The ASX Bubble, Fueled by China

The price action in the Aussie share market is starting to look like a pinball game. BHP Billiton (ASX: BHP), Rio Tinto (ASX: RIO), Woodside (ASX: WPL)... some of Australia's biggest resource stocks made 52-week highs yesterday. Both BHP and Rio gave investment presentations in London yesterday, highlighting their various degrees of exposure to China's urbanisation.

"In the face of global uncertainty and embedded inflation, Australia's resources market will become a haven for a tidal wave of funds from China, India, and developed economies," reports Patrick Durkin in today's Financial Review.

He was actually paraphrasing former Goldman Sachs Vice President Kenneth Courtis. Courtis told Australian investors at a conference, "China wants everything you've got, everything. And we still can't fathom the demand that China is going to generate in the years to come... Imagine another 250 million people urbanising China over the next 20 years. What do you think that does to copper prices, iron ore prices, even given the levels they are at today?"

Let's assume that question is rhetorical. Curtis answers it anyway, "Over the next two, three, four years, Australia could become really hot. You could see your stock market move a little bit like the Japanese market did in the 1980s or like the tech market did in the 1990s."

Well that's no good. That means the ASX is a bubble in the making. And we know how all bubbles end. Splat!

Source: http://www.decisionpoint.com

This theme of perpetual prosperity from China-driven demand is beginning to sound like a drum beat. We've been tapping our toes too, adding to the rhythm. But it's worth remembering that markets always move in cycles, from scarcity to abundance, from caution to excess, from fear to greed and back again.

Source: http://www.decisionpoint.com

The current cycle-or super cycle if you prefer-is still a cycle. But just how long might it last and how high might it take Aussie stocks? Well, judging by the chart above, the All Ords does not yet have that vertical look, where the slope is at a virtual right angle to the x-axis. But you get the feeling we're approaching liftoff, don't you?

If Aussie resource stocks become a global inflation haven, the next four or five years may be the best four or five years you'll ever see to make money in resource stocks. "We are in for a generation of growth led by China and India which is unstoppable, unbridled, and unrivalled. In 2020, we will look back with wonder, shock, and awe at the growth we have seen," said Oxiana's Owen Hegarty.

Hey, we like Oxiana as much as the next resource newsletter. But this kind of enthusiasm makes us a little nervous. When everyone starts to read from the same investment prayer book, that's when you usually get some act of God that no one saw coming. That is, there's no such thing as a sure thing in investment markets. You never know what may be lurking around the corner. It could be an earth quake, a war, or a revolution.

Still, you'd have to be a real Danny Downer to rain on this resource parade. About the only disappointing player on the whole resource bench is the one that should be the star: gold. Its recent 18% correction has a lot of new gold investors concerned about its relative underperformance.

There's not much to add to the case for gold that we haven't already said before. But for what it's worth: higher highs followed by periods of profit taking and consolidation are normal in any bull market. Gold is biding its time during the most recent mini-rally in the U.S. dollar. But unless the U.S. government is suddenly serious about a strong dollar policy-highly unlikely with a nation full of debtors-it is hard to see the dollar rallying a lot higher, or gold falling below $800.

Dan Denning
The Daily Reckoning Australia

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