— We’ve never seen a boom that has caused so much angst. Aren’t you meant to just sit back and enjoy it? It’s like people are scared that it will go away before we have reaped the benefits.
— Yep, the mining boom, like the US Constitution, is ours only if we can keep it. At least that’s the verdict of Mike Smith, CEO of ANZ. The bank commissioned a report to look into the challenges of managing the benefits of the mining boom that will, apparently, last for decades to come.
— The crux of the report is that Australia must undergo considerable structural reform in order to reap the benefits of the boom. No great surprises there. So what is actually going on here and why is ANZ getting involved?
— Firstly, let us say we think Mike Smith is not bad for a banker. He tells it like it is. He understands the bigger picture forces shaping the global economy. And he is prepared to stick his nose into the national debate on how Australia should manage its good fortune…before it turns bad.
— Compared to – or more likely because of – the gibberish coming out of Canberra, Mike Smith’s agenda is highly pragmatic. But let’s back up a bit. Mike Smith is head of a bank, not an economy. He’s talking his book.
— We can think of two very good reasons why Smith is concerned about Australia’s complacency and lack of reform drive when it comes to the resources boom.
— He’s the man behind ANZ’s Asian expansion strategy. Increasing trade between Australia and Asia can only be a good thing for the bank. Trade builds wealth, and banks profit from this build-up of wealth.
— The report acknowledges the fact that Australia doesn’t have a monopoly on the production and export of commodities – be they hard or soft. If we sit back and expect the money to just roll in, the money might decide to go elsewhere.
— The other reason, we suspect, is that ANZ has one eye on its traditional banking business. As we pointed out yesterday, the mining boom is having an inflationary impact on Australia. Throw in a minority government that doesn’t have to authority to tackle hard, long-term reform and you have a recipe for ongoing falls in productivity.
— Low productivity is the fuel for inflation. Higher inflation means higher interest rates…which means continuing weak demand for loans and falling house prices. Hardly good for a bank with the majority of its assets tied up in housing.
— But if you stop looking 20 years into the future, you’ll see the mining boom is delivering a strange type of prosperity now. Unemployment in Australia has jumped to a 10-month high. Job losses in the ‘other’ part of the economy have more than offset mining-related gains. The unemployment rate was 5.3 per cent in August, up from 5.1 per cent in July.
— The ‘problem’ with mining is that it is capital intensive rather than labour intensive. And because the cost of labour is so expensive in Australia, the companies undertaking multi-billion-dollar projects are outsourcing as much of the preliminary work as they can.
— For example, most steel fabrication work is performed in Asia and shipped to site. And where labour cannot be substituted, project costs increase, which affects the return on investment.
— This is the dark side of the boom.
— But it’s better than having a bust, which is what Bernanke and Obama are dealing with. Both made speeches overnight and the US market retreated. These two have become the blabbermouths at a party that no one wants to listen to. Someone should tell them to go home.
— But was the negative market response due to the dynamic duo opening their mouths in the first place – or a result of investors wanting more? We suspect the market is disappointed with the Bernank’s circumspect language. The US market, driven by short-term trading, has long since given up worrying about a sustainable recovery. It just wants some more short-term play money.
— The reality is you’re not going to see a return to sustainable anything until the world returns to sound money. This week saw the escalation of the currency wars with the Swiss National Bank committing to join the devaluation game. Trade wars follow currency wars – so there’s something to look forward around 2012-13.
— But the authorities have no intention of returning to monetary discipline. They keep trying to muffle gold’s voice. Even Goldman Sachs thinks something weird is going on in the currency and gold markets.
— Zerohedge published a report from a Goldman trader discussing what happened to gold after the Swiss intervened in the currency market earlier this week:
‘The immediate aftermath was in complete contradiction to prior recent episodes of intervention and what anyone would have expected. Instead of spurring a further gold price rally on the basis that it was one of the few remaining safe haven “currencies” we saw a 50 USD collapse in minutes. The source of this flow seems hard to pin down with some speculating over whether “authorities” were concerned about the signals of an accelerating gold price and its impact on other fragile markets. Soon after, much of the losses were recovered but the psychological damage had been done and there followed a series of liquidations from within the leverage space with gold closing down 50 USD on the day. This was then exacerbated by a near 60 USD flash crash within 2 minutes during the Asian session.
— The authorities are losing control of the situation. The one boom you can bet on, without having to worry about structural changes to take advantage of it, is in gold.
for The Daily Reckoning Australia