An epidemic has struck down half the Fat Tail editorial team, including your usual editor James Cooper.
But commodity investors are famous for saying that the Chinese character for ‘crisis’ (危機) includes the character for ‘opportunity’ (機). So I’ve elbowed my way in to tell you about one…
What could mining investors like you want to hear from Fat Tail’s resident doom-monger? Is it another warning about our national debt?
Well, fear-mongering about government debt has always been a bit one-sided. Like only doing half a cost/benefit analysis. Something a climate scientist would do, not a serious investment analyst.
To give a fair account, you also need to consider what assets governments have. Not just what debt they’re paying.
And boy does Australia have assets!
Which brings us to the opportunity in this crisis.
But before we get to that, let’s take a look at Japan.
The textbook example of having enough
assets to carry too much debt
Long hung out to dry by journalists as the world’s most overindebted government, the Japanese balance sheet is actually not too bad once you add in the assets.
What assets?
Well, thanks to its persistent trade surpluses, Japan has a vast net international investment position. Think of it as the stuff Japanese investors own overseas.
You see, Japanese people don’t like dodgy foreign products. But foreigners like their stuff.
When we buy more off them than they buy off us, they have to do something with the money they earned. They buy something overseas with it. Often our government bonds, ironically enough.
My point is that Japan is much more likely to sell the vast horde of foreign assets it owns than experience a debt crisis.
How much? Well, the NIIP is about a third of Japan’s national debt. So it would make a substantial difference.
The trouble is the impact on us. Japanese investors have been propping up our government bonds by buying them. So a Japanese fiscal crisis is more likely to pop up in Australia and the UK than Japan.
So are we right to worry about
government debt after all?
Well, Australia’s debt to GDP ratio is creeping up. And it’s sad to see us blowing our wealth on silly things. The latest Snowy Hydro blowout is just extraordinary.
But Australia’s assets are immense too. You only need to look at our national anthem to get a feel for it. We’ve got golden soil, wealth for toil and our land abounds in nature’s gifts.
Sadly, we don’t make the most of them. In fact, our reputation is taking a serious hit amongst our commodity-importing buyers worldwide.
But can you imagine how much tax revenue a more permissive mining and resources regime would bring in?
It’d be like a mining industry bailout of the government!
The coming asset sale…to you
It’s not just us. Overindebted governments worldwide are desperate to raise tax revenue.
Eventually, they’ll figure out the only way to do this is to grow the tax base. That means more mining projects, more oil and gas leases, less regulation, less bureaucracy and lower marginal tax rates.
This won’t be a surprise.
Greece, for example, sold off a bunch of beautiful islands during its sovereign debt crisis.
In a way, the Greek sovereign debt crisis wasn’t about the country’s unmanageable debts. It was about scaring Greek voters enough to make the humiliation of selling their islands palatable.
But it was only ever a question of time. They had the assets to sell off. And Australia does too.
Can you smell the opportunities, investors?
Overindebted governments are about to unleash a wave of investable resources opportunities.
And because they’re overindebted, these governments will be offering distressed asset prices to the buyers.
In some countries, the process has already begun.
Politicians see the light once they
run out of other people’s money
In the UK, Chancellor of the Exchequer Rachel Reeves just admitted the country needs more North Sea Oil after all. The energy price and fiscal tailwind is just too enticing to save the planet for. Norway’s success is too obvious to ignore.
The overindebted Italians are unlocking 34 frozen oil and gas licenses.
In Argentina, Javier Milei’s is cracking open the world’s second-largest shale gas and fourth-largest shale oil reserve in the Vaca Muerta basin.
President Trump just invoked the Defence Production Act to boost oil, coal and gas development. Which is precisely what Jim Rickards predicted over at Strategic Intelligence Australia. But there’s still time to position yourself in the stocks set to profit most.
At some point, the opportunity Jim laid out in the US will come to Australia. Then it’ll be boomtime. All brought to you by those pesky deficits I’ve been warning you about.
Regards,
Nick Hubble,
Strategic Intelligence Australia
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