Are You Ready If There’s Another Great Boom?

Are You Ready If There’s Another Great Boom?

The markets rarely offer you a chance to make serious money the same way twice.

But, as I’ve talked about all week, I think it’s going to happen right here in Australia.

In any case, this opportunity I’m talking about is going to stem from a unique sequence of events taking place in our number one export sector: resources.

In fact, Aussie resources could prove to be the biggest investment opportunity for Aussie investors over the next 10 years.

Buying dirt-cheap assets

In 1998 US stocks were heading into a massive boom.

This would become known as the infamous tech bubble.

Investors went wild for stocks related to the internet.

Companies that had no cash flow — let alone profits — soared to incredible heights as retail investors ploughed their money into the market.

It was one of the biggest bubbles in the history of markets.

US stocks were at crazy levels. The ‘madness of crowds’ had to eventually collapse.

That’s exactly what happened.

But one group of investors avoided the whole debacle, loading up on one asset class that was at a historic low in 1998.

I’m talking about commodities.

Not many people know it but, for example, sugar went up 1,290% between 1969 and 1974. Corn went up 295%. Oil rose fifteen-fold across the decade.

This same supply and demand dynamic that had sent commodities shooting up some 30 years prior was brewing again in 1998.

Adjusted for inflation, commodity prices were at levels not seen since the 1930s Great Depression.

It’s hard to imagine today how obscure the commodity market was in the late 1990s.

China’s massive global rise had yet to occur. It wasn’t even a member of the World Trade Organization at the time.

The Aussie dollar was about 61 cents to the US dollar.

Iron ore was US$31 a tonne.

In December 1998, one BHP Billiton Ltd [ASX:BHP] share was $4.45.

I’m sure you know a rough outline of the story from that point.

US stocks went on to collapse in 2000.

Meanwhile, China’s economy absolutely boomed and took commodity demand rocketing up.

By 2011, iron ore peaked at an all-time high of US$191 an ounce.

One BHP share was $50 — 10 times what it was in 1998.

Billions of dollars gushed into Australian natural resource projects.

Then it all soured for a while.

Are commodities setting up for a massive boom?

From 2011 until 2016, mining went into what’s called a ‘bear’ market.

This indicates falling asset values and contracting share prices as commodity prices retreat.

A series of global shocks and fears didn’t help.

Around 2011–12, the Eurozone went into paralysis over the Greek debt crisis.

Investors then panicked that a major credit crisis was coming to China — the biggest importer of raw materials in the world.

Not only that but, in the wake of the 2008 financial crisis, the US central bank was accused of propping up the US economy by printing money, fooling gullible investors in turn.

Many market players fretted that demographics, high debts and slow demand would sink the world economy into deflation (falling prices).

Commodities got smashed down as these fears played out.

What happened next was entirely predictable to anyone familiar with the natural resource cycle.

Commodity-producing firms like Australia’s BHP Billiton slashed spending on exploration and investment.

Miners, service companies and all associated firms laid off staff, too, with many skilled workers leaving the industry.  

They had to. Mining companies needed to preserve what cash they did have coming in and pay down the debts they’d accumulated in the boom times.

However, note one thing: While this was playing out, the world economy kept growing and consuming raw materials.

The Eurozone never collapsed, and neither did China.

And now investors are beginning to fret about inflation (rising prices), not deflation.

It’s 1998 all over again.

Take a look at the following chart:

Source: DoubleLine Funds

The chart shows the S&P 500’s (an index of US stocks) return relative to the return from commodities. You’ll notice that it looks very stretched. It’s far exceeding its median value from roughly the past five decades.

You can see we’re back down near the dotcom bubble on the chart.

This suggests commodity prices have the potential to do very well from here.

Welcoming a billion Indians into the modern economy

There are several reasons why the commodities sector looks bullish from here.

For one, China’s urban population is still only 58% of its total population.

There are hundreds of millions of people still to be brought into the modern consumer economy from the countryside.

This will require huge resources of oil, copper, natural gas and many more commodities as they buy cars, travel overseas, eat more meat, and enjoy all the creature comforts of today. We also have the Chinese ‘One Belt, One Road’ infrastructure boom now in motion.

And then there’s India.

India is on track to overtake China’s population in the next decade, just as it reaches a critical threshold in urbanisation.

India’s GDP rate was 7.2% in the December quarter of 2017 — making it the fastest growing major economy.

Between China and India, that’s a huge number of people driving cars, scooters and motorbikes, using air conditioning and heating, and producing a lot of goods.

A McKinsey Global Institute report last year suggested India’s working age population will grow by nearly 270 million people to 2030, with GDP set to increase fivefold.

And I’m not even talking about the smaller but rapidly expanding countries like Vietnam, which alone has a population three times the size of Australia.

Can you see where this is going?

The mining bear market from 2011–16 slashed investment in exploration and investment from the mining industry.

Meanwhile, the global economy kept growing, running down existing reserves and mines the world over.

Now we have the world economy beginning to heat up as the two most populous nations on the planet urbanise on a historic scale at the same time.

We could potentially be on the cusp of the biggest commodity bull market of all time.

Iron ore and coal most likely aren’t likely to lead the way as they did last time here in Australia. For example, LNG might take the spotlight over the next decade, followed by minerals associated with clean technology, such as copper, cobalt and lithium.

Or even agricultural resources. The cotton industry, especially in NSW, is enjoying a bonanza right now as consumers shift to natural fibres worldwide.

Only time will tell.

But heed the clues coming from around the world.

Last year a study from an international team of researchers concluded that exploration was not keeping up with demand, noting that ‘society is not equipped to meet the additional needs for these raw materials.

In the fourth quarter of 2017, Australian explorers spent more money than they did in the March quarter of 2015. That means they were out looking for new discoveries and testing promising leases.

This was only possible because investors are now willing to take risks in this space again because of the favourable outlook for natural resources.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia