In the immortal words of Ron Burgundy; ‘that escalated quickly’.
I’m talking about the east coast gas crisis. The one that Malcolm Turnbull has just woken up to, open mouthed and drooling like a glutinous uncle after a Christmas lunch binge.
And as often happens when you wake from a fitful sleep that has put your digestive system under immense pressure, you’re completely disoriented.
Turnbull has incoherently called for a crisis meeting with Australia’s largest gas suppliers to try and address gas supply problem.
While this may have ‘escalated quickly’ in the government’s eyes, like most ‘crises’, this one has been brewing for years. Plenty of people warned about it. The Australian Competition and Consumer Commission (ACCC) wrote a detailed paper on the looming issue and released it in 2016.
I warned readers of Crisis & Opportunity about it last year, and recommended a few stocks that are set to do very well from the gas supply problem.
In other words, even an ignorant bystander like me saw what was happening before the government could work it out.
Now Turnbull wants a solution for the problem from the companies who are partly responsible for it.
It’s not going to happen. Australia’s LNG players have just completed an $80 billion investment in three LNG production plants on Gladstone Island, QLD. They overestimated the amount of gas they could get from new (coal seam) reserves and, as a result, have had to draw on other suppliers that would normally go to the domestic market.
The situation is now at a point where gas prices in Australia are higher than in Asia (where the LNG exports are heading). But because the LNG terminals require constant throughput to maximise profitability, the gas cannot easily be diverted back to the domestic market.
Turnbull will no doubt understand this after tomorrow’s ‘crisis meeting’.
The government’s response was in marked contrast to that of industry. Or, specifically, the new player in the energy industry; Telsa.
You see, the east coast energy crisis is a part of a larger problem engulfing Australia’s energy and power infrastructure. South Australia (SA) is at the centre of it, as was made plain by the power failure at Adele’s concert last night at the Adelaide Oval.
Late last week, Tesla boss Elon Musk tweeted that he could fix South Australia’s problems with battery storage technology in 100 days, or it’s free. The Financial Review worked itself into a lather reporting on the tweets between Musk and Australia’s Mike Cannon-Brookes, who co-founded software company Altassian. One article featured the same tweet three times!
I’m not entirely sure how Musk will solve SA’s problems. I don’t think he is either. But he’s getting plenty of free publicity for it.
The issue is that energy still needs to be generated, either from conventional or renewable sources. Battery technology will assist in that it can store renewable energy for when it’s needed at peak demand times. At the moment, gas is the main source of peak demand energy supply.
The reason behind SA’s summer blackouts was the shutdown of the Point Pelican gas power plant due to insufficient gas supply. Renewables are a great supplement for conventional energy, but it will be some time before they take centre stage.
One thing is for sure, if Musk can sort out SA’s energy problem with battery technology, it will be a huge leap forward for renewable energy.
Let’s wait and see what happens. But watch for the market to sort this out well before Turnbull and his bumbling ministers do.
Watch bond yields
Speaking of the market, keep an eye on the US 10 year bond yield over the next few days. It’s just about to break out to its highest level since 2014.
This is both good and bad news. Higher yields indicate better growth prospects for the global economy. But when bond yields rise, the price of a bond falls.
If rising yields turn into a secular (long term) trend, it risks wiping out a huge amount of paper wealth in the global economy.
I don’t know the exact figures, but the amount of debt in the world is huge. Fund managers, central banks and individuals around the world are the owners of that debt. If you have any exposure to ‘fixed interest’ in your super fund, for example, you own some of it as well.
As yields began to rise (and the US 10 year treasury yield is a global benchmark) prices begin to fall. This will slowly erase the paper value of the world’s largest asset class.
The Financial Times recently reporting on the turn in the bond market:
‘One of the longest and most important trends in world finance may be on the cusp of a reversal. US 10-year Treasury bond yields, used as a benchmark in transactions the world over, have been in decline since inflation came under control in the early 1980s. But in the past week, yields have risen to their highest in almost three years, while the US jobs market has grown its fastest in more than a decade. With equity markets suggesting that growth and inflation are in store under President Donald Trump, and with the Federal Reserve committed to raising its base rates this week for the third time in a decade, some bond market luminaries are convinced that the great “bull market” is over. From now, they expect interest rates to rise steadily.’
Before panicking and dumping your exposure to bonds, check out the chart below. It shows the yield on US 10 year treasuries over the past few years. As you can see, yields breached the 3% mark in 2013/14 on hopes of resurgent global growth.
But then the commodity bear market really kicked in and deflation was the buzzword. Who’s to say this latest ‘growth scare’ won’t end up in the same place?
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Personally, I think today’s growth is a little more assured than it was a few years ago. The record highs being achieved in many global stock markets are a sign of this.
In such an environment, bond yields should be moving higher. It’s a sign of a healthy economy.
And as more people realise the long and epic bull market in bonds is more than likely over, where do you think they will put their funds? That’s right, into stocks. That’s just one of the driving forces behind this ‘unbelievable’ stock market rally.
When you create trillions of dollars to ward off a crisis, it must go somewhere. For years, it went into bonds. Now it’s swinging back the other way and going into stocks. Enjoy it.