Imagine, for a moment, iron ore at US$300 a tonne. Does that price level sound preposterous?
I’m assuming you’re thinking yes at this point. But one analyst predicted this very level last week in the next 12–24 months.
Oddly, the prediction appeared in the American media and not in the Aussie press.
Considering it’s our top export and makes up a giant chunk of earnings on the stock market, one would think it’s newsworthy.
Then again, I picked up a hard copy of The Sunday Age yesterday.
You do really have to wonder if there’s any point anymore. There’s nothing left of it.
Unfortunately, I can’t tell you the exact rationale for this forecast because I wasn’t at the conference where it was made.
However, we can infer the basics from what’s happening around the world. The steel market is booming.
But the big iron ore miners can barely hit their existing export targets.
We know Brazil has been problematic for some time. But last week we saw Rio Tinto come out with its latest production results too.
It was underwhelming. Rio’s exports in the last half were the lowest they’ve been since 2015.
They are also struggling to hit their previous guidance for new projects due to various issues.
It’s just another factor that keeps the market less supplied than it might otherwise have been. Don’t forget that Rio is Australia’s biggest exporter.
Here’s something of note. The dud update didn’t hit the Rio price after it came out.
That tells us that the market didn’t have an expectation of Rio delivering much growth anyway.
But the Rio price is a way to measure the market’s changing expectation around iron ore from here.
REVEALED: What’s Next for Aussie Gold Stock Prices? Learn more.
Rio, BHP, and FMG sold down earlier in the year on the expectation that the iron ore price would drop in the second half. That’s what all the investment banks were saying.
They were, at least so far, way off base. I didn’t see any of them call it above US$200 in the first place, either.
You only have to go and look at the screaming rises in some of the junior iron ore stocks to see the market is chasing the industry right now. There ain’t that kind of action everywhere.
This is also an astonishing windfall for Australia in terms of dividends and royalties.
Will it juice the speculative fever of Aussie punters some more? Perhaps. They’re a little juiced already.
The Australian reports this morning that total margin loans — debt to buy shares — is now at an 11-year high.
This is not a dynamic where you want to short the market in general. Why so? Theoretically, there’s no limit to how much credit the banking system can create to feed this.
That’s part of why stock markets can inflate sky-high and way beyond anything justified by ‘fundamentals’.
This is the same driver behind the hot housing market.
The Australian Financial Review reported on 2 July:
‘Housing credit growth is currently about 7 per cent, or about the same level when the Australian Prudential Regulation Authority started to tighten lending standards in 2014.’
You do have to know how banks work to appreciate this. They create money…out of nothing.
This is not news. I happened to be reading a book from 1937 last night that pointed it out. What’s bizarre is that somehow this knowledge fell out of mainstream economic thinking.
Or was it obscured? It’s a very profitable system for those that benefit from it.
Pity those poor fools that think Australia’s rising house prices are from ‘supply and demand’.
As a Daily Reckoning reader, you’re far beyond the average Joe that trusts this kind of mainstream garbage.
More credit = higher asset prices.
Best wishes,
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Callum Newman,
Editor, The Daily Reckoning Australia
PS: Our publication The Daily Reckoning is a fantastic place to start your investment journey. We talk about the big trends driving the most innovative stocks on the ASX. Learn all about it here.
