Real Assets Preferred

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–Before we get into today’s regular reckoning, we again send our thoughts and prayers up to everyone in Queensland and New South Wales dealing with torrential rains and flooding. From all the staff here at the Daily Reckoning headquarters, we send our best wishes. Stay safe.

–For readers outside Australia who are not familiar with the country’s geography, Brisbane is a city of about 1 million Australians on the north east (Pacific) coast. It’s about 2.5 hours north of Melbourne by airplane. Steady rains all summer have saturated the ground in Queensland. Heavy rains in the last 10 days have led to the flooding you see on TV.  The flooding is expected to peak today and tomorrow as it hits Brisbane and its suburbs.

–If you’re from overseas and feel compelled to contribute to humanitarian or relief efforts, we suggest the Australian Red Cross. The Red Cross does relief work all over the world and will surely be on the scene in Queensland in the coming weeks. There will probably be more local relief efforts you can contribute to. And if you’re affiliated with one or know about one, let us know and we’ll pass it along (after making sure it’s legitimate).

–Since our beat here is finance and economics, let’s take a look at the impact the flooding may have on the Australian economy and the world. Granted, it’s not the most urgent story at the moment. But the flooding IS going to have an impact economically. What will it be?

–You can see from the table below (via the Wall Street Journal) that Queensland accounts for a large percentage of Australian exports. In dollar terms, thermal and metallurgical coal are the two big bread winners. But it accounts for quite a bit of food production too, which you will probably notice in the coming weeks as the price of certain fruits and vegetables goes up in Australian stores.

chart

–Australia is the world’s top exporter of metallurgical coal (steel making, or coking coal) and the world’s second largest exporter of thermal coal (power plants). Queensland exporters alone account for 60% of global seaborne coking coal exports. The Financial Times reports that the spot price for coking coal is now around $295 per tonne. That’s a 30% premium to the quarterly contract price for coking coal.

–Coal prices (both thermal and coking) have been trending up since the middle of last year. Thermal coal now sells for $140 per tonne, a 40% gain in the last twelve months. For Queensland right now, though, the biggest worry is not the reduced volume of thermal coal exports in the rest of this quarter. It’s the supply of thermal coal for Queensland’s own power plants.

—The Australian Financial Review reports that the floods could disrupt the supply of coal to the government’s 1440 megawatt power station at Stanwell. The operators of the station say it usually has between 26–30 days of coal stockpiled just in case. However, thermal coal supplies to another power station at Swanbank might be affected  after a landslide blocked the rail line that links the station with the coal mines that supply it.

–These sorts of emergencies don’t happen often. But when they do, it reminds you of how much we take modern, industrial-scale, coal-fired power for granted. The margin between convenience and emergency isn’t that big, is it? Coal as a source of electric power is not going away any time soon.

–Meanwhile, outside Australia,  the disruption of coking coal exports is obviously going to drive prices higher. It should drive steel prices higher too. But will it drive Chinese steel production lower, leading to a dip in Chinese fixed-asset investment? Or will this spur the Chinese and others to look for non-Australian sources of high-quality coking coal?

–Substitution happens when prices get too high. You can’t make steal with mud. But you can find your coking coal somewhere else. This is the geographic kind of substitution. And politicians who take Australia’s mineral wealth for granted and believe it can be the engine for infinite income redistribution should keep this in mind.

–When it comes to individual companies and what to do about your investments, the Stock Doc-Diggers and Drillers editor Dr. Alex Cowie-is already on the case. And of course D&D readers will know that Alex tipped an Aussie-listed but African-based coal company last year. We’ll let you know what he finds when we hear from him.

–While the commodity story plays out here, the debt story plays out in Europe. As we mentioned earlier this week, Portugal is set to auction a heap of new government debt today. And the papers are full of stories about Portugal’s impending bailout from its equally broke European neighbours.

–What is the lesson? When a nation has unpayable debts, it seeks to “pay them” with currency debasement. This debasement leads to inflation. And if the debasement prompts repudiation of the currency by investors, it can lead to hyperinflation. Europe take note. America take note. Australians prepare.

–Currency debasements have dietary consequences too. Algeria’s government announced overnight that it was putting price controls and cutting prices on food staples. This came after big price increases for cooking oil and sugar. Reuter’s has the full story.

–You might wonder how the world’s fourth-largest exporter of natural gas could have a food crisis. This is proof that the real crisis today is not that there isn’t enough food in the world. It’s that there are too many U.S. dollars. If you think there will be less of them in the future, think again.

–The food crisis stems from the world’s monetary crisis. And the world’s monetary crisis stems from the fact that the U.S. dollar is losing its status as a world reserve currency because of the monetary and fiscal policies of the worst generation of American leadership in that country’s history.

–China knows this. Yesterday we learned that Chinese foreign exchange reserves—a huge part of which come from trade with the U.S.—are now just shy of $3 trillion. It was a 20% increase over last year. China makes. The world buys.

–This creates an inflation problem for China domestically. It also creates pressure on China to revalue its currency and let it appreciate against other currencies. And just yesterday, various news outlets report that the Bank of China will begin allowing customers in New York to trade the Chinese currency.

–“We’re preparing for the day when remnimbi becomes fully convertible,” said the New York branch manager Li Xiaojing.  The first step to internationalising China’s currency—so it can replace the dollar—is to let people trade it freely. This is one step closer to that.

–But we’re not there yet. And in the meantime, non-paper currencies like gold and silver and not financial assets like oil and energy are going to gain value against paper money. Floods, food crises, and debt crisis only highlight the distinction between financial and real assets. This is the year to migrate your wealth and definancialise your life. More on that tomorrow.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. Brisbane’s population is 1.75 million – You guys be based in the USA or the past to pull that figure out.

    Coal is the dirtiest source of fuel and emits more carbon than any other form of electricity generation. The rest of the world is moving away from coal but the idea that it is around for a long time sounds like the Australian media or government who are clearly in cahoots with the resources companies in Australia. What happened to alternative media?

    Reply
  2. Brisbane is over 2 Million people actually

    Tristan Lewis
    January 12, 2011
    Reply
  3. China is building roughly 8 Coal Fired Power Stations a month at the moment.
    India is also building Coal Fired Power Stations.

    Both will eventually switch over to Nuclear Power Stations but they take a long time to construct and are very espensive, Coal fired Power Stations are quick and cheap to build, Coal is in plentiful supply. Coal Fired Power Stations will be with us for some time yet.

    This is alternative media

    Stillgotshoeson
    January 12, 2011
    Reply
  4. Coal is also present in quantity in China\Mongolia and has no world consortium wanting to ‘inspect’ your electrical plants. Yes it’s dirty and per kwh produces MORE life harming material than a reactor (and many chemicals which are also more dangerous) all with pretty much no oversight from other inhabitants of the shared air system.

    Can you see why China likes it? Dirt cheap, simple to build and operate, no catastrophic meltdowns, limited special knowledge, quick to produce.

    Besides… let he who drives a solar electic car cast the first stone…

    Chris in IT
    January 13, 2011
    Reply
  5. “Besides… let he who drives a solar electic car cast the first stone…”

    Ahem: Whitey screwed up the environment to get a half decent standard of living and now wants to get all sanctimonious when the Slopes and Curry Munchers do the same thing. It’s just all a tad too hypocritical for mine I’m afraid.

    Reply
  6. “…Chinese foreign exchange reserves … are now just shy of $3 trillion. It was a 20% increase over last year…

    This creates an inflation problem for China domestically. It also creates pressure on China to revalue its currency and let it appreciate against other currencies.”

    Hang on.

    Three trillion dollars of reserves will cause an inflation problem for China, i.e. the currency will depreciate.

    But it will also cause its currency to appreciate.

    Me confused. Can someone explain this to me?

    Reply
  7. Here is another example of the Chicago mob at work.

    http://www.bloomberg.com/news/2011-01-12/corn-soybean-wheat-prices-surge-as-u-s-cuts-supply-outlook.html

    They need to turn up the acreage by talking up the prices, if raising the elevator storage rates emptied the on farm silos and there’s nothing left then they’ll have the small block farmer “planting the front yard” to get prices back down to where they can keep control of the world export market price and keep making the corporate farmers all their money from the subsidy after exploiting their broad acre efficiency vector over the small blocx farmer.

    If world prices rise the US and its traders lose control. They’ve talked up price like this while taking the other side of the option often before and if they are in control the spikes only last long enough to create volume impetus.

    If you want to see one of the great US Supreme Court cum executive lackey travesties over the US Constitution look no further than this.

    Reply
  8. Sorry all, but to avoid moderation I am starting a new message

    If you want to see one of the great US Supreme Court cum executive lackey travesties over the US Constitution look no further than this.

    http://en.wikipedia.org/wiki/Wickard_v._Filburn

    This decision and its consequences are so full of irony that it makes a mockery of all things the US constitution stands for. It makes a mockery of economic philosophy on price going back to Thomas Aquinas the whim of the US executive (we aren’t talking about a suspension for war purposes but an annexation for power purposes).

    And the look what Chicago and the banksters have done to flip it all around for opportunism to be derived from overproduction and world export market price and volume control.

    and that is just the start of the irony ….

    Reply
  9. “Ahem: Whitey screwed up the environment to get a half decent standard of living and now wants to get all sanctimonious when the Slopes and Curry Munchers do the same thing. It’s just all a tad too hypocritical for mine I’m afraid.”

    Exactly. As an individual in a city powered by coal for my whole life, who has driven around in petrol cars my whole life I, and probably all here are not really in a position to judge a rising culture who is doing -exactly the same thing-. I’m certainly not in a position to cast that stone ;)

    “Three trillion dollars of reserves will cause an inflation problem for China, i.e. the currency will depreciate.”

    (I am not an economist!) Normally, unpegged their currency would rise in value giving more buying power to the locals but also making he products less viable in the market. In a perfect world that ‘should’ mean buyers will go somewhere cheaper, and the currency would naturally deflate and fall back inline. However as the ChiCom’s use a usd peg, their currency not only stays low, but stays relative to the USD. As the USD inflates monetary supply, Chinese products actually get cheaper for everyone else, making their products even -more- attractive. The winners here are the people china spends money on, namely, us here in aus. The biggest losers would be the Chinese people themselves who get less currency value outside their own country. This is possibly why, unlike the Japanese in the 80’s you don’t see as much Chinese cash flowing out of China, but massive reinvestment within their own country.

    I see china more as a company than a country however. Those reserves are a bank account for the planners to spend abroad with US funny money. I think this is one reason why they order so many resources from us, they are just looking to offload that cash whilst it still has value. As a non floating currency I’m not sure if reserves has the same value. We could use reserves to defend our currency against an aggressive selling run, but with a peg that can’t really have any effect can it?

    Chris in IT
    January 13, 2011
    Reply
  10. Brisbane is over 406 Million people actually

    Reply
  11. They’re at in again Ross: ” In 2009 Clinton cited a classic Chinese tale to say how the two countries would “cross the river peacefully together” because they were in the same boat. These days she makes no such assumptions.

    “We are in the same boat,” she said. “And we will either row in the same direction or we will, unfortunately, cause turmoil and whirlpools that will impact not just our two countries, but many people far beyond either of our borders.” ”

    http://www.smh.com.au/world/uschina-meeting-gets-straight-down-to-tin-tacks-20110119-19wpf.html

    As in do what we say or things are going to get ugly! Not just for you and us but for everyone else as well!!!

    “America – The country with the foreign policy despised throughout the world” as my Dad once remarked.

    Reply

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