 8% market share.
That is a pretty big blow to the idea that the US doesn't make anything anymore. But how can this be? We all see the same headlines, such as the big failure of US autoworkers. We see the "Made in China" label slapped on nearly everything. We know Japan makes all kinds of electronics that the US no longer makes. We hear about companies moving plants overseas.
This is where things get more interesting.
Since 1983, manufacturing output in the US has more than doubled. (This, in inflation-adjusted dollars, by the way, makes the feat all the more impressive.) But it did so with about 26% fewer workers. As a result, 50 years ago, about 28% of all workers got their paycheck from manufacturing. Today, only 8% of the work force does.
That work force, though, is very productive. It's doing a lot more with less. As Turner reports, "US manufacturing workers...are the most productive - 50% more productive than workers in the 11 next-best nations."
So it's like the headlines about shark attacks that were common some summers ago. The headlines made it seem as if shark attacks were more common than they were. The public failures of big manufacturers and the headline-grabbing job losses have obscured the real story.
The real story is that the services sector has grown much faster than manufacturing. So when you look at manufacturing's share of the US economy, it has fallen from 28% in 1953 to only 12% today.
We may weep over the fact that the US economy is so service-driven, but that's not the same as saying that US manufacturing is in decline. The US is still the world's largest manufacturer.
The nature of that manufacturing base is also changing. One way is that the companies populating the forest now tend to be smaller. There are fewer giants. "According to the Cato Institute, for every one US manufacturing industry that's suffering a decline in revenue and profits, two US industries - led by small companies - are growing"
The above are just some highlights from Turner's report. My main goal here is to leave you with a different perception of American manufacturers. They are not like dinosaurs on their way to extinction. In fact, some of them are great investments.
We've talked a lot about the expanding global middle class. It seems clear to me that people will use a lot more consumer products, such as cell phones, computers and TVs. As investors, though, it can be tricky to figure out which cell phones or computers. There are a lot of competitors. Sometimes it's easier betting on the underlying commodity that they all rely on.
Silicon metal is one such commodity. You find it in all kinds of consumer goods. It's a metal, like steel, that people make. The basic recipe for making silicon metal is 2.8 tons of quartz, 1.4 tons of coal plus 2.4 tons of wood chips. Put it all together in a fiery furnace and you get one ton of silicon metal. It's not just as simple as this, but those are the basics.
If you know about silicon metal at all, maybe you've heard about its use in solar cells. This is the fastest growing use of silicon. The Norwegian Institute of Technology projects that solar cell usage alone will surpass all other applications combined by 2020! Just in the next three years, demand could double. If this pans out, we'll make a fortune.
Steel and aluminum makers also use silicon metal. A big driver of silicon use in recent years has been the increased use of the metal in aluminum in cars to make them more fuel-efficient. Over the last 30 years, the aluminum content in a typical car rose from 77 pounds to 326 pounds. Silicon also finds its way in numerous coatings, resins, rubbers and oils. You find it in shampoos and toothpaste. It's really a workhorse metal. And in many applications, there is no substitute.
Fortunately, there is a great way to invest in silicon metal. The company is Globe Specialty Metals (NASDAQ:GSM). You can make a lot of money in specialty metals when you buy them right - as our experience with titanium shows. The key is that you have to buy the stocks when the metal prices are cheap and when the stocks are below replacement costs. You want a great balance sheet and a company that makes money even in bad times, as TIE did. Globe sets up in a similar way. Let's take a look.
Globe is certainly global, with nine facilities - four in the US, two in Argentina, one in Poland and one in China. Most importantly, the four US plants are among the five lowest-cost producers of silicon metal in the world. I always like investing in the low-cost producers. I sleep better at night knowing my guy makes money even in bad times. Globe is also a sizable player in this field, with about 7-8% of the world's capacity.
Globe sells to a broad base of users. Globe's customers are diverse, but two biggies are Owens Corning and Wacker. These two chemical companies make up about 10% of sales each.
Globe is trading for around $12.60 per share as I write. The replacement value - or the cost to build these assets - is at least $22 per share. The cost to build a single furnace is about $100 million. And it also takes about three-five years. Globe has 17 such furnaces. That's a replacement value of $1.7 billion. There are 78.3 million shares (including 4 million in options). Do the math and you get $22 per share. This does not include any value for Globe's net cash ($2.20 per share), quartz mines, forestry reserves - for the wood chips - or its stakes in joint ventures and hydropower facilities.
Beyond this, Globe is cheap on the potential cash flow it can generate. If silicon prices stay where they are, Globe could easily earn over $1 per share after-tax free cash flow next year. If prices for silicon rise, Globe's earnings climb big-time. Silicon metal prices are low, which is why the replacement values are so large compared to the stock price. It doesn't make sense to build a new plant at current prices. So as demand grows and supply sits, prices will rise.
Just so you can get a sense for the upside here, I'll quote Meryl Witmer, of Eagle Capital, on Globe, from an interview with Barron's:
Silicon-metal prices would need to get to at least $2.20 to make it worth adding capacity [for the industry]. If the metal sells for $2 a pound, GSM would be able to earn north of $3 a share... Prices should get to $2 sometime in the next few years, assuming there is growth in the world economies. Our near-term price target for GSM is $15-$17 a share, but our longer-term target is $35. I think she has it exactly right - and $35 is a near triple from here.
Be patient here, as stocks like this can be quite volatile. (This isn't Proctor & Gamble.) Buy a little now and average in.
Regards,
Chris Mayer,
for The Daily Reckoning
Joel's Note: In case you missed it above, our offer to grab 8 of Chris' best plays on China's emerging middle class expires tomorrow night, right after he issues his new buy recommendation. In short, you get his 8 specific stock tips, plus a full month to try his premium research service, Mayer's Special Situations, all for one dollar. But you'll want to be quick. After tomorrow, this offer closes and the price shoots back up to the regular $995 per year. You can find the details here.
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| | | | Bill Bonner | | Hyperinflation and Unemployment Two Signs of Serious Trouble | |  | | Bill Bonner |
Reckoning from Paris, France...
No time to write a short Daily Reckoning today... So we wrote a long one...
"Mother of a whorehouse of sh**!"
"Ah... What an a******! This morning is sh****."
Our taxi driver was breaking down. The main road into Paris was blocked. Even at 6 AM, there was a traffic jam. Nothing moved.
Except our cab. After addressing himself vigorously and colorfully to no one in particular, he took matters into his own hands. With a few more expletives, he pushed his way onto the shoulder...and excited from the freeway. The next hour and a half were spent in more jam-ups, more cussing, and some death-defying highway stunts.
"I don't know how this city stays alive. Who would want to work or do business here? You can't get anywhere. This is unusual. But everyday there's a traffic jam. And I always seem to find it.
"Whore of sh**!"
We finally arrived at our office...at 8 AM.
Checking the news... The big news from yesterday was the rise in the price of gold. It went up $24 to a new all-time high. The stock market was just about flat.
What does it mean?
Well, the dollar is going down, for one thing. Bonds too. Has the long- awaited turnaround in the bond market finally begun? We don't know. We really didn't expect it so soon.
John Williams, who keeps track of what is really going on in the economy at his "ShadowStats" outfit, says to expect hyperinflation within 6 to 9 months.
Seems too early to us.
But a major turn in the bond market...and much higher inflation rates...are coming. And you don't want to be holding US bonds...or muni bonds...or any kind of bonds when they arrive.
What then?
Cash and gold. Those are the only reasonably safe positions now. Your gold will go up. Your cash will go down. You'll come out even. That will be a lot better than most people.
One thing John Williams is probably right about is that when it comes, it probably won't be led by a gradual, orderly increase in consumer prices. We're still in a de-leveraging cycle - with plenty of spare capacity and little excess purchasing power. Which means, normal demand will not push up prices.
Take the labor market, for example. There are millions of idle hands available... Labor is a big part of business costs. Until unemployment goes down and employees have some bargaining power, there shouldn't be any inflation coming from that front.
This will be a different kind of inflation...much more violent and dangerous. Prices will shoot up suddenly, quickly - as people lose confidence in the dollar. It will not be gradual, but shocking...turbulent...unexpected. Gold will hit $1,500...then, $2,000 just a few weeks later.
This hyperinflation, along with high, long-term unemployment rates, will set the stage for serious trouble.
Unemployment peaked out in the recession of the early '80s with the average jobless person out of work for a little more than 20 weeks. Today, the average jobless person is out of work for more than 35 weeks. We haven't seen anything like this since the Great Depression.
But our message today is that this is actually worse than in the Great Depression.
In the words of Dominique Strauss Kahn, who heads the IMF:
"We are not safe."
What haunts DSK, as he is known in France, is the French Revolution. People like DSK lost not only their jobs...but their heads.
Here's the report from The Telegraph:
"The labour market is in dire straits. The Great Recession has left behind a waste land of unemployment," said Dominique Strauss-Kahn, the IMF's chief, at an Oslo jobs summit with the International Labour Federation (ILO).
He said a double-dip recession remains unlikely but stressed that the world has not yet escaped a deeper social crisis. He called it a grave error to think the West was safe again after teetering so close to the abyss last year. "We are not safe," he said.
A joint IMF-ILO report said 30m jobs had been lost since the crisis, three quarters in richer economies. Global unemployment has reached 210m. "The Great Recession has left gaping wounds. High and long- lasting unemployment represents a risk to the stability of existing democracies," it said.
The study cited evidence that victims of recession in their early twenties suffer lifetime damage and lose faith in public institutions. A new twist is an apparent decline in the "employment intensity of growth" as rebounding output requires fewer extra workers. As such, it may be hard to re-absorb those laid off even if recovery gathers pace. The world must create 45m jobs a year for the next decade just to tread water.
Olivier Blanchard, the IMF's chief economist, said the percentage of workers laid off for long stints has been rising with each downturn for decades but the figures have surged this time.
"Long-term unemployment is alarmingly high: in the US, half the unemployed have been out of work for over six months, something we have not seen since the Great Depression," he said. And more thoughts...
We listen to CNN in Spanish on the radio while driving to work. If we listen to it long enough, we figure, maybe we'll understand what they're talking about.
On the radio Friday was an interview with Carmen Reinhardt. We didn't know she was a Spanish speaker. She wrote, along with Ken Rogoff, the book on sovereign bankruptcies.
"What should be done?" came the inevitable question.
"Well, I am actually in favor of stimulus," said the University of Maryland economist. "But the real problem is confidence. You can't stimulate effectively unless you also address long term, structural problems. Deficits need to be brought down. Investors need to see a good plan. Otherwise, the stimulus efforts will just lead to bubbles and more debt."
*** Cut the deficits? Not in Zombie Nation.
As we mentioned last week, zombies took over the nation in 2008, with the election of Barack Obama. He was the zombie candidate.
Now comes word, from The Washington Post, that there's been a sharp rise in disability filings at the Social Security Administration. People who were perfectly capable of doing their work before the financial crisis hit in '07 have been thrown onto the unemployment roles. Desperate for income, they find they have not just lost their jobs. They've been disabled.
That gives them a way to get money from the taxpayer even after their unemployment benefits have run out. They become not just temporary zombies, in other words, but permanent ones.
The trouble with zombies is that they're expensive to maintain...and inherently dangerous. Which is to say, the welfare state works fine as long as there's enough money to keep the zombies happy. But when you get too many zombies...and not enough money to feed them properly...you're in danger. Well, the welfare state itself is in danger.
Imagine. More than 200 million zombies. If each one ate two eggs a day it would take 400 million chickens to keep the zombies supplied.
"But wait...hold on there, Bill...you're not seriously saying that every unemployed person is a zombie. Many people lose jobs through no fault of their own. They live on savings...then go back to work. That is hardly the mark of a zombie."
Yes, of course...Mr. Compassion and Sensibility...
Don't get us wrong. We love zombies. Some of our best friends are zombies...and a lot of our relatives! Heck, we might be one too if they paid us better.
We're not saying that everyone who loses his job becomes a zombie. But that's what makes this Great Correction actually worse than the Great Depression of the '30s. There were fewer zombie supports back then. So people HAD to work. And they did. They worked on farms. And then, when the war started, they worked in factories.
The point is, they couldn't become zombies because - even with all Roosevelt's efforts to create a zombie economy - there just wasn't enough money to support them.
This is, of course, why there are so few zombies in the emerging markets too. Not that there aren't a lot of people who would like to zombies...and they'll get their turn!...but right now, the emerging markets are still too poor to be able to afford a large class of leeches.
In the '30s in America, as in most of the emerging economies today, people had to work. They might have worked cheap. They might have done work they didn't want to do. They might have had bad backs and weak knees...but they went to work anyway. They couldn't afford to be disabled.
If you go to China or Vietnam or one of the industrious emerging markets...you won't even see people sit down. They don't have time.
Work...work...work...work for wages...work for relatives...work for food...work for fun...
..it's what you do, when you have no choice.
Regards,
Bill Bonner
for The Daily Reckoning |
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