Not All Jobs Are the Same…

Good news. According to the latest jobs report from the Australian Bureau of Statistics, the unemployment rate remained steady, at 5.7%.

See, there is good news among all the gloom.

And just as good is the news that, overall, employment rose by 10,800 jobs.

More good news…or, maybe not.

As Bloomberg reports:

Full-time jobs fell by 9,300; part-time employment rose by 20,200.

Remember that, to be considered as employed for statistical purposes, you only have to perform one hour of work per week.

And while the unemployment rate may have stayed the same, and while the net number of jobs may have increased, it’s clear that not all jobs are the same.

An economy that loses 9,300 full time jobs, but gains 20,200 part time jobs, probably isn’t an economy that’s experiencing real growth and prosperity.

It’s an economy that’s on the slide, and potentially heading for big danger. Some would argue that’s long overdue, seeing as it’s 26 years now since Australia’s last recession.

Some would argue that, and we agree. Not only do we see it as overdue, but we see it as inevitable.

In the long run…

With all the talk about interest rates, oil prices, gold, and the Aussie dollar, we’ve forgotten all about Australia’s erstwhile major export — iron ore.

Shame on us.

We would do well not to forget about it. Because, since the iron ore price rally through to the middle of April, the price has slumped. So have the share prices of Australia’s major iron ore exporters.

And according to a report yesterday from Bloomberg, it doesn’t look as though things are about to get better:

Iron ore mining giant Vale SA has delivered a two-pronged warning about the outlook: first, this year’s dramatic runup in prices isn’t justified by the fundamentals, and second, watch out for a bumpy road ahead as low-cost supply is set to pick up.

“We’ll have to prepare for tougher periods ahead of us,” Claudio Alves, global director of iron ore marketing and sales at the Rio de Janeiro-based company, told an industry conference in Singapore on Thursday. “The price less than one month ago was more than $70. When you come back three months ago, it was $38. This shows there’s a big volatility.”

There is indeed ‘a big volatility’, Senor Alves.

You can see the volatility he’s talking about in the following chart:

Source: Bloomberg

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From mid-2013, the iron ore price went down almost in a straight line. But from early 2015, the volatility has been immense. The doubling of the price from December to April was part of that volatility…as is the 19% drop since the April peak.

As you may expect, the volatility is playing havoc with the share prices of the major Aussie mining stocks. Since the start of the year, BHP Billiton Ltd [ASX:BHP] has traded in a range from a low of $14.06, to a high of $21.25.

Yesterday, it was almost bang in the middle of that range, closing at $18.71.

It’s a similar story for Rio Tinto Ltd [ASX:RIO], trading in a range from $36.53 to $53.25. It closed yesterday at $44.29.

And so too for Fortescue Metals Group Ltd [ASX:FMG]. Although, depending on your view, you could say that Fortescue either has outperformed the two other mining majors, or that it simply has further to fall.

It depends on whether you’re a glass half full or half empty kind of guy (or gal).

From a low of $1.44, to a high of $3.65, Fortescue is currently trading above the mid-point of the range, at $2.94.

If the top dog at Vale is right, things are more likely to get worse for the big Aussie miners than they are to get better.

And that won’t be good for the Aussie economy, nor for its prospects of staying out of recession for another year.

As Vern Gowdie, editor of The Gowdie Letter, wrote on Wednesday:

Since 1961 world economic growth has averaged 3.8% per annum.

‘According to World Economics, “The World Economy has grown for 54 out of the past 55 years.

The only negative year being 2009.

A trend spanning more than five decades pretty much becomes the accepted benchmark.

Individuals, businesses and Governments have made plans, policies and
promises based on an indefinite continuation of the trend.

Source: World Economics

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What has been will continue to be so — or so they say.

Society has built certain expectations regarding employment opportunities, property values, retirement outcomes, education standards, security and the provision of a welfare safety net.

Meeting those expectations (and in some cases, demands) is dependent upon the long established growth trend resuming its annual 4% trajectory.

While 4% per annum seems like a reasonable number, on a compound basis (using the Rule of 72) it results in the world economy doubling in size every 18 years.

Global GDP is currently around US$80 trillion.

If trend growth was to resume, then in 2034 global GDP would be US$160 trillion; in 2052 $320 trillion; in 2070 $640 trillion and 2088 US$1,280 trillion.

The rather modest 4% per annum expresses itself in a 16-fold economic expansion over the next 72 years. Trees, we are told, do not grow to the sky, but apparently economies do.

Delivering on society’s considerable expectations has rendered the global economy and financial system a hostage to growth…at any cost.

The growth of the past has been largely a function of debt and demographics. Boomers borrowing.

Replicating those conditions — a low base of debt to build upon and a generation hooked on credit — is going to be nigh on impossible.

If you regularly read Vern’s work, you’ll know he doesn’t paint a rosy picture of the outlook.

Some folks call that pessimism, or ‘doom and gloomerism’. Vern prefers to call it ‘realism’.

And even though I’m as positive as you can get when it comes to searching for and finding great investing opportunities in the Aussie market, it’s hard to argue with Vern’s position.

That’s even more so after stumbling across statistics on Wednesday, which highlighted the relatively low level of growth during one of the most important periods of human history — the Industrial Revolution.

Vern notes that, over the past 50-odd years, global growth has averaged 3–4% per year. That doesn’t sound that much. But, when you compare it to previous periods throughout history, it’s huge.

To put things in perspective, according to a 1985 study by Nicholas Crafts, average economic growth in Britain during the late 1700s and early 1800s (the peak of the Industrial Revolution) was less than 2% per year.

That’s astounding. All that progress, all that new technology, and all that new wealth and efficiencies. And the growth? Less than 2%.

It all goes to back Vern’s view that the only reason the world has enjoyed such rapid growth over the past 50–60 years is due to the expansion of credit and huge amounts of debt.

And since the meltdown in 2008, that debt has only increased — by more than US$57 trillion, according to a report last year from McKinsey & Co.

So, call Vern a doom-monger if you like. And retain the view that in the long run stock prices (and house prices) always go up. But then look at the real long term, not just the past 50 years.

The reality is that asset prices don’t grow to the sky. Eventually, asset prices fall. And after the huge amount of stimulus and money printing, and now negative interest rates, which have pushed asset prices and debt levels to record highs, prices now appear to have a long way to fall.

As the saying goes: Look out below.


Kris Sayce

Editor, Port Phillip Insider

Ed Note: This article was originally published in Port Phillip Insider.

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