An Investment Strategy for the End of Australia’s Lucky Run

Pay no attention to the worthless US jobs report published last Friday. We got several reader emails over the weekend asking if the US employment recovery would damage the bid for gold and send the Aussie dollar lower. Interesting questions, but faulty premise.

There is no US employment recovery. In fact, everything is getting worse everywhere, at least in financial markets.

Before we dive into the dismal data for the day, a quick reminder. Over the weekend we sent you a note about the collapse of Iran’s currency, the rial. If ever there was a case of currency warfare, this is it. The US has kicked Iran out of the international payments system and made it difficult for the Iranian economy to earn hard currency. The result is a 60% fall in the rial against the US dollar and the beginning of hyperinflation.

Jim Rickards is likely to talk about this when he gives a keynote address at the Gold Symposium on Monday, October 23rd. The two-day show is at Sydney’s Luna Park for the second year in a row, just a ferry ride across from Circular Quay. Diggers and Drillers editor Alex Cowie will be speaking this year, along with your editor and a host of others.

By the way, if you register to attend, make sure you enter your VIP code at ‘step 4’ of the registration process. The code is ‘gold’. That will give you a $100 discount on your registration fee.

Now, about this US jobs number. Is it fair dinkum? Well, we have no idea. But remember, all these announcements are usually based on surveys. And surveys, though scientific, can be pretty inexact. It all depends on your statistical methods.

The Friday survey in the US showed the national unemployment rate going under 8% for the first time in President Barack Obama’s four-year term (43 months, if you’re scoring at home). With less than a month to go before the US election, it was a politically sensitive announcement. And if the number is to be believed, the 873,000 jobs added to the US in September would be the largest-one month gain in the 29-year history of the report.

This would be great news for investors, if true. After years of utter depression, the world badly needs some economic signs of life. Unfortunately, the US data are at odds with forecasts from the International Monetary Fund (IMF) and the World Bank. The long-term forecasts of any organisation are almost always worthless. The IMF and the World Bank are no exception, although we’re sure both organisations are full of well-meaning and capable statisticians.

Still, what did the IMF have to say about the future? ‘It’s not yet a lost decade,‘ said the IMF’s chief economist Olivier Blanchard, ‘But it will surely take at least a decade from the beginning of the crisis for the world economy to get back to decent shape.’ Using 2008 as the starting point, Blanchard says the global economy won’t get the all-clear signal until 2018.

Not content to ruin the next five years, the IMF has told Australia to expect lower growth starting next year, in 2013. The latest World Economic Outlook says Australia’s GDP will grow at 3% next year, not the 3.5% originally expected. And ganging up on us, the World Bank has cut its China growth forecast from 8.2% in May to 7.7% now. Ouch.

But as we said, these forecasts are almost always useless. Big organisations of any stripe have a tendency to discount the probability of really radical outcomes. Maybe there’s a self-preservation bias at work. Understandably, it’s not pleasant to spend a lot of time thinking about how things could be much worse than your pretty little models predict. But for people who live in the real world, where models don’t pay the bills, you have to act as well as think.

BHP is thinking about acting. The world’s third-largest iron ore producer said it would shift 900 jobs in its iron ore division to reflect lower commodity prices and higher costs. Does ‘shift’ mean ‘eliminate?’ Not yet.

‘For most people there will be little change other than position title and reporting line changes,’ said BHP spokesman Antonios Papaspiropoulous. He added that, ‘Against a backdrop of increasing costs and falling commodity prices, we continue to focus on reducing overheads and operating costs.’ People may be fired, in other words. But not just yet.

BHP’s announcement confirms the idea that mining booms end when costs are high and commodity prices fall. At the very least, all the easy profits from a boom have been made when you have to start shifting jobs from your most profitable operating segment. This fact calls for a rethink of 2013 investment strategies, which is exactly what we’ve done in our latest video feature.

The other bit of interesting news about BHP is that it’s offering bonds priced in Aussie dollars for the first time in 11 years, according to Edna Curran in today’s Australian. Details on the size and price of the offering will come out later today. But could this be a trend? Could the corporate debt market in Australia become a more attractive way to secure long-term financing than selling equity?

This is another trend we’ve been examining in The Denning Report. The end of the mining bull market is really the end of Australia’s 21-year lucky run without a recession. If global growth is down, then local commodity earnings will have to go down too. We reckon investment portfolios will shift from aggressive growth stocks to high-credit quality corporate bonds, and that the ETF market already provides a few ways you might be able to profit from this.


Dan Denning
for Markets and Money

From the Archives…

Derivatives as a Sponge
5-10-2012 – Greg Canavan

Don’t Teach Your Man to Fish
4-10-2012 – Nick Hubble

Three Phone Calls You Must Make Now
3-10-2012 – Nick Hubble

Beer and Tax in Retirement
2-10-2012 – Nick Hubble

Hard Times for Hard Rocks
1-10-2012 – Dan Denning

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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3 Comments on "An Investment Strategy for the End of Australia’s Lucky Run"

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wouldn’t it be interesting if Iran started to pay in gold.

truth and integrity

It was paid in gold by China for oil so why not pass it on.
Probably a new trend.

Thanks ‘Truth’ I was wondering why the US was out to destroy Iran. Nothing to do with oil, or nuclear weapons after all, seems half the world have them. Now I read today that the US is going to engage in ‘cyber warfare’ with anyone the don’t like; which seems to be everyone. Although if a young Englishman who suffers from Asbergers syndrome can hack into the US Army, Navy, Air force and the department of Defence, others can, (he was looking for evidence of alien files) what are the chances for dedicated professionals?. I don’t think Iran should worry… Read more »
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