BHP & Rio Tinto Merger: A Boom Must Become a Bust

“Sit Coco! Sit!”

Coco sat, reluctantly. But kept on barking at a silver Mercedes parked on the street. Coco is a small white lap dog with brown spots, of indeterminable breed, tied up to the fence next to us while her owner sips a latte behind us and discusses real estate. Our ears perk up.

The overheard conversation is a useful literary device. We dimly recall its use in Othello, leading to confusion, deception, misunderstanding, and eventually death. But in the financial world, it’s not murder and sex and intrigue people talk about in low tones. It’s rising share prices, real estate, and the latest rate decision and policy language from the Federal Open Market Committee. Sexy.

We have traded the well-ordered streets of Singapore for the bustling streets of Perth to check on the health of the boom. It’s been three years since we last came here. It looks busier, but that’s just a superficial observation. We’ll pass on what we’ve found out after nosing around for a few days. Today, on the patio of Cimbalino on Mount Street, in the shade, we’re looking out on the skyline of Perth and wondering if Coco senses the top may be in, too.

Yes, we choose to think of Coco as an alert guard dog with some sixth animal sense that detects when human beings have lost their rational faculties and gone completely mad. They may not ring a bell at the top, as we mentioned earlier this week. But maybe a dog barks the same way a rooster crows before the sunrise. Or maybe not.

For now, it’s hard to hear even a loud dog bark over the din of excitement generated by the prospect of a merger between BHP Billiton (ASX: BHP) and Rio Tinto (ASX: RIO). Does the merger (if indeed one is in the offing) make sense? Mining companies, the good ones, usually take the long view. They buy assets at depressed prices, on the downside of the cycle, because they know the cycle will eventually turn up again. What to make of a merger near the top?

That BHP may or may not be interested in a big deal at this point in the cycle again makes us wonder just where we are in the cycle. Is BHP on the hunt because it’s being forced to compete with private equity and a merger and acquisition frenzy? Is it a reluctant suitor?

Or, flush with cash from China trade, does Australia’s bluest blue chip see a much longer, stronger cycle than previous years? And if it does, is it the kind of mirage that clouds over the eyes of even the most level-headed investors in the glee of a boom? Or, is now the right time to be hoarding scarce assets at any price you can buy them?

Well, judging by the creeping inflation in all the Western World, it is very good time to buy tangible assets, especially those priced in U.S. dollars. If we are on the early slopes of a world wide melt up, there is no telling how high nominal prices could go. The Dow could go to 15,000. The ASX/200 to 7,000. There will be corrections, of course.

But the whole world seems to be have embraced-for better or for worse, for richer or for poorer-the sham that is government money creation and the bubbling asset inflation it creates. With the whole world on a paper money standard, the great global melt up may keep on melting up, right past barking dogs and dogged Markets and Money editors.

While it all happens, we’re going to stroll down to the Perth Mint and take a look at gold. It is melting up, too. Of course, gold’s melt point is very high, in physical terms. That’s what makes it such an excellent store of value over time. It retains its purchasing power, no matter what the government is doing to your money in the back rooms of the central bank.

As we wrapped up our notes, a well-dressed women in a black business suit calmly fed her dog bits of bacon from her unfinished breakfast. The dog jumped up and bit her on the hand. “No,” she said to the black little beast. “That is not acceptable behaviour.”

“Uh, ma’am, it’s a dog. It doesn’t speak your language,” we almost said. As Bill often says, fish gotta swim, birds gotta fly, and dogs gotta bite. A thing can’t escape its nature. A boom must become a bust. They are the alpha and the omega of the business cycle. We meant to say all this to the dog and the woman. Instead we held our tongue and watched the show.

Dan Denning
Markets and Money

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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1 Comment on "BHP & Rio Tinto Merger: A Boom Must Become a Bust"

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Bill Gardner
Hi DR, I hail from a Queensland outback Town where BHP & RIO TINTO operate many large Coal Mines. This location was once a steady,..easy way of life,..with Farming industries Cattle,Cotton n Grain. Since 2002 this Town has swiftly switch to cater for mining,.why not since 10 yrs of dought? Most of the Real Estate folk, tell would be buyer’s this boom is here forever!!!,..hence homes prices risen over 250%. Coal miner’s Wages are double of Farming wages,.plus their coal bonus,..better conditions etc,..who ever wants sit on old Farm Tractor. Many ride new Harleys around and pour funds into other… Read more »
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