Wednesday, 9 November 2022 — Albert Park

By James Woodburn Publisher, The Daily Reckoning Australia

[6 min read]

Dear Reader,

It was the mid-2000s when The Daily Reckoning Australia first started writing to investors. And there was one central story of that era…

…a commodity boom of epic proportions…one that was only just taking shape.

Our mission was to explain it and try and help you navigate it. And, hopefully, profit from it in what was an extremely dicey point in the markets.

Our hunch was that the established financial media hadn’t quite grasped the true impact of what was coming.

And that was much, much higher iron ore and metal prices.

These would make many projects commercially viable inside a very short time frame.

And we believe these projects could make you a lot of money, too, if you managed to pick them…and buy shares in them…before the average investor.

‘Take Fortescue [ASX:FMG] as an example’, our founding publisher, Dan Denning reckoned at the time, ‘Although it’s rapidly becoming a very large Australian stock’…

‘High prices for iron ore are making previously un-economic grades of iron ore worth pursuing. The high-grade iron ore of the Pilbara is the hematite. On the surface, hematite is the rust-coloured ore that’s already 70% iron. Just below hematite is magnetite, about 72% iron.

‘The lowest grade iron ore is taconite, which is 30% iron ore and takes some upgrading to be useful in producing steel.

‘We wouldn’t normally indulge in a reading from the book of iron ore. But just as tight global energy supplies have forced more careful analysis of the economics of energy exploration and development projects, so too is the “longer and stronger” resource boom forcing analysts to reconsider what ore bodies can be developed at a profit in the next ten years.

‘This takes a little better understanding of the geology and geography of Western Australia, hence our indulgence.’

The ‘indulgence’ proved to be prophetic.

You know what happened with Fortescue next.

As Dan concluded:

‘This cycle is not an ordinary cycle. It’s not a motorcycle, a unicycle, or a tricycle either. It’s a super cycle! China doesn’t seem to care where the iron ore comes from or how long it took to get there, as long as it gets it.

‘And what that means is that the demand for resources is forcing a fundamental rethink of the economics of resource projects AND the valuations on resource stocks.’

The cycle turned again from around 2012, as cycles tend to do.

My mate Dan handed over the publishing reins and moved on to cover new cycles in new parts of the world. (He’s currently working on a new project with the grand Daily Reckoning originator himself, Bill Bonner.)

As resource prices fell and many resource stocks, especially small caps, fell with them…we moved on to spend the next 10 years reckoning with other things.

Trump. Climate. Cryptos.

Pandemic. War. Wokeness.

Hypocrisy. Cronyism. Government hubris.

Bubbles upon bubbles upon bubbles.

Now, though, we sense a shift once more. Have we come full circle?

A new era of Australian reckoning may be dawning once again.

Same as the very first one.
But also, quite a bit different…

Tomorrow, we launch a new project to investigate this new era.

It involves, once more, a renaissance in our resources sector.

We believe this will be the most important topic for Australian investors to understand and position for, for the rest of this decade. Maybe longer.

More importantly, we believe that there’s an understanding-lag in mainstream investment circles. Just like there was in the early 2000s.

Yes, there’s a general whiff something’s up in the outback again.

Inflation. Supply chain nightmares. Precarious geopolitics. 

The green energy transition. The collapse of tech and a new appreciation of ‘real assets’.

It doesn’t take a genius (or an expert geologist like James Cooper) to see all the key ingredients are in place.

Then there’s what’s happening with certain ASX mining stocks right now.

You may have noticed that some rare earth explorers, in particular, are starting to fire up in a very depressed wider market.

When you look further afield, into 2023, you can see several other things stoking that fire.

For example, the reactivation of China’s property market from the COVID-era, boosting demand for Australia’s coal and iron ore, is one. 

Biden’s US$1 trillion Infrastructure Bill is another. As James Cooper has said:

‘Just think of all the metal needed to rebuild bridges, ports, hospitals, roads, and railways for the world’s largest economy.’

But even all that is just part of a much BIGGER story that’s forming.

This is a story we’re going to start reckoning
with in greater detail, beginning tomorrow

You see, this new boom in resources will be different from the last one.

The last one was built on huge demand from a developing China.

This time, we believe, it will be based on a crushing lack of supply.

Or let me ask the question this way…

What if the Age of Abundance has concluded…

…and a new Age of Scarcity has arrived?

What might that mean for the Australian commodities space? And for Australian investors who understand what’s happening before the crowd?

As you know, we’ve recently welcomed seasoned exploration geologist James Cooper into The Daily Reckoning Australia fold.

We know from correspondence that many of you are already loving his unique inside take on what’s going on in the mining space.

All I can tell you now is you ain’t seen nothin’ yet.

Tomorrow, we start reckoning with James’ Cooper’s‘Age of Scarcity Attack Plan’.

If you’re a bit over this frustrating market. If you sense an opportunity forming. And suspect there are some deep bargains to be had out there right now…then make sure you watch your inbox…

Cheers,

James Woodburn,
Publisher, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

An early dawn on the battlefield. Little by little, you make out the shapes in the distance — the sky, the horizon, the trees…

…then, smaller, less distinct…you see tanks, artillery…and the soldiers who are coming to kill you.

Last week, investors began to see what is headed their way. For most of the year, they’ve been in denial. Stocks go down; they buy the dip. And then, they go down again. But that only brings the same reflex. Their investment strategy was simple. BTFD, they say — ‘Buy the F…ing Dip’.

And so it came to pass that, once more, investors thought they heard the bugles blowing behind them. From Jay Powell:

‘...the committee will “take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”.’

That was all they needed. It was the Fed coming to the rescue! Their blood up…confident that the Fed had their backs…and that this was the dip they were looking for. They went ‘over the top’, charging the enemy with bayonets attached, and giving out their full-throated war-cry — BTFD.

It was then that Chairman Powell let them know: ‘You’re on your own’, he told them:

‘It is very premature to be thinking about pausing. People when they hear “lags” think about a pause. It is very premature, in my view, to think about or be talking about pausing our rate hikes. We have a ways to go.’

Three of these things

The next three hours were the worst for a ‘Fed day’ (when the Fed makes its interest rate announcement) in history — especially for investors in the tech-heavy Nasdaq.

And who can blame them? The only world they have known was remarkably prosperous…forgiving and safe. It was a world — roughly from 1980–2022 — that was marked by three extraordinary things.

First, the Chinese were giving us the cheapest labour ever.

Second, capitalists and innovators were giving us the cheapest energy ever.

Third, the Fed was giving us the cheapest credit in history.

It was those three things, and not the genius of the Fed jefes, nor the wizards of Silicon Valley, nor the know-it-alls in the White House that gave us 36,000 on the Dow, the ‘goldilocks economy’, and the ‘great moderation’ of the pre-2022 economy.

And now, things have changed so fundamentally that investors are forced to ask questions. ‘Where are we?’ they want to know. 

Here, the question mark is our most treasured punctuation. We use it on everything, like duct tape or WD-40. We keep them in the back of the truck, along with the spare tire, the jack, and the bottle of whiskey; we never know when we might need them.

Typically, question marks disappear when things go well. But when the fender falls off, you get out the duct tape.

How come productivity is falling? Why hasn’t this ‘transitory’ inflation transited? What the Hell was White House Press Secretary Karine Jean-Pierre trying to say?

Investors long for the good ol’ days. They keep waiting, hoping, dreaming of a Fed pivot. Each time, they bid up stocks…hoping that things will get ‘back to normal’ tootsweet. And each time, our old classmate, Chairman Powell, who must keep a photo of Paul Volcker on his desk, proves them wrong.

Mr Powell meets Mr Market

But a whole generation of Americans have never known ‘normal’. And now that the curiously beneficent conditions of the last few decades have deserted them, the new normal is terrifying.

As to the cheap labour, China is running out of it. The rush of some 500 million peasants into a modernising, industrial economy was a ‘one off’ event. There aren’t many peasants left; those that still live in Chinese villages are needed on the farms. Chinese labour is no longer dirt cheap. And the feds are working hard to discourage trade with China, anyway. Mr Trump limited imports from China. Mr Biden kept his tariffs in place.

Energy isn’t so cheap anymore either. Typically, oil prices go down when the dollar goes up. But today, the dollar is at a 20-year high…while oil is more than US$86 a barrel — up from less than US$20 in 2020.

Nor is oil or gas likely to get much cheaper. Practically, every major government in the Western world has threatened to put the producers out of business, while actively subsidising their competition. The price of gasoline is already inching back up. And gas heating bills this winter are expected to be about 30% higher than last year.

And interest rates? For the moment, the Fed is raising them (making credit more expensive). Mr Market is raising them too; he’s got to protect himself from inflation. Mortgage rates, for example, topped 7% last week. Between the two of them — Mr Powell and Mr Market — the price of credit is going up.

And for better or for worse, the world of 1980–2022 is dead.

Regards,

Bill Bonner,
For The Daily Reckoning Australia