Is "Peak Semi" a Genuine Phenomenon?
Understanding the Concept of Peak Oil
Around 2007, the concept of peak oil was a significant topic of discussion, especially as oil prices skyrocketed. The theory suggested that all the easily accessible oil had been extracted, and oil production was on the verge of a decline. This situation was expected to result in perpetually high oil prices.
However, the principles of economics and finance propose that high prices will attract capital and innovation, leading to increased supply. This is precisely what transpired with the US shale revolution, which transformed the US into an energy exporter and flooded the market with oil.
Are Semiconductors and Oil Similar?
The most effective shorts are cyclical businesses that people perceive as secular stories. These businesses just need prices to rise high enough to attract competition. Semiconductors and oil appear to share many similarities in this regard. They are both essential for economic growth, but they require occasional periods of high prices to incentivize supply and capital investment.
In recent years, the pricing of semiconductors has surged. Initially, it was expected that this surge would be followed by a period of decline, similar to what happened from 2002 to 2011. However, the situation seems to be different now.
The Surge in Semiconductor Pricing
The recent surge in semiconductor pricing was initially attributed to the US effectively crippling the Chinese semiconductor industry. Given the innovative and competitive nature of the semiconductor industry, it was expected that the surging prices would soon plummet, as they did in 2001.
However, recent reports suggest that the semiconductor industry is not evolving as it used to. Unlike oil, there has been no breakthrough technology in the semiconductor industry, which has been operating at peak semi since 2010.
Contrasting the Semiconductor and Oil Industries
In stark contrast to the oil industry, the semiconductor sector has been thriving. There have been discussions about potential technological breakthroughs, such as switching from silicone to nano carbon or quantum computing, but nothing substantial has materialized yet.
If the concept of peak semi is accurate, and artificial intelligence (AI) continues to evolve, semiconductors will likely continue to perform well, barring a recession. Like the peak oil scenario, the semiconductor industry requires new technology to increase capacity. Despite considerable investment, no transformative breakthrough has occurred yet.
AI and Power Usage
One intriguing aspect of "peak semi" is that AI is driving increased power usage. The performance of US utilities, especially those focused on nuclear power, indicates that a connection between computing and power prices is starting to form.
Can AI Influence Power Prices?
There is a possibility that surging investment into AI could eventually cause power prices to rise significantly, forcing central bankers to implement much tighter interest rate policies. However, this is still uncertain.
What has been learned is that if the best shorts are cyclical stocks that people believe are secular growth stocks, then the opposite is also true - cyclical stocks that transform into secular growth stocks are the best longs. Currently, Nvidia and semiconductors seem to fit this description, and perhaps utilities as well.
Bottom Line
The concept of "peak semi" presents an interesting perspective on the semiconductor industry and its potential future. It raises questions about the industry's capacity for innovation and its connection to power prices. What are your thoughts on this topic? Do you think the semiconductor industry is at its peak, or is there room for further growth and innovation? Share this article with your friends and hear their thoughts. Don't forget to sign up for the Daily Briefing, which is delivered every day at 6pm.
