The resource bears took a few swipes yesterday, reader. This morning we read that the commodity boom is over.
It’s articles like this that are making companies like BHP cheap. It’s down 25% in a couple of months. And bears will make investing in commodity-based equities a good idea in the second half of the year. It’ll probably be the best opportunity you have to buy mining and energy stocks since 2003.
But buying resources is not as clear (or easy) as it once was, as you’ve probably found. And that article above isn’t just pessimistic. It’s utterly dismal. We felt like a pallbearer as we read.
“Demand from China is softening….the CRB Commodity Index fell 10% last month…gold will slump to $650 an ounce…”
Hey…we’re still locked up in our room with some sort of allergic reaction. But we’re not that feverish. Let’s unpack those comments.
China Shifts Gears to a Domestic Boom
“Demand from China is softening.”
Quite possibly true. China’s annual GDP is running at a rate of about 10% this month. That’s about 1.8% down on the high it hit last year. That means consumption has probably fallen off too.
But so has every country. It’s what happens in a credit crisis. You can put the drop in economic growth so far down to the shockwaves from America…not a fundamental demolition of Asian demand.
If you think that fall is a reason for dropping your Chinese-related investments, you automatically make an assumption. You assume that American spending is more important to China’s growth than Chinese spending.
That may have been true in the past. It won’t be in the future. China hasn’t yet accumulated the same income levels as Uncle Sam. But for every spender in the US, there are four in China. Add in India, and it’s more like eight.
And the tide is turning as we write. Chris Shaw from www.fnarena.com notes that
China has shifted focus from exports to the domestic economy. How? Encouraging retail sales and industrial production.
So we don’t see a slowing China as the end of the boom this month. It’s more of a correction. Who knows? Maybe China needed this. It’s possible to grow too fast.
And looking at the 10% drop in commodity prices…well, that depends on your view of China. If you think it’s going down the toilet, be our guest and sell everything. If you think it’ll keep growing, commodities aren’t dropping. They’re getting cheaper.
Peak Oil in a Picture
The article had something to say about the oil correction too.
“The price of oil will slide back to its marginal production cost of $60-$80.”
Eighty bucks is a possibility. But the thing for you to consider here as an investor is not whether oil prices will come back in line with production costs. It’s where costs are going.
They’re not standing still, reader. Here’s how future oil production looks.
If you think peak oil is occurring now…and we do…then the marginal production cost of oil can only go higher. The less there is of something, the more expensive it is to get at it. And if the costs are going up, so is the price. In the long term, anyway.
Employment Numbers Rise
The statistics bureaua served up some new employment numbers yesterday. Analysts spat them out in disgust. Maybe the garnish wasn’t right.
They came in low. Quite low. Almost 11,000 people found jobs in July.
But analysts are still calling for a rate cut. It seems odd. Wasn’t the RBA worried about a “wage-price spiral”? Weren’t rising incomes threatening to derail its plans to destroy domestic demand? If job demand is still high, the price of jobs is likely to be rising too.
This is just a blip on the radar, says the analyst community.
We’re not overly concerned if it is or not. You can make more money selling things to Chinese than Australians these days. We have a direct link to the hottest market in the world. People are gradually forgetting that, now that things aren’t as great as they used to be.
Instead of worrying about what retail financial stocks are doing in response to interest rates…we’d just rather find companies with a piece of China. Still.
