First I must declare my position. I believe we are well into a resources bubble, probably the largest one to ever hit this lucky country. And yes, after having been a bull for quite a few years on the China, India and oil story, I am now nervous.
And in some ways running the risk of being too conservative too early. I note the well-known bear on the global economy, Morgan Stanley's Stephen Roach, has just turned bullish on exactly that, and what is good for global growth is also good for resources.
The forces behind the current resources and resources share boom are:
1. China and India - 37 per cent of the global population is trying to join the developed world in just 20 years. This take-off from underdeveloped to developed requires tremendous resource intensive investment in infrastructure - roads, buildings, rail and communications.
2. The Hubbert's Peak equation. This is a method of defining oil resources, which was used by its originator, M King Hubbert, in 1956 to predict that US oil reserves would peak in 1971. He was correct. His principles point to a peak in the supply of global oil as we best understand it - the sweet oil that flows from Bass Strait and Saudi Arabia. And that peak could be in place now, or later in the decade. Whatever the date, the margin between supply and rapidly growing demand is tight, and thus the oil price is subject to upward pressure and possibly dramatic spikes.
3. There are long lead times to bring on major new resource production - oil and metals broadly. This is critical after a long period of relatively low demand, low prices, surplus former USSR stocks being liquidated and low levels of exploration.
4. From 2001, the rapid growth of China, India not far behind, together with Russia and Brazil is driving global growth up an important notch. This year Japan and Europe have joined in global growth. For the first time in nearly 20 years all the major engines of the global economy are running in forward gear.
In recent years I described these forces as the work of giants - a reference to 37 per cent of the global population all wanting to get rich at once. The previous two great resource cycles - 1900 to 1920 and 1960 to 1980 - were driven by first the USA, then Japan, when both were less than 5 per cent of the global population.
Through April the prices of copper, the world's major base metal, and BHP, the world's resource giant, increased around 25 per cent. Yes, 25 per cent in not much more than one month. Giants at work. Copper broke through its previous records early in the second half of last calendar year - the US$1.70-ish a pound level - and I felt I was bullish in the extreme predicting US$2. It went through that by Christmas and by early April was through US$3 a pound.
I recently reviewed Charlie Munger's great book Poor Charlie's Almanack, where he discussed the economic impact of 'feebezzlers'. Well the feebezzlers are in the metals markets to an extreme. I read a leading global broker's bullish research and the first force they highlight in the exuberant metal markets is funds - commodity funds, hedge funds, fee-driven investment pools venturing into historically volatile commodity markets. After the funds, the broker mentioned demand from China among others.
China is currently grizzling at the iron ore prices being asked of it, in a market where funds have little influence. What does it say to the copper market? Or what does it say to the commodity funds that make its entire key inputs that much more expensive?
In 1999/2000 I regarded the dotcom boom as a bubble rather akin to the resource booms of Australia yesteryear. Now I describe the current resource boom as like the previous dotcom boom.
In the dotcom boom the avalanche of greed forced the wind up some long well-performing value funds that correctly ignored the dotcom boom. Investors and some advisers said: "If you ain't in the dotcoms, then we ain't with you."
I remember comparing the boom market capitalisation of something like OneTel to the then valuation of Woodside, the proud owner of the North West Shelf. The conclusion was obvious - one was a $4 billion market capitalisation of hopes and dreams, one was a massive real asset earning money and paying dividends. Now I wonder whether the price of Woodside is not putting some of its market capitalisation in the house of dreams class. I do own Woodside, never OneTel.
In today's developing share market bubble the fund manager can be forced to be in BHP, Rio and Woodside - or else in a psychology akin to that of the dotcom boom.
Sure the development road ahead of China and friends is going to run for many years, but could we currently be seeing such a good thing, so exaggerated by the feebezzler commodity funds, that a stock market bubble is developing?
