In 1985, demographer David Harvey theorised that there were three types of circuits in a capitalist economy: the primary circuit, the secondary circuit, and the tertiary circuit.
The primary circuit refers to production — in Australia’s case, think of the mining boom. The secondary circuit of capital, however, is the switch from production to consumption, creating what’s called the ‘built environment’. That means moving to construction being the primary driver of an economy. I spoke about these first two phases in detail yesterday, which you can review here.
However, I didn’t really cover the third phase — the ‘tertiary circuit’.
Harvey explains that, following a construction boom, spare capital flows from construction into a sector that benefits society much more in the long run. In other words, the tertiary sector is when a society invests in science, technology and other products that add social value.
The role the tertiary circuit plays is a tricky one for investors. Harvey suggests that it’s excess supply in construction that leads people to invest in science and technology. And he points out that the secondary circuit — using construction as a driver of economic growth — generally ends up in some form of a crisis.
Even without a crisis, however, the money that would have flown into construction flows into an underinvested sector during a building boom. That’s because underinvestment in a particular sector means gains can be higher in the early stages of investment.
The idea is that, even with a crash in a construction boom, there are still ways an economy can grow, and for people to profit from such an event.
If there’s no money to be made in production or construction, lifesaving medical investments, for example, might attract early investors.
This has a two-fold affect. The economy benefits from new jobs being created through new fields of science and high-tech methods of production.
Australia is yet to transition from the secondary circuit. Our economy is still very much hitched to building apartments, roads and bridges. What this means is that investment opportunities in the tertiary circuit are being completely overlooked.
Like those in medicinal marijuana for instance.
The government made legislation changes last year allowing the sale of cannabis for medicinal use. In the process, this has created some very big gains is what has become a booming industry. Some of the stocks listed on Australian Securities Exchange have already seen triple-digit returns this year alone.
While you might mistake it for another bubble, the facts speak for themselves. Because medicinal marijuana use is new in Australia, there are few growers available to provide the product.
In addition, meeting the stringent security requirements means that not every company applying to the Department of Health for a growing licence will be approved. And that means a handful of ‘pot stocks’ are poised to dominate this booming market in the years ahead.
Best of all, there’s still time to get on this ground-breaking development in medicine at the ground-floor. You can start here.
This week in Markets & Money
On Monday, Vern looked at the failings of economic data, central bankers, and the misconception that everything is OK:
‘The information being produced for public consumption is seriously compromised.
‘The “go along to get along” culture means you do not rock boat.
‘CPI figures. Unemployment numbers. US corporate earnings. The reserve position of banks. Investment industry reports.
‘The agenda follows the same pattern…keep the masses sedated. Keep them calm. Keep confidence levels up. Reassure them that all is OK. The situation is under control…Janet Yellen is at pains to tell us the system is stronger than it was in 2008.
‘Who believes anything that comes out of the mouth of the Fed chair?
‘There’s not enough space in this article to list the stupidity uttered by current and previous Fed chairpersons. So here’s one that sums up how clueless the Fed is, from Ben Bernanke, dated 28 March 2007: “…the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”
‘The system has set us up for a massive failure.
‘There’s never been a more dangerous time in living memory to be on the wrong side of markets.
‘When this market finally buckles to the reality of the situation, the losses will be devastating.’
On Tuesday, Jason discussed the importance of China’s changing economy. As he notes, China’s well on course to transitioning to a consumer-based economy. More importantly, he says that there’s a way investors can benefit from this transition. And it all comes down to one metal:
‘China wants to become a consumer-driven economy. Today, the country is an investment-driven economy. It grows by importing resources and selling products. But that will change. As it moves towards a consumer-driven economy, one resource should benefit most — nickel.
‘Nickel has lots of potential. It’s used in both investment and consumption economies. It’s primarily used to create stainless steel. Home appliances, vehicles, electronics, new factories and restaurants all require nickel.
‘As wealth spreads, people will demand a better standard of living. And that means more demand for nickel.’
Following on from the nickel story, on Wednesday, Jason teased the ASX-listed stock that he believes could become the ‘Fortescue of nickel’.
On Thursday, Matt urged investors to ignore the mainstream press on real estate investment trusts. Had you followed their advice, you might have missed out on some big gains. Like any market, though, you need to sort the wheat from the chaff. But it’s not always obvious where you need to look.
Retail-facing REITs have been under pressure, while other lesser-known REITs have actually climbed in value.
You also need to be wary of money flowing out of REITs, especially when interest rates rise. That’s because income-focused funds will often split their investments between bonds and REITs.
What’s more, because REITs give you the opportunity to invest in some of the biggest commercial properties in Australia, they’re threatened by disruptive entrants like Amazon.
Does all this make REITs a no-go sector of the market? Not according to Matt. He believes you just need to know what to look out for in order to find potentially big returns in this sector.
On Friday, Vern let four charts do the talking for him.
The first showed the rise of the Dow Jones Industrial Average from its beginning through to today. Modest initially, the Dow took off like a rocket in the lead up to the new millennium.
The second showed the federal funds rate from 1980 through to today. This chart had a significantly downward slope, supporting how prevalent cheap credit has become.
The third chart showed China’s debt explosion pre- and post-GFC. Debt skyrocketed in the aftermath of the crisis. As did debt as a percentage of GDP.
The fourth chart showed Australian household finances, which showed the extent of over-indebtedness among Aussie households.
What do all these charts mean taken together? As Vern says: If you’re indebted and overexposed to markets, this is a story that should be keeping you awake at night.
Editor, Markets & Money