It could all come apart in May, as it did last year. But right now, you have to be a little dumbstruck at the massive rise in global asset markets. China's Shanghai stock market is up 37 per cent year to date. That number is jaw-dropping, even by Australian standards, and vaguely threatening by contrarian standards. Something that rises that fast is either exiting the earth's atmosphere, or reaching its apogee prior to decline.
But right back down in the red earth of Western Australia prices are soaring, too. And why wouldn't they be? "China, the world's largest iron-ore buyer, may boost imports as much as 20 percent this year as demand rises, the head of the China Metallurgical Mining Enterprise Association said yesterday," Bloomberg reports.
Come again?
Staggering. Astonishing. Quick, find a thesaurus. We need more adjectives. We've grown so accustomed to huge numbers coming out of China that we probably take them for granted. But this is an astonishing figure. It also means that you may have about 18 months left to get in on the biggest boom in resource stocks Australia has ever seen. After that, all bets are off.
"BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO) are thought to be looking at plans to double iron ore production beyond their aggressive expansion plans, to take advantage of expected increase in the already booming demand," reports Michael Vaughan in today's Financial Review. Vaughan added that, "BHP was targeting annual output of 300 million tones under a project dubbed Quantum and Rio was aiming to increase production to an ultimate target of 450 million tonnes."
If Vaughn's sources are correct, then a lot of expansion is in the cards for both BHP and Rio. We are headed to Western Australia in two weeks to check things out in person, and promise to report back on what we find.
In just a few weeks a uranium futures contract will begin trading on New York's Mercantile Exchange. The introduction of the contract should bring more liquidity and transparency to the uranium market. It also makes it possible for people who didn't make a boat-load in uranium stocks to make a boat load in uranium futures. Those people, of course, are Wall Street money shufflers. "The Nymex hopes to capitalize on the desire for a more institutionalized uranium market as well as the appetite in the hedge fund community for more investment products."
Uranium doesn't need investment demand to continue its upward trajectory. It's being driven by a supply shortage, due to flooding at Cameco's Cigar Lake mine, and of course, due to the policy of the Australian Labor party against new mines in the country. The Labor party meets soon to decide if it will change that policy and kick off another, even more powerful boom in uranium stock and prices.
Finally, though the current boom is being driven by scarcity economics in the resource markets, a lot of it is being driven by funny money. That makes it hard to sort out a real bull market from a fake one. The real problem is that with credit so widely available, even conservative investors are encouraged to become speculators.
"A Ponzi investor is someone who takes on new debt to meet current obligations, and hopes to finance the ever-rising debt through higher asset prices," reports Wolfgang Munchau in today's FT. Under that logic, we are all Ponzis now.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
