By David Forest, editor, Strategic Investor
Things are tight in the chip market right now.
There are shocking reports from carmakers. In Michigan, “phantom” Ford Broncos have reportedly choked parking lots in recent months.
The Broncos can’t be driven. They can’t be sold.
They’re missing the chips they need to work.
It’s unbelievable that an entire car gets built – then can’t go anywhere because it’s missing one tiny part. But that’s the way the chip market works. Chips enable almost everything we use on Earth today.
Many carmakers slashed production recently. They want to avoid Ford’s problem. No one wants a lot full of phantom vehicles sitting around.
The Problem Is Getting Worse
Last week, a massive earthquake struck Japan. The 7.4 quake rocked the country’s northeastern coast.
That’s an important region for chips. It’s home to memory maker Kioxia’s K1 chip manufacturing plant.
Reports suggest big impacts on production at the K1 plant. That’s critical. This plant produces about 8% of Kioxia’s total chip output.
This couldn’t come at a worse time. The world’s already struggling to find chips anywhere it can. Now, the supply’s dwindling more.
The results of the quake and the K1 shutdown tell us some important things. We could be headed for a worse bout of inflation than anything we’ve seen so far.
That’s because of how the chip market works. Chips are increasingly traded like commodities. When supply goes down, the price goes up – and there isn’t much buyers can do about it.
That’s weird for consumer goods. Usually, there isn’t much room to increase prices. If producers hike rates, buyers disappear.
But that’s during good times. Normally, buyers wait for more supply to come. They figure with higher prices someone will produce more.
Usually that’s the case. We’ve gotten good at setting up manufacturing. We’re able to ramp up supply of most things, if the price is right.
Chips, however, are a different story. It’s tough to build a chip factory. You need exacting equipment and testing. It takes years to get a facility up and going.
That makes it almost impossible to flip a switch and grow supply. We’re stuck with what we’ve got – just like with commodities like oil, gold, or lithium.
The result is rampant chip inflation. Here’s how one insider source put it recently:
Disruptions to the supply can boost revenue and even profit for some [chip] companies – as customers bear the brunt of the costs.
That’s right. The shortage can be profitable for chip producers. They might produce less… but the price per chip goes up dramatically.
This is dangerous ground. If chipmakers get comfortable with higher prices, they will have no drive to make more. They can sit back and make easy money.
There just isn’t any competition. No one can eat the chipmakers’ profits by starting up chip production to undercut the big boys’ rates. The barrier to entry is too high.
That’s what makes last week’s Japanese quake so worrying. We’ve already lost a huge amount of chip supply. How long until a straw breaks the camel’s back? Until prices soar to damaging levels?
When that happens, everything gets expensive. Car prices are already soaring, up 40% according to some estimates. When car chips explode in price, that gets worse.
Phones, laptops, even medical equipment, it all shoots up when chip prices soar. Nearly every aspect of daily life inflates. All at a time when few Americans can afford to pay more.
What Should the Average Investor Do?
You could wait, hoping chip supply comes back. But what if it doesn’t? If prices stay high, producers might just make fewer and charge more.
This is one more reason to start building an inflation-proof portfolio. We’re under threat from all sides – rising energy prices, supply chain shortages, and now a looming problem for the electronic basics of modern life.
Fortunately, there is an answer. Chip makers themselves are becoming a great “inflation-proof” investment. They can charge what they want… As prices rise, so do their profits.
I’ve laid out a strategy for investing in chips and other inflation-sheltered investments. I urge you to take a look now. The warning signs are flashing.
Don’t wait until your savings are decimated.
Keep walking the path,
Editor, Strategic Investor