Monday, 21 March 2022 — Albert Park

By Callum Newman Editor, The Daily Reckoning Australia

[9 min read]

• Something doesn’t square, but we’re profiting from it
• Prepare — don’t predict

Dear Reader,

1) Looky here, iron ore is back to US$150 a tonne. Perhaps you’re thinking what I am? Something doesn’t square here.

On one hand, we’re told that the Chinese property market is teetering on a precipice. On the other, iron ore is up 75% since the low it hit late last year.

And it’s looked solid throughout the wild swings of 2022. 

Chinese property makes up 42% of Chinese steel demand. If they’re not building houses, where is all this steel going?

Your guess is as good as mine. Perhaps all they need to do is ship it to Europe.

Look at the parabolic rise in EU steel prices below:

You can peg the recent lurch up on the EU decision to ban Russian steel and iron ore.

Hmm.

There is a kind of madness to this.

The EU is hurting its domestic market by pushing up steel costs. Think of its auto industry alone!

But the overall effect on Russia is unclear.

Why? Oil and gas are not included in the sanctions.

Therefore, Russian energy revenue is booming. You can see that here:

I’ll leave the policymaking to those more qualified than I.

As far as you and I are concerned, all we need to note is this commodity boom is driving huge revenue through firms like BHP, South32, and Rio Tinto.

This could drive the Aussie market into new highs the longer it continues.

The Australian delved into BHP specifically over the weekend.

What do we see?

They say if iron ore and coking coal stay at current spot prices, BHP could see its earnings rise 75% next financial year. That’s not all, either.

The recent lift in oil has taken the value of the petroleum demerger with Woodside up by $8 billion.

Altogether, the next BHP dividend due in September could be another doozy.

Don’t be blasé about this, though. I remember a similar scenario in 2021 before iron ore tanked last year. BHP shares got whacked 30%.

Like so much right now, it all depends on the war in Ukraine. A peace deal would likely see some slack come back into the system and, therefore, prices.

For now, Australian miners are minting a fortune. This gives a solid base to the market to build from if this rally can keep going.

2) The above is an example of how difficult it can be to predict the market.

After all, when iron ore tanked last year, who on Earth could predict that a war between Russia and Ukraine would knock two iron ore exporters out of the market?

Certainly not me. That’s why a good trader and investor will rely less on prediction and more on preparation.

In late 2021, it was enough to know which stocks might benefit if — in this case — iron ore rallied up again.

That allowed you to jump on to BHP and Rio at cheaper prices than they are today. I spilled a bit of ink in The Daily Reckoning Australia, trying to highlight that opportunity.

In October last year, I also recommended Rio Tinto for readers of Cycles, Trends and Forecasts. They’ve got a decent capital gain so far (17%) and a juicy dividend ($6 per share) coming in April. 

But the sheer size of BHP and Rio means there is only so far they can run before they become fully priced.

The small-cap end of the market gives you a much longer runway. Of course, this longer runway adds a lot more risk because of the huge volatility swings.

It’s a tricky space to navigate, that’s for sure.

Gold expert Brian Chu does a pretty good job at navigating the smaller end of the gold market. If you’re interested in being a little more speculative in your commodity investing, check out his service Rock Stock Insider here.

Best wishes,

Callum Newman,
Editor, The Daily Reckoning Australia

PS: Keen to invest or trade? You need money for that! It’s hard to bank lots of cash relying on wages alone.

History shows most self-made men and women got that way owning their own business.

In my podcast tomorrow, I reveal my favourite book on this topic. You then hear from Stewart Bracken.

He’s a buddy of mine who grew a business over 10 years before a multimillion-dollar exit. Now he advises and invests in start-ups. Tune in tomorrow to discover if a business is for you...

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

Today, we leave the world of comedy and fantasy to look at real life. On Sunday, we went to visit the widow of a farmhand. Carlos drowned in a reservoir. We came to pay our respects…and find out more.

But first, let’s check the headlines. Here’s the latest from Bloomberg: ‘US Rent Inflation Hits New High, Led by Miami, with 39% Rate’.

Another ‘Putin Price Hike!’

But don’t worry about it. The Fed is on the case. Bloomberg again: ‘Fed Kicks off Most Aggressive Rate Tightening in Decades’.

As expected, the Fed raised its inflation-adjusted key rate from around MINUS 7.7% to around MINUS 7.5%. And the plan is to keep raising it until it reaches MINUS 5% by the end of next year.

That ought to stop the Putin Price Hikes, right?

The Fed chief also assured the world that the US is not going into recession:

‘The American economy is very strong and well positioned to handle tighter monetary policy’, said he.

Tighter? At the present rate, even by the end of 2023, the Fed will still be operating an extremely inflationary money policy.

Meanwhile, in the real world…

Alicia’s lip quivered when we greeted her. Then, tears appeared in her eyes, running down her cheeks.

The widow had two children at her side. One, a boy of about 12, kept his head down. The girl, maybe six or seven, didn’t seem to understand what had happened. She looked at us expectantly as if we could explain it to her.

‘Your father was a good man’, we told them. ‘He was a good worker. And very strong. He helped me build that little casita.’

We pointed to a house in the distance, which we built 10 years ago and now graces the labels for our Tacana wine. Carlos was on that job, part of the crew. It was hard work under the intense sun and, for us, with little air. We weren’t used to the altitude. But Carlos lived here all his life; if it was hard work, he didn’t notice. He had a ready smile and, often, a puzzled look. We assumed it was because he couldn’t understand what we were talking about. Our Spanish was even poorer then than it is today. And in this part of Argentina, they speak a local idiom; even people from Buenos Aires have a hard time keeping up.

‘He was very strong. He was able to lift big stones that I couldn’t lift myself. I will miss him.’

That was about all we knew about Carlos. Since we worked on the little house together, we hadn’t seen much of him.

He was probably about 37 years old. Well-built and good-looking. But the salient fact about him is that he was found under the water in our new reservoir two weeks ago.

It is very rare for someone to drown in this area; there is very little water to drown in.

‘I waited for him on Saturday night’, Alicia explained. ‘He never came home. The next day, I took the kids up the river. We found him in the reservoir. It was horrible. What am I going to do?’

We tried to comfort her with small gestures and sympathetic tears. But Alicia had practical things on her mind.

‘I hope you will give me a widow’s pension’, she said, briefly restraining the tears and raising her head.

‘We will make sure you and the children are taken care of’, we replied. ‘It is the least we can do for one of our good men.’

We were standing in front of the house where Carlos and Alicia lived. Built of mud bricks, Carlos had been adding to it. He had worked as a mason and was making a substantial addition. This was slightly odd, because the house didn’t belong to him, but to us. As far as we know, he had never asked permission to add onto it.

Of course, we would have said ‘yes’, but Alicia had turned him in a different direction. She calls herself an ‘originaria’, a person who doesn’t have to ask permission, because of her indigenous status. She told the police that Carlos was an originario, too, though he had never made that clear to anyone else.

The ‘originario’ idea has brought conflict to the valley. It causes family break-ups, distrust, and disrespect. Gates have been broken; houses have been occupied. Two of our remote cabins — used by us and the originarios themselves — were set on fire.

Faux tribalism

Except for maybe 10% of the population of pure European descent, everyone else is a mestizo…a mixture. In terms of culture, place of origin, tradition, and genetic make-up, they are all about the same people. Alicia is one of them.

But when the legislature in far-off Buenos Aires gave special status to ‘indigenous people’ who lived in a ‘traditional way’ on long-held ‘tribal’ land, some people recognised a good hustle when they saw one.

Where we live, there are no real ‘indigenous’ people. The valley was cleared out three centuries ago. Since then, the area has evolved, but the basic economy has remained much the same. Europeans bring in money and technology to try to make the big farms pay (usually, they fail). The ‘local people’, who trickled in from other areas, work for them or own their own small farms.

But along came an opportunist from another province. He reinvented a tribe — the Diaguita — and made himself its chief. He then told the locals that if they said they were members of the tribe, they wouldn’t have to obey the laws of Argentina...they could reclaim their ancestral land…and they’d get money from the government. Since then, little money has been forthcoming, but enough to keep the activists in business. Alicia’s brother is one of them. He and she look to us to pay the salaries, fix the roads, put in irrigation canals, bring in tractors and other equipment…

…and to give the widows a pension.

But she nevertheless believes that she is the rightful owner of the land. Diaguita lives matter. Others, not so much.

It is a familiar conflict. Some expect to get what is coming to them by their own efforts — generally, providing goods and services to others. And some look to their tribal connections, race, colour, family, party affiliation, politics, ideology, or religion for their identity…their sense of worth…and their income. Some are proud of what they do; in other words, others are proud of who they are. The former hope to get what they are after by giving to others; the latter believe their status confers special rights and benefits.

This is the fundamental difference between civilisation and barbarism…between a command economy and capitalism…and between the Old Testament and the New one. In the Old Testament, for example, being a Jew is the name of the game. In the New Testament, we are told that just being a Jew or a Gentile is not enough. It is our acts (love thy neighbour!) that count.

Likewise, in the modern world, achievements — providing oil, inventing the laptop computer, teaching children, flipping burgers, investing shrewdly — lead to self-esteem and wealth. 

But some people insist that they are entitled to special treatment….

The final scene

We expressed our sympathy to Alicia. We promised to help. And then, after hugs and kisses, we took our leave and headed up the valley.

We wanted to see how Carlos died.

‘Very strange’, a neighbour had commented. ‘He lived here all his life. He knew that reservoir. It is not possible that he fell in and drowned. There is one end where the water is deep. But most of it is only about 4 or 5 feet deep.’

‘The whole thing just doesn’t add up.’

We drove up the rough road to where we could go no further. The river was too high to cross. Taking off our shoes and rolling up our pants, we waded across. The water rushed by fast and cold, we had to hold onto each other to avoid falling in.

The reservoir was just in front of us, up a hill. It is surrounded by a wire fence to keep the cattle out. You have to open a gate to get in.

‘As soon as we found out, we called the police’, said the farmhand who accompanied us. ‘Of course, it took a few hours for them to get here. They pulled him out of the water. They examined the body. No sign of injury.’

‘But look…you can see his footprints.’

The reservoir is new. It is lined with black plastic. Still relatively clean, the footprints were unmistakable.

Neighbour: ‘See…they are Carlos’ footprints. And there are only one set of footprints. He started here, where we are. He walked around the edge to the deep side and that is where the footprints end.

N: ‘The police said they thought he slid on the plastic into the water. And since he didn’t know how to swim, he drowned.

N: ‘And they found his phone over by the fence, on the ground.’

Bill: ‘You mean, he put his phone down, and then by accident, slid into the reservoir?’

N: ‘Yes…that’s what they said happened.’

B: ‘What happened to the phone?’

N: ‘They gave it to Alicia. She said there was nothing unusual on it.’

Carlos’ family is suspicious. They don’t like or trust Alicia. They are not ‘originarios’.

‘They think they can do whatever they want’, an informant remarked, speaking of the originarios, on condition of anonymity, and looking around the corner to make sure no one was listening:

‘Alicia was never honest with them. (Her husband’s family.) She treated them like trash. She thought she was better than everyone else because she was an “originaria”.’

Thus began a long list of grudges and further elucidation of the struggle between the self-proclaimed ‘Diaguita’ tribe members and everyone else:

‘That “Diaguita” thing is a lie. There never was a “Diaguita” tribe. It was just a term the Inca used to describe the local people in this region. They thought the tribes here were backward. It was an insult.

‘Alicia and her brother thought that could take the grandmother’s place…just because they said they were “Diaguita”.’

Carlos’ grandmother lived in a high farm way up in the hills beyond the reservoir. The mountains are dry and hostile. But in them there are oases, where a trickle of reliable water allows a family to eke out a living. A few cattle. A few goats. A few fruit trees. Not much more.

When she turned 80, the family decided that their grandmother could no longer stay by herself at her mountain farm. She was taken down to the town to live with a granddaughter. These little farms are owned by us. But by custom, and today’s political reality, the local people decide for themselves who lives in them. Typically, they pass down through a family.

The originarios, however, are eager to get control of the whole valley. If a farm is abandoned, they move in…and cannot be removed. You call the police. The police hear ‘originario’, and the potato is soon too hot to handle.

‘She’s had her eye on that farm for years. And now, with Carlos out of the way, I think she’s going to get more originarios in there.’

‘How did Carlos seem to you when you last saw him?’, we asked.

‘We talked to him on Friday; he died on Saturday. He seemed fine.’

The police say the case is closed.

But there’s always more to the story.

Stay tuned...

Bill Bonner,
For The Daily Reckoning Australia