We remember our junior soccer days. Ahhh, success. Your editor’s team won two premierships in a row. Yet we were surely the worst player Bendigo’s Under-12 Soccer League has ever produced.
We just weren’t made for soccer. Our lack of movement was legendary. Apparently (according to Dad’s favourite story), the ball itself could roll all the way over to us and make contact with our foot without drawing a response. We’d look down at it briefly. It just wasn’t that interesting.
But the standout feature of those soccer games was the lack of structure. There were no positions. The ball would move from Point A to Point B. Inevitably, a jostling, violent clump of 11 year-olds would follow it.
All players on both teams went to the same place. At the same time. For the same reason. It was the ultimate example of mob behaviour. And now we’re seeing more of the same in financial markets.
The ASX chases the Dow wherever it goes. Last night Captain America’s stock market lost 242 points. Leading the charge toward oblivion were US financials. Banker Lehmann Brothers (NYSE:LEH) and insurer AIG (NYSE:AIG) took a whacking.
And what ho…this morning BHP (ASX:BHP) and Rio Tinto (ASX:RIO) are down 1.5% apiece.
Australia is a two-sector market: financials and resources. But in a bear market, they cease to be two different sectors. They become the same thing. ‘Stocks’.
The same was true for the US market in the early 1920s. More so. There was no index for the overall market. One each for the two different sectors: railroads and industrials. You could have chocolate or vanilla. No strawberry.
Industrials pulled the whole market up during WWI. Analysts were worried pre-war that Europe would sell US dollars for gold to help finance their war efforts. The opposite happened. Liquidity flowed in. To murder each other more efficiently, European nations needed to tap into the new, American industrial machine. They bought everything America could make.
At the turn of the century, US industrial stocks were worth about 25% of the market. By the end of the war that was closer to 80%. During that time, the railroad-dominated transport index had been up and down. Then the bear of 1919-1921 struck.
Prior to the bear, industrials were industrials. Railroads were railroads. They went up and down for their own reasons. In 1919, they all became ‘stocks’.
There was no more discrepancy. The chocolate tasted awful. Vanilla tasted just as bad. Investors spat them both out. Each lost over 40% before the market settled in 1921.
The last year has eclipsed that performance. Pretty much anything with a price tag has tumbled in value at some point, on a global scale. It all went up, bar a couple of dogs like the US dollar. Now it’s all coming down.
The common denominators? Stupidity, ignorance and speculation. Credit booms breed these things. Credit busts help eradicate them.
What we want to know is how the financial mountain-range will look after the snow of speculation has fully melted. Our guess is that the real Everest of the boom (Asian industrialisation) will stand a lot taller than the other, false peaks (banking, real estate, derivatives, stupidity).
On that point, Rio has raised an interesting possibility this week. It reports annual results later today. Expect double-digit profit growth and shameless spruiking of its businesses.
But the big miner gave us an appetiser this morning.
Your Most Honourable Chief Reckoner Dan Denning mentioned the possibility of a post-Olympics slump in China’s economy recently. Something similar to Sydney. A slow-down in the economy as all the tourists and competitors head home, taking their spending money with them.
Best of luck to any athletes travelling Qantas. The swimmers should be fine.
Beijing isn’t Sydney, though. It’s the centre of the world’s third grand industrialisation. And while the country was on show, everything had to look ship-shape. That meant a bit of spit here. A bit of polish there. Shutting down factories that otherwise would’ve spewed pollution into the path of Kenyan marathon runners.
“The Olympics have accentuated the usual summer slowdown in commodities demand,” Rio’s Chief Economist Vivek Tulpule told reporters yesterday. “When activity is allowed to start around – Beijing, there will be a post-Olympics jump.”
There’s the possibility China might have brought the slump forward. That’s food for thought. Sydney didn’t have smokestacks it could turn off prior to the 2000 Olympics. All it had was tourism spending.
But China has more internal demand that it can now bring into play. And it continues to prove that point. The greatest source of its wealth is its own people. Their spending and labour is self- contained. They have little to do with America’s shambles.
China has 1.2 billion people living on incomes of around US$5,000 per year. The average person in a developed country makes over six times that. Catch up, China.
There will be bumps, of course. You can’t grow a country at double- digits smoothly. And there’s always the risk the whole thing could come crashing down in a heap. There’s only so much oil in the ground, after all.
Until that happens we like a couple of metals plays. You’ll find them in the recent pages of Diggers and Drillers.
The first is nickel. We’ll hold off on dropping the full story here. Suffice to say, a lot of the world’s biggest nickel mines are getting a mite expensive. That’s putting a new floor under the nickel price. Want a closer look at the nickel market right now for free? Pop on over to Money Morning. Gabriel Andre has a few words for you.
But we don’t mind telling you about the other play in full. We’re out of time today. You can read the full report sometime in the next 48 hours. Keep an eye on your email inbox. And tomorrow we’ll find out exactly what Rio has been up to there past six months.
for The Daily Reckoning Australia