Resources Believer

Last month top stock picker Greg Matthews exclusively warned Eureka Report subscribers of an expected pull-back in resources stocks. He had reduced some of his overweight exposure and was “keeping some powder dry” for buying opportunities.

On Wednesday, it looked as if that moment had arrived. It’s been a wild week, but the huge run-up in metals prices and resources stocks means increased volatility will be par for the course. There is no shortage of doomsayers predicting the China-led resources boom has peaked and Wednesday’s sharp drop was the stuff to scare nervous investors who could well be tempted to take profits.

According to China bull Carol Austin though, resources still have a long way to run, albeit with corrections along the way. We spoke last year to the Contango Asset Management chief economist and investor services director and found her convinced the impact of 20–25 million Chinese peasants moving to the cities each year effectively underwrote resources demand for several years. As you can see in today’s video interview, not only is her view is unchanged but she believes American and European investors are still only waking up to the China story. Her views should steady investors’ nerves when volatility inevitably rattles share prices again.

The day after the release of weaker employment figures for Australia, Austin has a warning about the longer-term outlook for the Australian economy. Our mining, transport, construction and infrastructure sectors are booming, but the Australian resources industry will settle down to a much less employment-intensive phase of simply extracting the resources from the expanded sources of supply.

That’s when our domestic outlook gets tougher, and when we may well regret short-term political decisions being made today. Beyond this expansion phase of the resources boom, Australia needs a greater investment in its people to generate wealth in tertiary industries.

It’s easy to be cynical about governments today trying to solve yesterday’s problems tomorrow. We might be seeing that now in the rush to build a new Federal TAFE system to train trades people because of the most obvious present skills shortages. That’s no bad thing, but the reality is that Australian governments’ spending on education overall has been sharply shrinking for the past two decades as a proportion of our GDP. We are investing less and less in our most important asset: our people.

Thursday’s labour force numbers illustrate the problem. Employment is booming at the resources rockface: unemployment is just 4% in Western Australia but its creeping up the closer you get to latte-sippers and away from iron ore mines. Our national unemployment rate rose to 5.3%. Victoria’s rate is 5.4% but it was only saved from a higher number by people dropping out of the workforce. NSW’s unemployment rose to 5.7%. It was just 4.8% in the middle of last year.

Macquarie Bank economist and interest rate strategist Rory Robertson has characterised our economy as having its head in the oven and its feet in the freezer, so on average it’s about right. The employment prospects of the nation though are swinging his forecasts for Reserve Bank policy away from its tightening bias. In a brief note to clients yesterday he wrote:

“The growing prospect that unemployment has troughed for now means the RBA will be hard-pressed to express much of a 'tightening bias’ in its quarterly report on Monday.”

For now, alas, the RBA remains firmly on hold, enjoying the fruits of The Great Moderation and awaiting clear signs that masterly inaction no longer is the best option

The failure of the resources boom to spread its wealth further afield and the price of our under-investment in education seems to be pointing more to unemployment rising than falling.

Thus, while our economy is just right on average, there are problems on the horizon that investors should consider. The tinderbox remains our over-priced housing. Sydney’s housing bubble, for example, can only continue to deflate comfortably if employment remains strong. An employment-related wobble in consumer confidence '” never mind the ability to meet mortgage repayments '” could be very tough for those of us at the economy’s freezing feet, rather than its cooking head.

View Carol Austin’s interview for comfort about where our stockmarket is heading this year, but also for a timely warning about where our nation is heading a bit further out.