China is coming for our iron ore

Dear Reader,

After plunging yesterday, stocks are set to rebound today.

Using Tesla Inc [NASDAQ:TLSA] as our barometer, you can see just how wild things are getting.

On Tuesday in the US, the electric car manufacturer plunged 21%. Overnight, it rebounded 11%.

In my view, the (big) tech bubble is in its death throes. And these highly volatile moves are evidence of that.

The good news for Australia is that, apart from the impact on sentiment, this tech bubble bust shouldn’t cause too much damage. Sure, there are some local stocks that could take a big hit, but overall, the market won’t fare too badly.

For example, the ASX version of the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) is known as WAAAX (Wisetech, Afterpay, Appen, Altium, Xero).

The largest stock is Afterpay, with a market value of $21 billion. Apple, on the other hand, has a market value of US$2.1 trillion. Apple is the largest stock in the world. Afterpay comes in at number 17 on the ASX.

While Aussie investors don’t have to worry too much about the potential unwinding of the tech bubble, there are some far greater challenges ahead.

One is the utter incompetence of the Andrews government in Victoria. Having failed in its responsibility to its citizens, its main aim now is to promote fear, to in turn promote unquestioning compliance.

Meanwhile, the economic and human cost grows by the day. Brian McNamee, Chairman of Australia’s largest listed company CSL Ltd [ASX:CSL] is scathing of Andrews, saying:

‘Our response is disproportionate to the medical challenge.

‘The Premier is saying his opinion won’t change because of anger, but the truth of the matter is that I don’t think he even understands the severity of what is occurring, both in the economy and also in the human consequences.

‘I don’t know anyone who supports this plan.

‘We are an absolute outlier internationally.

‘It’s the most crushing policy in a sophisticated modern country with a dynamic city like Melbourne.’

When voices as respected as this pop their heads up, you know things are serious.

Victoria represents around one-quarter of the Aussie economy. It’s currently in a depression. The longer this insanity goes on, the greater the damage to the state’s capital, both physical and intellectual.

This will set Victoria back for years, and perhaps permanently.

It’s similar (but probably much worse) to when Victoria broke with NSW in colonial times. Radical liberals in the state, led by proprietor of The Age David Syme, waged a long and determined battle against free trade in favour of protectionism.

This eventually led to the rise of a tariff-protected manufacturing class in Melbourne. It’s why the nation’s manufacturing base emerged in Victoria rather than NSW. It’s probably also why Sydney moved ahead of Melbourne in terms of wealth and size in the 20th century.

History is rhyming again.

Victoria broke with NSW and will pay a long-term price for it.

Australia’s other great risk is the ongoing punch-up with China. I’ve been warning about this for months. From The Australian:

‘Australia-China relations have been plunged into their worst ­crisis since the 1989 Tiananmen massacre after two Australian journalists fled to safety under ­diplomatic protection and ­Australian broadcaster Cheng Lei, who works for the state-owned China Global Television Network, was charged with endangering China’s security.’

Then there’s this from the Financial Review:

‘One of China's most voracious property developers Poly Global is shedding staff in Australia and has suddenly abandoned a late-stage deal with Lendlease, as tensions between the two countries escalate.

‘This week, after lengthy and advanced negotiations, Poly Corp abandoned talks with Lendlease about buying Bingara Gorge, a 200-hectare residential development and golf course in Sydney's south-west.

‘The deal was worth as much as $300 million and would have represented one of the biggest residential development land deals in the past few years.

‘A property industry source said people involved had been told it was a last-minute “directive from Beijing”. Another industry source said the advanced discussions suddenly went “dead cold” and “shut down in the last few days”.’

If you don’t think China is intent on punishing us as much as they possibly can, you’re not paying attention. It’s like a formerly amicable break up gone wrong, and one partner in particular wants retribution.

To all but those directly affected, it feels like a phony war right now. But China is coming for the crown jewels. It has its eyes set on our iron ore exports. True, nothing is ready to replace the dominance of the Pilbara’s red dirt anytime soon. China’s gargantuan debt burden is a greater risk of blowing up in their face and reducing demand for our ore in the short term.

But the CCP is all over Africa, which has iron ore deposits that could replace a considerable portion of Australia’s supply.

As I said, it’s a long way off. But you can be certain that’s the direction China are moving.

What is Australia’s plan B? We’ve sold dirt to China and leveraged the gains into property for the past 20 years. That, plus population growth, has been our sole economic policy.

If that’s all we’ve got, we are indeed in trouble.

Regards,

Greg Canavan,
Editor, The Rum Rebellion

How the World Got So Screwed Up
By Bill Bonner

We are reminiscing, trying to recall what it was like — life before the internet. And before COVID. Before Tesla. Back when life was ‘normal’.

But remembering is like opening an old box of photos; you don’t necessarily find what you were looking for. Instead, you often find what you need to see.

And how we doom and gloomers suffered back then, when life was ‘normal’. The US budget was balanced (briefly). The country was at peace. We went to the office to work…and to stores to buy things.

It was so calm and tolerable; we only got through it by anticipating the tragedy ahead.

And we weren’t disappointed.

By our reckoning, the gaudy show began about 20 years ago. Since then, we’ve had bubbles…bailouts…bombs…and bumble-dumble leaders, who’ve caused nothing but trouble.

And now, it’s getting worse.

Massive drop

But we’ll come back to that.

Let’s first look at the financial news. Tesla fell 21% yesterday…leading the market down. Even Zoom dropped nearly 5%. From CNBC:

‘Stocks fell sharply on Tuesday as another massive drop in tech put the Nasdaq Composite in correction territory and led to the S&P 500’s worst three-day stretch in months.

‘The Nasdaq Composite dropped 4.1% to end the day at 10,847.69. Tuesday’s drop put the tech-heavy Nasdaq down 10% over the past three days. It marks the Nasdaq’s worst three-day stretch since August.

‘The Dow Jones Industrial Average plunged 632.42 points, or 2.3%, to 27,500.89. The S&P 500 slid 2.8% to 3,331.84. The broader-market index was down nearly 7% over the past three days, its worst three-day stretch since June.’

September is typically a bad month for stocks. This one is shaping up to be no exception.

As to whether this sell-off will continue, we have no opinion. Mr Market can do what he wants.

Bawdy spectacle

But as to what the Federal Reserve will do if stocks continue going down, we have no doubt. It will react, seeking to upstage Mr Market…with a fan dance that exposes plenty of fake flesh and arouses investors’ animal spirits.

The Fed has been rehearsing for more than two decades. The show is not likely to disappoint this time.

But what is new is that the federal government itself has gotten in on the act. It is now doing for Main Street, more or less, what the Fed did for Wall Street. That is, misleading it…falsifying it…and corrupting it.

Today, the US stock market no longer reflects an intelligent, price-sensitive allocation of capital or a wise use of Americans’ savings. It, like the US politics behind it, has become a delirious, bawdy spectacle paid for with trillions in fake money from the Fed.

And every time the party sags, with investors cashing in their chips and heading home, the Fed comes in with a whole new show…more risqué…more daring…and more expensive than ever before.

Numerical mischief

But while the Vegas-style extravaganza-palooza went on on Wall Street, Main Street was neglected, forgotten…quiet.

That is, until the government created the COVID crisis.

Even now, nearly six months after the declaration of emergency by Donald Trump, 30 million people are collecting unemployment benefits. Mr Trump now brags that the unemployment rate is down to 8%. But that just shows you what mischief you can do with numbers.

In February, there were some 164 million people in the US workforce. Let’s see…if 30 million are now on ‘unemployment’…to say nothing of the millions who don’t have jobs but who don’t qualify for unemployment benefits…that represents 18% of the workforce, not 8%.

Recent data show that these people are unlikely to find jobs anytime soon. There will be no V-shaped recovery, in other words. And no U-shaped recovery either.

Instead, we opined last week that it was more likely to be shaped like an L…flatlining, in other words. People have gotten in the habit of not going out and not spending money. Job cuts are becoming permanent.

But Jeff Tucker, economist at the real estate business Zillow, has another letter. He says it will be more like a K, with a few people doing very well…while the others sink lower and lower.

Moving out

None of this would have been possible during ‘normal’ times — before the internet and COVID-19 changed everything.

Before the internet, we worked 10-hour days. In the office by 8am. Out by 6pm. Most people worked eight hours.

And on weekends? With no laptops to open or iPhones to check, the weekends went by with little thought to the business world.

Now, even in our 72nd year and 5,000 miles from the home office, with no commute…and no coffee shops…we turn on our computer at 7:30am every weekday. It is rare that we turn it off before seven at night…

And then, on weekends, too — we ‘check our mail’, just to be sure there is nothing urgent to deal with. Or sometimes, we ‘check the news’ to see if there is anything going on that we should be thinking about.

Now that so many of us can work ‘remotely’, the big, old, tattered cities are falling further into desuetude. People who can are moving out. Why live close to work if you never go to work? Why live close to nice restaurants, bars, and nightclubs if they are all closed?

Moving in

Where are people going? To the new ‘Zoom towns’, says Tucker. Prices in these smallish towns are rising at 20% per year and more, according to real estate brokerage Redfin. Nationally, home prices are up 8%...while listings are down almost 22%.

Rents are falling, too. And rental demand. Zillow says almost three million adults, mostly millennials, have moved in with their parents or grandparents. There are a record 32 million of them now living with their parents or grandparents.

All of which is part of the K-shaped recovery. Older, settled, prosperous, stock-owning…zooming…people are able to live and work remotely — often in beautiful, safe places far from the maddening crowds.

But for younger, more indebted, poorer people…those who work at pick-up gigs or in the hospitality industry…those with no savings…those who live hand-to-mouth…things are not looking good.

After all, when you live pay cheque to pay cheque, what do you do when the pay cheques stop? And what do the feds do when 100 million voters can’t make ends meet?

Screwed up

It wasn’t like that in the 20th century. That was back when life was ‘normal’.

But back then, young people didn’t have to move back in with their parents…you could go out to a restaurant…you could get a job and earn money (rather than waiting for it to be dropped from helicopters)…

You still got mail — on paper!

We can scarcely remember it.

So, we close our eyes…and invite the past…and try to understand what made it so ‘normal’…and how the present got so completely screwed up.

Regards,

Bill Bonner,
For The Rum Rebellion