No Fear in the Australian Economy as Iron Ore Falls

In today’s Money Morning…iron ore prices are falling, so where’s the panic?…from selling dirt to selling land…the banks may not admit they’re worried, but they’re taking precautions…Sam celebrates ‘420 day’ legally…and more…

This week has seen the iron ore price continue to slip.

It wasn’t too long ago that would have been enough to send tremors through the entirety of Australia’s economy. And, as you’ll see below, there was a pullback this week that’s largely been attributed to falling resource prices.

But where was the panic? Where were all the think pieces about the dangers of Australia’s economy being so strongly focused on selling dirt to China?

The answer, of course, is that they weren’t there. Because, as large as mining may still be in the Aussie economy, we just aren’t as dependent on it as we once were. We’ve grown, matured, and wisely diversified.

Because now we Aussies make our money selling one another houses.

Yes, that’s right. Why bother shipping physical products overseas to bring in foreign money, when we can just swap apartments at ever increasing prices and keep the money sloshing around within Australia?

What could possibly go wrong?

Well, a lot of things, as it happens. Not least because we aren’t just moving around within Australia. As Shae explained in Thursday’s Money Morning, Australia’s banks are bringing a worrying amount of foreign money to our shores to finance Australian’s housing addiction. Amounts that could be very difficult to pay back, if the heat ever comes out of the housing market.

And those same banks are beginning to act as if they expect exactly that. Read on below for the details…

But just before you do, a point on the resources market. Iron ore prices are falling. And with the world’s largest producer, Brazilian multinational Vale, ramping up production, that doesn’t look likely to change soon.

But the iron ore market is not the whole of the resources market, whatever the newspaper headlines may have you think. Our own resources analyst, Jason Stevenson, is looking at two niche resources set to explode. Even while the wider resources market slumps, the companies Jason profiles could deliver greater than 1,000% gains. You can read how, here.

Now, on to this week in Money Morning

As we returned from the Easter long weekend, Greg took a look at the nature of faith and humanity’s need to believe in something…anything. It’s fair to say that markets rely on faith. Some more than others. But just because something seems to be held up by belief more than anything else, doesn’t mean it’s about to fall. At least, not immediately. Greg argues that China’s growth resurgence may a façade, but it’s a façade that’s working for now. Which is good news for Australia’s economy, and for Aussie stocks.

Eventually the debt funding China’s latest waves of construction projects will have to be addressed. Whether growth in China’s consumer markets can grow to match its infrastructure spending remains to be seen. But the Chinese government has managed to avoid a major debt crisis so far. And if they can continue for years to come, then the odds of a crash in Australia will be low. You can read why here.

Aussie stocks saw a 1% drop Tuesday, as resource prices pulled back. Those falls looked set to continue Wednesday. In that morning’s article, Greg discussed whether this correction will fizzle out or continue. He looked at the biggest current risks to the Aussie economy, and the silver lining in the resource price falls.

Greg argues that it’s likely markets will head sideways for a while rather than falling much farther — or reversing and heading upward.

There are still outstanding stocks to be found in a sideways market. But also others to avoid. Greg concluded with Telstra’s example, as one of the widest-owned and most recognisable stocks in Australia. Strengthening competition and the rollout of the NBN have seen Telstra’s share price fall recently. As of Wednesday, it was at a level not seen in four and a half years. So is now the time to buy into (or buy more of) this household name? You can read Greg’s analysis here.

On Thursday Shae took a look at household debt in Australia, which is primarily tied up in housing. When you drill down into the numbers, it can get pretty scary. Especially with the recent rise in Australians seeking assistance from services like the National Debt Helpline. Shae argues that the RBA is simply ignoring the issue, while agencies like the Australian Prudential Regulation Authority try to contain the danger.

Is the RBA right to ignore the risks in Aussie housing debt? Is this just more of the same real estate angst, or are the risks building towards a genuine crisis? There are plenty of arguments throughout the media. But Shae explained that a more reliable indicator may be what the banks are doing, rather than what they’re saying. One particular move from Australia’s banks could be a sign of their growing concerns. You can read what it is in Thursday’s Money Morning.

Recreational cannabis users around the world celebrated 420 on Thursday this week. If you don’t know (and as it’s still illegal in Australia, we assume you don’t!), ‘420’ is a term for weed and it’s use, the origins of which are shrouded in smoky history and myth. It’s since become tradition for fans of the herb to light up on 20 April, or 4-20 in US date format.

With the accelerating legalisation of marijuana across the developed world, this years’ festivities have been bigger than ever. If you went anywhere near social media this week, you probably saw it. So Sam closed out the week in Money Morning with the story of his own recent cannabis purchase, and what it means for investors. Don’t worry, Sam won’t be writing his articles from prison in the near future.

Thanks to recent changes in UK law, Sam’s purchase was perfectly legal.  And, to be fair, completely non-recreational.

The product Sam bought was a medical derivative, with the psychoactive ingredients removed. Useful for any number of medical applications, but it won’t get you high. Similar products were recently legalised in Australia for a range of medical uses.

There’s already plenty of money being made in marijuana stocks around the world. Both medical and recreational. Sam looked at the history of prohibition, and why it’s failed so thoroughly. He argues that over the next few years, it’s inevitable that we’ll see medical marijuana become as commonplace as paracetamol or ibuprofen. And recreational weed as widespread as alcohol. So if we see it coming so clearly, how can we set ourselves up to profit? Read Sam’s plans in Money Morning, here.

And that was it from the Money Morning team this week. We’ll be back next week, when iron ore will likely continue to fall, housing will continue to rise, and the ASX will continue to head sideways. Or maybe not. Tune in then to see.


Tyler Jefferson,
Editor, Money Weekend

Publisher’s Pick: Special Report:Gigastocks’ The mainstream press is just starting to clock this phenomenon. But most of the resource-sector wonks haven’t grasped the FULL potential of what’s unfolding. Specifically, they don’t get the grand scale and potential of a development that occurred on 4 January, 2017. And what it could mean for three specific Australian stocks currently trading in obscurity…[More]

Numbers of Interest, as of Friday

Aussie Dollar to US Dollar: 75.38

Gold: US$1,237.90 (AU$1,641.70) per troy ounce

Silver: US$18.04 (AU$23.93) per troy ounce

Bitcoin: US$1,266.94 (AU$1,680.47)

West Texas Intermediate Crude Oil: US$50.27 per barrel

ASX 200: 5,854.10

Tyler Jefferson joined Fat Tail Investment Research in 2012. With a background in publishing, he started out as part of the team working behind the scenes with your Editors to bring you Money Morning each day.

When he joined, Tyler was Fat Tail Investment Research’s 12th employee. Today that number has grown to over 50, as more and more readers turn to Money Morning as their source for independent financial analysis and ideas.

Today as Managing Editor, Tyler still edits the articles you read each day. Along with that, he occasionally contributes to Money Morning with his own irreverent take on the most interesting news and opportunities for you.

Money Morning Australia