Australia has hit rock bottom…and struck gold

I migrated to Australia on New Year’s Eve, 2003. And got swept up in a truly extraordinary commodity boom. It lasted for a decade. Interrupted only by the crash of 2008, when I was busy applying for jobs at investment banks…

But even the GFC was only a temporary interruption. A real testament to the all-consuming power of a commodity bull market.

The Aussie dollar went bananas, to over USD1.10. The ASX 200 soared. Commodity stocks in particular went bonkers.

The tailwind was so powerful that the economy didn’t even go into recession during the biggest economic and financial collapse in a lifetime.

Anyone could get a six-figure job at the mines – where most of my fellow finance graduates disappeared off to in 2010.

Yes, the Australian economy was so good that even aspiring investment bankers were able to get a six-figure job during the GFC. Admittedly, in a big hole in the middle of nowhere. But still…

We found plenty to complain about, of course. Like the ‘two speed economy.’ But it was a spectacular decade for Australia. A strange time to become aware of the economics of real life.

Things haven’t been going so well since…

Our ‘luck’ ran out in 2013

I joined Fat Tail Investment Research in 2010. I thought my time was dominated by the fallout from the GFC. At least, that’s what I was interested in.

But in hindsight it was actually the blow-off top of the commodity boom that dominated. Australia’s economic Bradbury moment. Largely thanks to China.

Back then, our publisher Dan Denning turned me into an LNG research assistant. Right before the bottom fell out of the commodity boom…

Since 2013, real GDP per capita growth in Australia has been miserable or depressing, depending on how you measure it. This year, we ended a 21 month per capita recession!

Before and during the commodity boom, real GDP per capita was volatile, but surging. Since the end of the boom in 2013, it’s been steady and low, but for the pandemic of course.

Substantially higher ‘population growth’ masked this effect by goosing GDP figures. Something other countries have been trying to copy since. But too much immigration just makes people angrier.

We know GDP per capita growth has fallen because that’s what we actually experience and feel. Adding in a disruptive number of migrants to goose overall GDP just makes this even more annoying.

The point is that commodities drive Australian prosperity. Or undermine it…

So, where are commodity prices heading next?

Prepare to get as rich as an Argentine

Plenty of countries tie their economy to a particular industry. And their fortunes wax and wane with that industry.

The UK has been in the doldrums since the GFC because its financial sector sputtered. The Germans are struggling now as the CEOs of their car companies shift manufacturing to China.

What if our country is to be commended for its ability to bear a commodity bear market without collapse?

Economists call it Dutch Disease and Commodity Curse for a reason. Most countries can’t handle having a two-speed economy. They become banana republics that squander their wealth in the good years and implode in the bad.

Norway, Australia and Canada are rare exceptions of resources-based economies that manage comparative economic stability in the face of…economic instability from their key industries.

If a sustained period of per-capita disappointment is as bad as it gets during the downswing of a commodity cycle, we should pat ourselves on the back, mate. Because, when boomtimes are back, we’re going to be making up for it.

Of course, I don’t believe any of this. It’s impossible to look at the Victorian government, the national government’s energy policy, or our resources taxes and conclude anyone deserves a pat anywhere.

But maybe I’m just wrong and ungrateful? A child of the commodity boom…

After all, few governments of commodity endowed nations are so incompetent that they fail to harness a commodity boom. Only the UK and a few African countries have managed to dodge prosperity after discovering vast resources within their exclusive economic zone…

The wrong lane in a two-speed economy

I remember the endless discussion about a ‘two speed economy’ well. Before the commodity bubble burst and GDP per capita went into a tailspin. Then everyone blamed commodities for dragging the country down.

You can’t win. No wonder Gine Reinhardt has given up on trying to be popular.

Even during the boom it seemed like an odd complaint. Most economic growth stories are two-speed economies. Just look at AI in the US now.

But the lesson is that your positioning within the stock market is crucial. Booms and busts happen. Australians just know this better than anyone. At least, they should…

You need to be overinvested in commodities during the boom and dodge them in a bust.

You need to be overinvested in the US during a tech bubble. And underinvested when it bursts.

It’s no good complaining about a ‘two-speed stock market’. You’ve got to be in the right lane at the right time. From the start of the boom, not when it threatens to bust.

What’s been underperforming lately? Pharma, oil and commodities.

Actually, commodities have already turned the corner. Right now, our commodity focused newsletters are making money at an extraordinary pace. After a decade of watching them squeeze blood out of a rock, it’s a noticeable change.

The boom may last for years. But you have mere hours to join this opportunity to harness it.

By the way, back in 2009, without even a job interview on the horizon, I was wondering whether I should stick with uni for a few more years to study mining. I would’ve graduated in 2013, when the commodity bubble burst…