Welcome Back to the Old Economy

With markets steaming ahead in 2023, investors are decidedly upbeat about the future.

So, are we really there? Should we jump in all guns blazing as stocks continue to rally?

After all, the latest CPI data from the US tends to suggest that inflation has been curtailed…leaving open the option for rate cuts at some point in 2023.

While I believe there’s good reason to be positive about certain segments of the economy, it’s the weaker areas that we need to be weary of.

When we enter phases of broad market rallies, it’s important we don’t mistake it for a new ‘everything bubble’.

Right now, there is a cross-current of strength and weakness.

You won’t be surprised to hear that I believe much of the future momentum will be focused on real asset investments…food, utility stocks, metals, and energy.

Billionaire entrepreneur Robert Friedland, CEO of the copper producer Ivanhoe Mines [TSX:IVN], describes these investments as being part of the ‘old economy’.

A segment that has been grossly underappreciated by investors who have been obsessed with high-growth tech.

He believes there’s been an enormous misalignment of capital over the last 10 years, focused solely on the ‘new economy’.

I agree.

The scale of investment into the ‘new economy’ was exceptional.

The period from 2013–21 will perhaps be looked back on as one of history’s most ‘inflated’ bubbles…

At its culmination in early 2022, Apple’s [NASDAQ:AAPL] market cap was an astounding US$3 trillion.

At one point, the size of Apple was larger than 186 countries…only the US, China, Japan, and Germany were bigger.

It’s absurd to think that a single company making some pretty little ‘devices’ could be worth more than France, Italy, the UK, Australia, or Korea.

But that’s the scale of the bubble we’ve just had.

While resource companies have a bright future, I believe there’s much more pain on the way for tech.

It’s one of the concerns my colleague, Vern Gowdie, has raised.

In fact, over the course of this week, Vern’s been hosting a four-day strategy session outlining his ideas on how investors can protect their capital.

The final part is today. You can check it out here.

You can’t eat iPhones

Now, let’s turn our attention to the future and the safest place to be investing…the ‘old economy’.

However important the latest iPhone model might appear to be, it doesn’t provide us with any of our basic human needs.

While investors are starting to wake up to their drunken obsession with tech, the makings of a resource crisis is already underway.

The global economy has assumed an endless supply of food, energy, and raw materials would continue indefinitely.

Europeans could soon discover the importance of energy security, not so much in the sense of recharging their smartphones, instead as a matter of life or death.

Northern Hemisphere winter storms are a threat to the sick and elderly in normal times, extreme gas shortages stemming from Russian aggression could threaten the health of vulnerable Europeans on a much larger scale.

But a day of reckoning is fast approaching for all consumers.

Our growing obsession with the latest trends means we’re placing a far greater burden on the planet in sucking out the supply of its critical resources.

Mindlessly replacing perfectly functional electronics with the latest iPhone, laptop, or TV, means we add more pressure to finite resources supposed to fuel the green energy transition.

The last 10 years or more have been mired by increasingly wasteful consumer habits, parents buying cheap plastic toys for their children, made in China, lasting little more than a week. At one point, kids were given quality wooden toys that would be passed through generations.

Knocking down solid brick houses for glass walled heat traps that need continuous artificial cooling in summer and warming in winter…more energy is the answer to extravagant architecture.

All this while the world’s population continues to add another one billion people each and every decade or so.

As Visual Capitalist points out, it took all human history until the year 1803 to reach the first one billion people.

Now, we add one billion people every 12 years!

It’s a sobering statistic if you ask me.

For too long we have lived incredibly wasteful lives, taking for granted the endless supply of materials, food, and energy.

All the while we have done this without securing future raw materials.

Running on empty

By their very nature, mines and oil fields are depleting assets; to replace major reserves requires years of intense investor capital.

With lack of new discovery in established mining districts, companies are forced to explore for new ore in increasingly volatile ‘frontier’ locations.

In a stable, mining friendly jurisdiction with a skilled labour force, such as Australia, development could take around 10 years from discovery to first production.

Yet, mining companies are being forced outward and beyond.

Lack of discovery in established areas means a push into unstable regions.

What few people understand (outside the industry) is the added delays involved in establishing a mine in risky geopolitical environments.

For example, in 2010 when I was working for Barrick Gold [NYSE:GOLD], formally the world’s largest gold producer, the company was looking to develop an enormous copper-gold project on the border of Afghanistan and Pakistan.

You can see an aerial capture of the project and exploration camp below:

At the time, the war in Afghanistan was at its peak. Geologists working on the project regularly watched US fighter jets flying overhead.

They suggested their drill rigs probably looked like enemy anti-aircraft missile to US fighter pilots streaming above.

But it wasn’t a wayward F-18 missile, lack of water, or extreme isolation causing ongoing delays…the real problem was the extreme bureaucracy of the Pakistani Government in allowing the project to proceed.

In what’s one of the world’s largest underdeveloped copper-gold projects, the Reko Diq deposit has now taken almost 20 years for development to proceed.

This is certainly not unusual and will be the future trend for mining as operators are forced into ‘frontier’ locations in an attempt to replace exhausted global reserves of critical metals.

It means a doubling in the development timeline in order to reach maiden production.

This should be the expectation of future supply, yet most analysts have failed to properly account the extreme timelines involved with project development in the new era of ‘frontier mining’.

Ageing operations located in established mining territories will struggle to meet normal demand over the near future. They have zero chance of reaching the energy transition goals set out by political leaders.

While investment in these new regions will be touted as the answer to supply shortages, leaders, economists, and those responsible for this energy transition mess have no first-hand experience of the extreme delays associated with mining in less than friendly jurisdictions.

Delays that can exceed 10 years or more!

We are very much opening a new chapter in human history…an age of scarcity.

Consumers will either sink or swim as they scramble for basic resources.

Consider the pandemic as a prelude.

Clambering for toilet paper will be the least of our worries as we watch European cities switch off as Russia places tighter controls on gas supplies.

Never has the West been so reliant on Saudi Arabia for virtually all its energy security…watch that space very closely in 2023.

Renewables will not come to the rescue quickly enough; lack of investment in the raw materials needed to build the carbon-free infrastructure has all but guaranteed that.

People will no longer have the luxury to buy items and then ditch them when they break…instead, they’ll need to learn how to fix things…again.

The ‘everything bubble’ that forgot to include commodities

I know this has all been a rather doom and gloom outlook, however, as someone that’s worked in the resource industry, it’s becoming blindingly obvious the insurmountable task the global economy faces in delivering not just critical metals for the future energy transition but food, water, and energy.

The period from 2013–21 has mistakenly been termed the ‘everything bubble’.

Resources were NOT part of that boom period…far from it.

The term itself diminishes the significance of resources as an asset class, assuming that ‘everything’ means the NEW economy.

Investors have ignored the onset of extreme scarcity of basic human needs for far too long.

The tech bust ‘we needed to have’ has finally occurred but still has some way to go yet.

The recent burst gives us hope that investment will begin to be redistributed to where it’s needed most…the old economy.

It’s part of the ‘great asset transition’ I keep spelling out to readers, one where real assets will come into favour against, still, overvalued tech.

It’s these tangible assets that will dominate the investor landscape over the coming years…the things that make civilisation on planet Earth possible.

The years to come will drive a new level of appreciation for basic human needs, something that has been grossly overlooked for far too long.

But have no doubt, extreme challenges await.

While the great shift in global capital will bring on more investment into the resource industry, years of under investment, and enormous development timelines ensure we are facing a resource crisis.

Lack of food, water, energy, and raw materials will be the price we pay for years of overindulgence and a disregard for basic resources.

All this while we seek to transition into a metal intensive carbon-free ‘electrified’ economy.

To say challenges lie ahead is a gross understatement.

Until next week,

James Cooper,

Editor, The Daily Reckoning Australia