Monday, 13 May 2024

By Greg Canavan Editor, Fat Tail Alliance, The Insider and Fat Tail Investment Advisory

[5 min read]

EDITOR’S NOTE: You’ll notice a different voice below. It’s that of our head of investment research, Greg Canavan. Your usual host for the day, Ryan Dinse, has been sick as a dog all weekend. He’s resting up today. However, he forwarded a fascinating video to his Crypto Capital readers on Friday. It’s by an economist called Lyn Alden, and it explains how money and banking really work…and why they are breaking now. It’s essential viewing, according to Ryan, especially if you are interested in the world of Bitcoin and cryptocurrency or simply looking for some better answers to the cost-of-living crisis. Watch it here now.

Dear Reader,

Watch what they do, not what they say.

Treasurer Jim Chalmers tells us tomorrow’s budget will help get inflation back within the RBA’s target band of 2–3% by Christmas.

Let’s see what spending measures they come out with.

Don’t forget that federal spending is only one part of the inflation puzzle. You have state governments that have completely lost the plot since COVID.

Victoria’s net debt was $44 billion in the year ending 30 June 2020 (FY20). It was $100 billion in FY22 and is forecast to hit $177 billion in FY27.

What about the resource-rich states? Surely, they should be paying down debt and running strong surpluses?

Yes and no. Queensland also had a net debt of $44 billion in FY20. Thanks to huge coal and LNG royalties, it will drop to around $14.7 billion in FY24. However, the boom in renewable energy investments will see net debt surge to around $47 billion in FY27.

So, despite very strong royalty revenues, net debt will increase by over $30 billion in the next three years. And that spending will result in higher energy costs, not lower, in the years ahead.

Multiply this state government spending by all the other states following the net zero dream, and the Federal Government too, and you have a recipe for long-term structural inflation.

Higher interest rates don’t fix that. It simply sacrifices families and mortgage holders on the altar of net zero.

Monetary policy is impotent in an era of fiscal dominance. COVID spending awakened politicians to the ability to spend like crazy with little consequence. Yes, we’ve had an inflation spike. But they’re telling themselves (and us) it was temporary, and inflation will continue falling.

The government will trot out this line as a key selling point in tomorrow’s budget.

But it will be a lie. If they keep the doors open to half a million new people each year, keep spending on wasteful projects, and hand out royalty income to buy popularity, watch demand continue to outstrip supply.

Again: watch what they do, not what they say.

***

Meanwhile, in the investment world, I thought these recent comments from Mining Phase One editor James Cooper were interesting.

‘Across the board, explorers lag behind the miners and the underlying commodity.

‘While that can be frustrating, it’s perfectly normal at this early stage in the cycle.

‘As metal prices tick higher, investors move into revenue-producing assets first—companies that can generate free cash from higher-value sales.

‘But as momentum builds and balance sheets improve, sentiment naturally flows down the mining lifecycle toward developers and explorers.

‘At that point, gains for the miners typically become far more stunted relative to the smaller-cap juniors.

‘I believe we’re getting closer to that point now.

‘But another aspect to this…Mergers and acquisitions.

‘You’ve no doubt heard about BHP’s latest buy-out attempt. The world’s largest miner is trying to nab Anglo-American, a multination miner with mines scattered across the globe.

‘Yet BHP is most interested in Anglo’s copper assets.

‘Again, this shouldn’t come as a surprise to you.

‘For over a year, I’ve been shouting from the rooftop that higher copper prices are coming.

‘Big deals like this are typical of the bullish set-up happening in this market. You should view the Anglo bid as a sign of things to come rather than an anomaly.

‘And at Mining Phase One, we’ll certainly be looking to capture some of these tailwinds.

‘But a proviso…buyouts should never be the primary reason to buy a stock.

‘Zeroing in on high-quality geological assets will always be our primary focus.

‘But by focusing on geology, we’re also positioning ourselves for potential buyout opportunities. After all, the majors are also on the hunt for quality assets.

‘It’s not the company they’re interested in; it’s the rocks!

‘And with the tide shifting on mining stocks, here’s a list of the top three potential buy-out contenders in the MPO list…’

Out of respect for James’ members, I won’t reveal his top three picks here. But it is something to keep in mind. The junior mining sector has had a rough trot in recent years. But the early signs of a change in sentiment and fortunes are apparent.

***

A good example of why this change is unfolding is in the following post I sent on X last week:

‘In the past 12 months, the largest tech company in the world Microsoft spent US$39.55bn on cap ex, presumably to build AI capability. Compare that to the largest energy company in the world, Exxon Mobil. It invested US$21.58 billion.

‘Yes, there are big differences in market cap but their assets and equity values are much closer. AI is hugely energy-intensive. Massive expansion in AI capacity with underinvestment in energy is a recipe for higher long-term energy prices.’

The year-on-year growth rate (to 31 March) in Microsoft’s investment was 52%. For Google’s parent Alphabet, growth was 36%.

I can’t see how windmills and solar panels are going to power this new information revolution. But that is exactly where governments are subsidising capital to go.

Meanwhile, traditional energy is left to pay the taxes and royalties to fund this. For example, Queensland collected $18.3 billion in LNG and coal royalties in FY23. WA collected $11.2 billion, mostly from iron ore and oil and gas.

Woodside [ASX:WDS] alone paid $5 billion in taxes and royalties in 2023.

Milking an industry while disincentivising new investment has a predictable result. Increasing demand, meet lack of supply.

This is a not-so-subtle way of introducing Murray Dawes’ ‘Trilogy Trade’. Murray saw and acted upon similar signals in the uranium and gold markets recently.

He sees a similar set-up unfolding in energy again. To access Murray’s presentation and get all the details, go here.   

Regards,

Greg Canavan,
Editor, Fat Tail Alliance, The Insider and Fat Tail Investment Advisory

Greg is the Investment and Editorial Director of Fat Tail Investment Research and Editor of our flagship investment letter, Fat Tail Investment Advisory. Over the last 20 years, Greg has developed a unique investment philosophy that combines value fundamentals with technical analysis. The result is a portfolio solution that’s consistently beaten the market and embraces one key idea: that you don’t have to take big risks to make big returns.

Greg also runs the Fat Tail Capital Solution model portfolio, which is currently only available as part of the Fat Tail Alliance.