‘The most precious asset of the commodities business is the character weakness of this generation of central bankers. Forget talk of tapering, conditionality or data dependence; they’ll run from deflation at the first shot of the next crisis.‘ – Financial Times
That quote perfectly sums up our market view.
It’s good to see that what we’ve said for the past ten months has now made it to the mainstream.
The article is right. Does anyone really believe the men in charge of the central banks will do anything that would mean the next financial crisis happens on their watch?
Of course not. Why would they? They know they’re only in the role for five or maybe ten years max. It’s no time to be a hero and do what’s right when there’s a future high-paying private sector job on the line. They’re not likely to get on the board of a big bank if they’ve just caused the biggest financial collapse in history.
So, forget the idea of asset prices falling and deflation taking hold. This rally has plenty more to run. In fact, according to one controversial analysis, it could have another 50 years to run…
Remember that this week we’re showing you both sides of the coin.
In the lead article (this bit) you’ll hear arguments for the bullish case – reasons why we believe stocks are set to enjoy a multi-year rally.
In the second article (below) all through this week you’ll hear from 26-year financial planning veteran, and newest member of the Money Morning team, Vern Gowdie. Vern’s view is that investors should remain cautious as the Great Contraction takes hold.
In today’s article, Vern warns that if federal budget deficits continue, watch out. The government could begin to cast its eye over your retirement savings.
But that’s for later. First, let’s get back to this multi-year…scratch that, multi-decade rally…
A Blip on the Road to a Resource Boom
You’ve probably heard that the resources boom is over.
You’ve probably heard that because, heck, we’re pretty sure we’ve told you that once or twice in recent months.
We’re not the only ones to give you that message. The death of the commodity boom or resources boom is all over the mainstream press.
And even though we’ve recommended buying beaten-down resource stocks since the market bottomed in late-June, we’ve been careful to point out that we’re not predicting the birth of a new resources boom.
We simply see the resource sector returning to ‘more normal’ conditions. By that we mean that not every resource stock will go up. Instead, given recent history, investors will be fussy about which stocks to back.
That’s good news for small-cap mining stocks with a potentially quality resource.
However, there is a school of thought – a small school of thought – that believes the recent resource stock rout is just a blip on a multi-decade boom. If true, it could be a spectacular change of fortune for resource stocks.
But what’s the source of the belief in a new commodity boom? Well, it’s all thanks to a man the Soviet Union murdered in 1938…
Is it ‘Ludicrous’ to Say the Resource Boom is Over?
We’re talking about Nikolai Kondratiev, the Russian economist who developed a theory based on 45-60 year economic cycles. He’s a mostly forgotten character in history. But Stalin didn’t like Kondratiev’s free market tendency and so executed him.
But there are a handful of advocates who follow his theories and put them into practice today. One of those is investment analyst Dennis Gartman. He told the Financial Times:
‘It’s ludicrous to talk about an end to a supercycle that only started a decade ago. [Bank divestitures and mining firm losses] are just the sort of stories that accumulate at the end of a downward move.‘
In other words, Gartman is saying that if this really is a supercycle, it’s far too early to pronounce it dead.
Of course, as you may remember, we’ve profiled another analyst who follows Kondratiev’s theories – Phillip J Anderson. Anderson says the resources boom isn’t even half over. And it’s not just the resource sector that Anderson analyses using Kondratiev’s cycle theory.
Anderson has also shown that a similar ‘supercycle’ is about to play out somewhere else – the US and Australian housing markets. In fact, Anderson says Australian housing is at the start of a 14-year boom.
If he’s right, it would mean the Aussie housing sector has missed out on the bust that was inflicted on most other economies. While it’s difficult for your editor as a housing market bear to accept that, we have to acknowledge the possibility.
Resources to Follow the Tech Boom Model
Think about something else too. In 2001 most folks thought the technology boom had ended following the dotcom boom and bust. In reality, the dotcom bust was a cleansing exercise. The market purged malinvestments that investors should never have made. Companies went bust and investors lost money.
Sound familiar?
That’s what has happened in the resource sector over the past two years. But the technology boom didn’t end in 2001. It recovered. It boomed again with the rest of the market leading up to 2007, and following the 2008 crash technology stocks are booming again.
In fact, many tech stocks are now at an all-time high – 12 years after the dotcom bust. If good quality resource stocks can give investors even half the gains that tech stocks have given investors, then far from being the end of the resource boom, we could well be at the beginning of a multi-decade boom.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: Panic of 2013
Daily Reckoning: Superannuation Overtakes Bank Deposits
Money Morning: Why I’m Certain Stocks Are Going Higher
Pursuit of Happiness: War: The Reason to Own Gold
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks
