Boom and Bust, Crypto to Commodity

If successful, the BHP takeover of Oz Minerals will see trucks operating from the Musgrave Ranges nickel mine roaring past the old Poseidon nickel mine near Laverton. Learning that this would happen caused me to cast my mind back to the early 1970s, when Poseidon drove a spectacular nickel boom in Australia.

The boom ended when, suddenly, the drill results from the Poseidon deposit disappointed and shares that had risen to as much as $280 went to virtually nothing. And with that fall came many other exploration disasters.

It so happened that this week a young friend confessed to me that he had put what he described as “small amounts of money” in buying one of the cryptocurrencies other than Bitcoin. He has lost a lot of money but had decided to ride it out hoping that his crypto won’t be “another Poseidon”.

Crypto Losses

There is grave danger of a disaster much greater than Poseidon because the collapse of FTX showed that what should have been a simple exchange was a company borrowing billions to invest in venture capital and other high-risk investments. These companies are likely to run out of money.

The companies that have loaned FTX money are now in trouble and their troubles will spread to others. Crypto losses this year total around $US1.4 trillion.

The big institutions foolishly punted money on the crypto market and may attempt a rescue on part of it but they have incurred a considerable portion of the $1.4 trillion in losses. Even worse, the losses in cryptocurrency are going to scar a generation of younger people who invested in cryptocurrency with an almost emotional zeal.

They saw the currency as breaking the paradigms of former generations and opening up a new vision for a new generation. Instead, many of them bought crypto on margin and poured more money in as they desperately tried to keep their security, but this only compounded the losses.

Can crypto avoid being another Poseidon? it will require substantial rescue funds either from the institutions or, perhaps more likely, from crypto entrepreneurs who made large amounts of money and kept a worthwhile portion. Currently the favoured candidate in this bracket is a Chinese entrepreneur, Justin Sun, who is currently a diplomat for Grenada.

Many will be wounded for a long time but as the collapse of the Poseidon boom showed people do recover, usually via hard work.

Lithium Boom

There is another boom which really should also be watched very carefully – the lithium boom. In the case of lithium there is no doubt that there is going to be a big market for the material because of its use in electric vehicles.

But this week BHP made it clear why they were not investing in lithium. The mineral is actually fairly common, and the mines tend to be relatively small. That means that over time a lot of new mines will develop and that has the potential to keep a lid on the prices. BHP says that it is far better to concentrate on nickel and copper. But Rio Tinto takes another view.

If you are gambling in the lithium boom, at least take note of BHP’s caution. They might be wrong but don’t be frightened to take your profits and don’t fall in love with the whole market.

The best deposit of lithium in Australia is Greenbushes because it has scale but it is controlled by the Chinese. But there is a minority equity held by the IGO group. I emphasise that the non-Chinese equity is in a minority situation.

The great risk for traders in booms is that they fall in love with the stock and often go down with the ship.

South Australia & BHP 

In looking at the longer-term outlook, the state to watch is South Australia. The Oz Minerals BHP takeover makes it virtually certain that BHP will erect a massive new smelting complex in South Australia powered by solar and wind. And while it is less certain, it is highly likely that in the next few years we will spend more money on defence installations in South Australia.

It has been a state that has looked promising for many years. Olympic Dam has so far been a huge disappointment but now with Oz Minerals you can expect some important announcements in the next few months as BHP completes the feasibility studies that helped trigger the Oz Minerals takeover.

Supermarkets & Interest Rates

During the week I was having a yarn to some people who stack shelves in supermarkets at night and they reported to me a new development in the people taking on the job in preparation for Christmas. 

Those who have full time employment are suddenly being squeezed by higher interest rates and desperately need extra money to pay current and future mortgage commitments as the impact of the past interest rate increases hits their pocket.

For me this was a very clear sign of what is ahead, and more and more people will look for second jobs, leaving very little time for sleep and families as they attempt to hang on to their homes.

The impact of this on the economy will not be evident until the new year but by that time it will be the main discussion point.

Fear of Overshooting

Mortgage fear was not helped by the recent labour statistics which makes it far more likely that there is another Reserve Bank interest rate rise. I fear we are going to overshoot.

Finally, a friend of mine who has been remarkably successful in building retail chains and then selling them off to larger enterprises tells me he is not going to attempt it again because the costs of retailing via rent and labour are becoming simply too high. But he still has a twinkle in the eye and believes his next retail exercise will concentrate purely on online trading.

We have been talking about the demise of bricks and mortar retailing for many years and retailers are becoming more and more innovative on how they manage their businesses, but my friend says that a large number are going to suffer because of rents and labour costs.

He believes that given the large exposure by many of our population to higher mortgages, they simply won’t be able to afford the costs inherent in the bricks and mortar retail system.

I am not forecasting some immediate catastrophe but when someone so proficient in bricks and mortar retailing over several retail sectors says that enough is enough it is a long-term warning.