Mainstream Forecasts: Typically Clueless

Mainstream Forecasts: Typically Clueless

Every day my bullish thesis for the world looks to be more on point than ever.

Overnight, US stocks kept the momentum going. The Dow Jones Industrial Average closed up 1.3%.

Meanwhile, Aussie GDP numbers released yesterday surprised to the upside, with the economy growing 3.1% in the year to March.

Exports of coal, LNG and iron ore are going along at a cracking pace. Prices are much higher today than forecasts suggested.

Coal prices especially are pouring an unexpected windfall into the coffers of the Queensland and NSW state governments.

Australia is not alone in this regard. The Wall Street Journal reports that US petroleum exports hit a record $20 billion in April. They’re likely going higher too.

Just look at the trendline on this chart:

Source: The Wall Street Journal

It’s certainly good news for those looking for work in the Midland region in Texas. The oil boom there is so prodigious that a truck driver can earn US$140,000 a year.

Police officers, grocery clerks and bus drivers are quitting their jobs to take the high wages in the drilling business. Naturally, rents and house prices are soaring in the energy boom towns.

However, one thing that didn’t quite boom was the initial bidding for BHP Billiton Ltd’s [ASX:BHP] shale assets in Arkansas and Texas.

The big Australian miner is openly looking for a buyer and values its holdings at $US11.66 billion, according to The Australian.

Opening offers are apparently much lower at between US$7 and US$9 billion. That won’t cut the mustard by all accounts, so we’re going to see this play out over time.

It’s taken for granted that BHP ‘should’ sell its US shale assets. Being an oil bull, I’m not so sure.

Still, BHP will have conventional offshore assets elsewhere.

What’s more, the longer this sale drags on, the better for BHP it will be if the oil price strengthens as I expect. That would take the valuation of its shale acreage higher.

If that happens, investors are likely to bid up BHP, lifting the wider Aussie index in turn.

BHP certainly has the wind at its back right now. China is favouring the high-quality iron ore it produces. And, what’s more, coal and oil are strong.

The only slight laggard this year from its major portfolio is copper. But the outlook here is incredibly bullish, and copper is beginning to move.

There’s a reason they call it ‘Dr Copper’ after all. When economic growth is healthy, copper demand is strong because it’s such an integral part of everyday construction.

But as the world car fleet goes electric and economies keep shifting to renewable energy, you should start holding on to your hat.

Copper demand is likely going to skyrocket.

The hard part is actually finding a good way to play it. A while back I conducted a review of copper stocks listed on the ASX.

There are a few mid-tier producers worthy of attention.

But so many of the other copper stocks are tiny early-stage explorers. There’s a very big gap between finding a viable deposit to mine and actually getting the copper to market.

I’m not sure the global picture is much different. I can’t help but wonder if at some point there’s going to be a scramble for supply in copper worldwide.

Developments in Chile at the moment aren’t easing any fears on that front.

A lot of copper comes from South America, and the Escondida mine is a big part of that.

Workers there are pushing for higher wages. In 2017 they went on strike, resulting in an 8% cut in output.

On the back of this, copper just hit a three-month high in London trade. Nickel and zinc pushed higher as well.

The chief of major miner Freeport-McMoRan said in March that there’s no quick copper substitute available in the same way that shale can fill in for the oil market.

His point was that the downside risk in the market is coming from the demand side. That’s because 40% of copper is consumed in China.

I’d suggest that’s broadly true of all commodities at the moment with the exception of iron ore. That means a bet on commodities is a bet on world growth staying strong.

That’s a bet I’m happy to take right now. The majority opinion is that the US market is topping out, and that rising interest rates and high debt will kill off any momentum in global growth.

I saw a notable mainstream economist present last week at a conference. He made the point that productivity in the Western world is sluggish and unlikely to improve.

He seems to think the economic situation is ‘as good as it gets’ for the foreseeable future. It was a typically clueless statement from this type of forecaster.

The advancement in artificial intelligence and robotics taking place now is going to take productivity screaming up in the years to come. So the geezer should pay less attention to statistics and more to what’s happening in the real world.

For example, Brazilian mining giant Vale saved US$399 million in 2017 using big-data technology to help integrate its operations.

Another example is that agriculture-related firms are developing driverless tractors and other equipment. Goldman Sachs suggests the potential demand for this could be as high as $45 billion over the next five years.

Heck, on a recent trip to Queensland, I even saw an article about a local engineer that’s developed a robotic avocado picker!

Human ingenuity knows no bounds. Those betting against it will be left behind.

Don’t be one of them.


Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia