Australia’s Bad Bet on China

Wolf here: After any bubble, it’s always: “Nobody predicted the crash….” Central bankers don’t see bubbles. They’re not allowed to. At least officially, they don’t see them. And thus they can’t see the implosions coming. They can’t officially see these things because they help create them with their monetary policies.

Industry insiders and their financiers don’t see bubbles either because they get rich off them. Politicians and bureaucrats don’t see them because bubbles make them look good and bring in a lot of moolah.

But people do see the bubbles – which are huge and easy to see – and they do predict their crashes though they might not always get the timing right. Yet, they’re pushed aside and made the most unpopular folks around, and they’re expelled from the herd, and their warnings are ignored. It happens every time. And it happened during the Australian iron-ore bubble, whose spectacular crash suddenly “nobody was predicting.” Ha! Here’s Lindsay David:

By Lindsay David, Australia, author of Print: The Central Bankers Bubble, founder of LF Economics:

Late last week Bloomberg’s James Paton released an article titled, Gina Rinehart says ‘nobody was predicting the ore price crash’

Rinehart, “Australia’s richest woman” and “chairman of Hancock Prospecting,” as the article put it, is not the only mining head, politician, treasury employee, mainstream economist, or Reserve Banker “not” to predict the ore price crash. In fact, unless I am seriously mistaken, none of them saw the price crash coming. But they have indeed ignored all the warnings by those who did predict the crash in the spot price of iron ore.

As a clear example:

It’s no secret that back in early 2014, I made the prediction that the spot price of iron ore would breach below $20 per metric ton before the end of 2017. At the time, it was trading above $120 per mt. It’s currently trading at below $58 per mt. And in my opinion, this prediction is on track to eventually becoming a reality.

Back in May of 2014, I attended the “Australia in China’s Century Conference” where Andrew “Twiggy” Forrest was a panelist. Citing my research and concern that the price of iron ore could crash, based on the notion that the mining industry did not accurately calculate how much iron ore China would need in the future, I asked Mr Forrest in front of several hundred people, What if Australia made a bad bet on China?

‘Twiggy’s’ response to my question was clear, as per this article below posted on The Australian shortly after his response to my question. See paragraphs of the article below highlighted in red boxes.

Mr Forrest’s response to my question was applauded by the audience followed by the majority of attendees, including federal politicians, frowning at my question, and making me the most unpopular attendee at the conference.

Firstly, its not like I was “not” trying to warn our mining executives of the mathematical screw-up they made. I wrote a book about it when the spot price of iron ore was well in excess of $120 per mt. But I did make it clear that the risks back at the time of the Australia in China’s Century Conference (when iron ore was down at $95 per mt) would be a problem “today” for iron ore producers. And these miners are at the early stages of experiencing a wealth of financial pain that will claim multiple victims. But the mainstream herd of the Bogan Empire simply chose to ignore my view, which was backed up by math.

My case is just one small example. However, I was not alone warning of the risk of a collapse in the price of iron ore. There were several of us bears raising the alarm bell. All of whom too were ignored.

Back in February 2013, if the leaders of the Bogan Empire had spared the equivalent income derived from selling 654 metric kilograms of iron ore and reinvested that cash into an annual paid MacroBusiness subscription, they would have noticed David Llewellyn Smith’s long list of outstanding reports where he uses data to illustrate the risk profile of the mining industry. These articles were obviously ignored by the mainstream herd of smart people in the Bogan Empire.

Today, it would now cost them more than 1,450 metric kilograms of iron ore income for the same paid subscription.

When diversity (all views) is ignored by the herd, that’s when troubles occur. It was mathematically only a matter of time before the spot price of iron ore would crash.

Unfortunately Australia’s banking and real estate sectors are too on track to witness the same catastrophic, yet incredibly predictable downturn the mining industry is only just beginning to experience. Since returning to Australia, I’ve quickly understood that using a calculator with some common sense seems to be a difficult procedure for Australians to undertake when the herd makes a mathematical forecast. By Lindsay David, author of Print: The Central Bankers Bubble

The Australian mining sector is screaming towards what may be one of the most colossal economic breakdowns in modern Western history. Read… Australia Runs out of Luck, Now Needs a Miracle

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  8 comments for “Australia’s Bad Bet on China

  1. mick says:

    None of these commodities have crashed, they were all in a bubble and have returned to their historical average price. Call it the China commodity bubble. When they fall in half from here, they’ll truly have crashed.

    • NY Geezer says:

      I think you are partially correct.

      I have watched oil for a long time. Prior to 9/11/2001 its price was in the neighborhood of $20 and hardly ever went higher. It remained there until we invaded Iraq in 2003. Since then the price rose to its recent heady levels until its recent decline.

      Oil presents one of the clearest examples of the successful suppression of supply to create a price bubble. I believe this bubble is related to the substantial removal of Iraq’s oil from the market. The bubble lasted longer than I believed it would as there is no way to account for the extent of the willingness of warring factions to kill an economy.

      However, somehow the Iraqis have now restored much of their prior production even though the factions do not appear closer to peace. And it would be a total shock if the oil interests were to lose their battle to keep Iran’s oil off the market.

      Once the oil bubble started to inflate the financial markets jumped in with virtually unlimited financing to create new supply where extraction was previously too expensive, eg., fracking, oil sands and ultra deep ocean drilling.

      I would agree that iron which has benefitted a demand distortion and several other commodities are also in a bubble but not all.

  2. hidflect says:

    Gina Rinehart is a stumbling, urban legend of inanity in Australia. She’s going to make herself a millionaire from the billions she inherited. Even her own children hate her with a years-long legal suit.

    • B Wood says:

      Yeah, trying to think of one redeeming personality trait of Gina and I’m just coming up blank…..possibly way down deep somewhere.

    • B Wood says:

      I am in Perth and have been told by supposed experts that Iron Ore is just taking a breather and there is no way that real estate or employment in Perth will be affected very much, as for Banks, AAA rating baby!…..Its wonderful living in such a truly AWESOME! place where fundamentals just don’t apply anymore.

  3. NOTaREALmerican says:

    As long as humans have pathological optimism there must be bubbles. Bubbles are as natural as reproducing, and caused by the same part of the brain.

    • Ray says:

      The old human nature argument. Yet from my perspective it has everything to do with power and moral hazard.

  4. Julian the Apostate says:

    The repetition of this phenomenon over the course of history does seem to buttress its hardwired nature in the human psyche. One can see a similar progression in the annals of science, where a new discovery, though proven to exist by experiment and reproducibility of result, can be resisted mightily by the status quo. Einstein overturned 19th century physics, then the quantum mechanics ran with the ball and upset Einstein mightily. He spent the next 40 years trying to challenge it. His exasperated response to it is often quoted: “God does not play dice.” Neils Bohr’s rejoinder is never quoted, “Don’t tell God what to do.” The herd accepts Einstein’s quote, and rejects Bohr’s. The smartest people in the room, when proven wrong ALWAYS say that “nobody could have seen this coming.”

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