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Iron ore - the mother of all bubbles By Bruce Jackson Tuesday, September 11, 2012
Dear Fellow Share Market Investor,
The Europeans are back from their summer holiday, and Greece the basket case is back on the agenda.
“The euro zone is a problem that is so difficult to solve, we’re going to continue to live with it for many months or even longer,” said Stanley Nabi of Silvercrest Asset Management Group on Bloomberg. “Who is going to step in and finance Greece here? We can’t continue to throw good money after bad. This is not a temporary situation.”
Overnight US markets fell back from their highest level since 2008, the Dow falling 52 points.
The VIX, otherwise known as the fear index, jumped 13%, its biggest gain in seven weeks. Still, at 16, the VIX is still trading at a discount to its long-term average of around 20.
All is relatively calm...except if you’re in the mining industry, or heavily invested in mining stocks.
On that front, despite a recent bounce in the share prices of some beaten-down mining and mining-related stocks -- including Fortescue Metals (ASX: FXC) and Boart Longyear (ASX: BLY) -- the news keeps getting bleaker.
The headlines in The Australian Financial Review make for grim reading...
Coal miners brace for royalty hike. Xstrata (ASX: XTA) cuts 600 jobs, BHP Billiton (ASX: BHP) mine closure hits 300. Asia wilts amid China slowdown. Good old China...how we pine for the heady days of 10% economic growth, when you consumed iron ore and coal like it was chocolate, when you built bridges to nowhere and cities with no people...
Iron ore...the mother of all bubbles
Iron ore at US$180 a tonne was the mother of all bubbles. But the party’s over, and the hangover could be worse than anyone ever expected.
As quoted in the AFR, Ashok Jacob, the man who runs the Packer family’s fund manager Ellerston Capital, has likened the rise and fall of the iron ore price to the boom and bust of technology stocks and Japan’s 1980s bubble economy...
“How do you invest in China? I think you want to be very, very, very careful about investing in anything there for a period of time.”
How long’s a ‘period’? You decide, but the really scary thing is Japan has never recovered from its late 1980s bubble economy...
Stating the obvious, it doesn’t sound promising for investors in mining stocks.
Nor does it sound promising for the Australian economy. As a country, we’ve hitched our cart to the mining bandwagon. Now the wheels are coming off, are we going to be left “up Port Hedland with no iron ore”?
Glenn Stevens: our knight in shining armour
Never fear Fools. Despite the doom and gloom, and the bearishness of this missive, we have Glenn Stevens and the Reserve Bank of Australia on our side.
Unlike Europe, the US and Japan, with our cash rate at a relative heady 3.5%, Mr Stevens still has plenty of interest rate bullets to shoot at our possibly soon-to-be ailing economy.
We’re no economists, but we wouldn’t be surprised to see the RBA slash interest rates by a full percentage point over the next 12 months, starting next month.
Laughing all the way to the bank
Sharply lower interest rates will see the mortgage belt laughing all the way to the bank.
Retailers will think it’s Christmas every week.
Banks will be beating away new homebuyers as they take advantage of generational low interest rates to buy up suddenly affordable homes.
And who knows, our pathetic politicians might join the party, throwing yet more stimulus cash at consumers. What’s not to like about a $900 cheque arriving in the post?
Reality is always different. If lower interest rates were the panacea, some -- particular those in the property sector -- would like us to believe, Europe would be booming and Barack Obama would be riding a wave of American patriotism and be set to be returned to the White House virtually unopposed.
Wake up, Australia
Lest you think we’ve lost our usual optimistic Foolish swagger, let’s bring in Motley Fool Share Advisor Investment Analyst Scott Phillips to chase away these gloomy thoughts…
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“As a nation, we’re punch-drunk. We’re so shell-shocked by the seemingly constant stream of bad news, pessimism and fear that we’ve given up. Bear in mind, we’ve spent the last three years paying down mortgages, reducing credit card debts and building up our rainy day savings.
And despite that reduction in demand, the economy still looks good. It’s time for us to wake up and realise how well our economy really is travelling.”
Thanks Scott. It’s a timely reminder that Australia, and Australians have never had it so good.
The Clayton's recession
Could it be we’re having the Clayton’s recession -- the recession you have when you’re not really having a recession?
One can only hope so, because in order for an economy to recover, it first has to collapse. And since Australia, courtesy of our mining boom, has never collapsed, we can’t start to recover.
Bizarre as it may seem, despite it having 8.1% unemployment, because it collapsed and is now recovering, the US economy is better placed than its Australian counterpart.
The gap between the performance of the S&P 500 and the S&P/ASX 200 Index from March 2009 to date says it all.
Ladies and gentlemen, we hereby introduce to you, in full colour, The Great Australian Clayton’s Recession...
Source: Google Finance
Rather than wallow in the inequality of it all and whip ourselves into a “it’s just not fair” and “I blame our politicians” frenzy, look at bright side…
It's OUR turn to recover
Here’s how Australia will recover...
1) The Aussie dollar will fall. In the face of the end of the mining boom and lower interest rates ahead, trading around $US1.03, the Aussie dollar is defying gravity. In the long-run, gravity always wins.
2) Take a lower Aussie dollar, lower interest rates coupled with an improving US economy, and an already elevated local saving rate, mix it all together and you’ve got the perfect recipe for lifting Australia out of its Clayton’s recession.
Four surprising winners
These might seem like challenging times for investors. But perception and reality are often different. We can do no more than to again point to Scott Phillips’ Top 4 Blue Chip Stocks for 2012.
The last time we looked, including dividends the not-so-motley group of high yielding stocks had returned over 20% so far in 2012…
Reality 1, Perception 0.
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Until next time, as ever, we wish you happy, profitable investing.
Foolish Best,
Bruce Jackson General Manager Motley Fool Australia
