Saturday, 17 June 2023 — South Melbourne

By Nickolai Hubble Editor, The Daily Reckoning Australia

[8 min read]

Dear Reader,

It may well be the most ridiculous idea since the Children’s Crusade. But the net zero campaign still anticipates creating the biggest economic boom in Australia since the gold rush. Both the attempt to reach net zero and its inevitable failure promise to make select groups of Australian investors very rich.

Indeed, we could not have designed a country better suited to profit from the net zero boom and its subsequent doom. We have the natural resources needed for both the bubble and its bust, the industry needed to get at them, the political stability to make the most of it, and the experience of recent history to guide us.

It all reminds me of the Chinese mining boom of 2003–12 when Australia provided the resources needed to urbanise and modernise China. That era was so good for Australians that our dollar ended up well above parity with the US dollar. And it wasn’t just because I migrated here in 2003 either…

What I’m suggesting is that net zero offers a repeat of this experience but on a much larger scale. This time, the entire world is trying to transition into a different sort of economy.

Also, instead of a bust following the bursting of the 2012 commodities bubble, Australia will discover that it has an abundance of the resources needed in the subsequent boom too.

Imagine being invested in the tech bubble and the housing bubble. Or the FAANG stocks and meme stocks. That’s what’s in store for Australia — a double whammy.

Let me explain why my usual doom-mongering is taking part in the Sunshine Coast Council’s random public holiday today…

The first part is quite simple. The net zero campaign requires eliminating or offsetting our carbon emissions. We plan…well, we intend to do this in a variety of ways. This includes building renewable energy to replace fossil fuels, electrification of everything that uses fossil fuels, carbon capture and storage, power storage, and much more.

Unfortunately, all of this requires a lot of resources. An impossible amount according to those who bothered to do the maths. (Which didn’t include the governments who committed us to the task.)

Conveniently, Australia is home to a lot of the resources that we need impossible amounts of. Top of the list is copper, the metal of electrification, but it’s a very long list.

Here’s how The International Energy Agency, which may have to be renamed ‘The International Energy and Mining Agency’, summed it up, with my emphasis added:

‘[A] concerted effort to reach the goals of the Paris Agreement (climate stabilisation at “well below 2 degrees global temperature rise”, as in the [IEA Sustainable Development Scenario] SDS) would mean a quadrupling of mineral requirements for clean energy technologies by 2040. An even faster transition, to hit net zero globally by 2050, would require six times more mineral inputs in 2040 than today.

‘Which sectors do these increases come from? In climate-driven scenarios, mineral demand for use in EVs and battery storage is a major force, growing at least thirty times to 2040. Lithium sees the fastest growth, with demand growing by over 40 times in the SDS by 2040, followed by graphite, cobalt and nickel (around 20–25 times). The expansion of electricity networks means that copper demand for grid lines more than doubles over the same period.’

Let’s add a few individual resources. The estimates vary between 700% and 4,000% increases in total supply needed.

• Lithium 4,200%.
• Graphite 2,500%.
• Cobalt 2,100%.
• Nickel 1,900%.
• Rare earths 700%.

Compare the resource shortfalls to Australia’s mineral reserves and you get a decent match. We have the second-largest copper reserves and largest cobalt reserves, we’re equal first for nickel, fifth largest for lithium and rare earths, and so on and so forth. Production rates also tend to be high, and resources (a broader definition than reserves) too.

So, know anyone who can increase global metals production sixfold by 2020 when the IEA estimates were made? Of course not. By the time we’d have achieved the impossible, we’d need manifold more supply anyway, because of how long it takes to get mines up and running.

This supply increase is supposed to take place in an environment of declining mining investment for many of the resources, and the anticipated closure and/or nationalisation of major mines in South America, by the way…

All this means higher prices. A lot higher. This may potentially lead to very high inflation according to one of the experts I recently interviewed about all this.

Even the Australian Financial Review is on the case for what this means for us:

‘Australia is in pole position to benefit from a sixfold increase in demand for so-called “critical minerals” worth $US12.9 trillion (AU$17.6 trillion) over the next two decades, driven by the race to hit net zero emissions, according to analysis from The International Monetary Fund.

‘In its latest World Economic Outlook, the Washington-based multilateral lender projects that a steady 15% increase in its metal price index will bolster Australia’s annual economic growth by one percentage point, further strengthening the government’s finances.’

I don’t know about you, but I reckon a sixfold increase in mining output would add a heck of a lot more than 1% to our GDP…

Things are so desperate for net zero in the resources sector that Australia may avoid the worst of the net zero mania to keep the rest of the world supplied with the metals they need to go gaga. As a Sydney Morning Herald headline put it: ‘Boosting copper output “the biggest contribution Australia could make” to hitting net zero’.

To be honest, it's beginning to remind me of the book and film, Dune. With Gina Reinhart as the Baron. The spice must flow. This begs the question: who is going to volunteer to marry the princess of the environment, Tanya Plibersek…?

Anyway, the Australian mining industry is well-established, experienced, resourced, and capable of taking advantage of this boom. Compared to other countries, anyway.

Another factor in Australia’s favour is political risk. Most of the world’s mines are also home to troublesome governments. Some of which are in trouble, including those in South America.

Australia offers reliable resource supply, making it more viable for investment and the long-term sales contracts that unlock such investment.

But what the net zero zealots might not realise is just how well-positioned Australia is to profit from the failure and fallout of net zero too.

You see, governments seem to have miscalculated in their attempt to reach net zero. Well, they didn’t do the calculations in the first place. But the outcome is the same. We are in for serious energy shortages in the coming decades.

Whether it’s an investment in energy resource production (like coal, gas, or solar), electricity production and storage, renewables manufacturing and installation, grid expansion and upgrades, or any other measure of energy you can think of, we are falling very badly behind what we need to sustain our current lifestyles.

Of course, this takes years to become evident because the energy industry is a slow-moving beast. But it also takes many years to fix the problem once it becomes evident on your power bill. The point is that we’re in for a sustained period of energy shortages worldwide.

Australia just happens to have an abundance of energy resources to ‘fill the void’, as my colleague and mining expert James Cooper recently put it. Specifically, the energy resources that are fast and easy to bring online.

We have the infrastructure to use gas, and gas is much faster to develop into production than other forms of energy resources. It takes about twice as long for mines to be developed as gas wells, for example.

All this puts Australia — and Australian investors — in pole position when it comes to the failure of net zero to live up to expectations. You just need to transition from the right metals to gas at the right time.

But perhaps the best opportunity is in the nuclear field. You see, the one thing all experts on net zero (outside of Germany) agree on is that nuclear is the key solution to cutting emissions. This implies a huge boom in nuclear power buildouts. One which has already begun in many nations.

Australia has the resources needed to feed uranium demand in a secure way. It also has huge nuclear power potential. And the polls have turned in favour of the fuel here.

A boom in nuclear would benefit Australia disproportionately because it can be used in other ways we need disproportionately thanks to our geography, including hydrogen and desalinisation.

All this amounts to another episode of ‘The Lucky Country’. The question is, what will your part be?

Until next time,

Nickolai Hubble,
Editor, The Daily Reckoning Australia Weekend

By Jim Rickards Editor, The Daily Reckoning Australia

Dear Reader,

One of the most fascinating aspects of the SVB collapse and the subsequent bank runs is how quickly global bank regulators abandoned carefully worked-out ‘bail-in’ rules and reverted to a weird hybrid of bail-in and old-fashioned bailouts. The putative result was short-run calm. The real result was total confusion among bank depositors and a further loss of confidence in the whole banking system.

The explanation for this bail-in/bailout distinction takes us back in the time machine to the period from 2008–14.

SVB is more than a wipeout for stockholders. SVB is the first example of a financial regulatory rule put in place by the G20 in November 2014 in the aftermath of the 2008 crisis. There was a popular outcry against using taxpayer money in 2008 to bail out bank CEOs who were making millions, and whose banks are still around. In response, the G20 agreed that in future financial crises, there would be no more bailouts with taxpayer money. The new approach was to be a bail-in.

This means that in the case of a failed bank, equity would be wiped out first, and then depositor funds would be converted to contingent claims if they were above the insured amount. Bank deposit insurance is US$250,000 per deposit in the US and €100,000 per account in the EU.

More than 95% of the deposits in SVB exceeded the insured amount. This means those deposits were gone, according to the FDIC’s press release on 10 March 2023. Depositors were to get a ‘receivership certificate’ from the FDIC, which may or not have been worth anything depending on what the FDIC might collect from asset sales.

It could take months to ascertain the size of the SVB losses and a year or longer to sell assets. Depositors might ultimately get 90 cents on the dollar or 10 cents on the dollar. No one would know until the FDIC computed the size of the hole in the SVB balance sheet. The losses would get worse as the fire sale proceeded and asset values dropped further.

Contagion and systemic risk

The systemic problem is that those lost SVB deposits represent venture capital investments and working capital balances for thousands of tech startups and early-stage tech companies. They would have no cash to spare. This means they would not be able to make payroll, pay the rent, pay vendors, or conduct business. Those tech firms would likely fail, tens of thousands would lose jobs, and the ripple effects would spread from there.

The issue of contagion from SVB is interesting and not well understood. Everyone is worried about other banks failing. That’s a real possibility and is likely to happen. But that’s far from the only kind of contagion.

Silicon Valley companies and tech firms around the world held in portfolio by SVB would see their stock prices decline as the FDIC conducted a fire sale of assets to pay creditors. Buyers would lower their bids knowing the FDIC was desperate to raise cash.

There’s an unhealthy tension between how quickly you dump assets and how much you can get for them. Generally, a slower approach gets higher prices, but that slow approach may strangle the startups. Top Venture Capitalist (VC) firms warned startups that if their money was lost in SVB, they would not be getting new funding from the VCs. So they would fail.

The bail-in became a bailout

The FDIC announcement of a bail-in of depositors held sway for about 48 hours. Around 6:00pm ET on 12 March, a joint announcement by the Federal Reserve, FDIC, and US Treasury said, in effect, ‘just kidding’. The bail-in was abandoned.

Instead, the regulators announced that 100% of depositors at SVB would be protected in full. The bailout was back. The 2014 bail-in rules, which had been in place for nine years, were thrown under the bus in two days. (In passing, the press release also announced that another large bank, Signature Bank, was being shut down by the FDIC. Their depositors were protected in full also).

This was clearly a bailout of Silicon Valley, but it’s bigger than that. The depositors at SVB, tech startups, and mature companies were bailed out when the Fed/FDIC abandoned the US$250,000 deposit insurance limit. But those companies had investors of their own (large VCs and high-net-worth individuals), and they were also bailed out by not having to take losses on those investments.

Not only that but the entire banking system was bailed out by the 12 March announcement. This is because the Fed invited any member bank to deliver underwater Treasury and mortgage securities and get 100% cash (no haircut) for the full par value of the bonds — even though many are deeply underwater on a mark-to-market basis.

The Fed, FDIC, and Treasury credibility on the subject of ‘no bailouts’ is now in shreds. This is a bailout of monumental proportions, which mainly benefits tech entrepreneurs, wealthy investors, and banks.

Secretary of the Treasury, Janet Yellen, said this bailout would not involve taxpayer money. This is false for two reasons: US$25 billion of the bailout money is from the Exchange Stabilisation Fund (ESF), which was created in 1934 after FDR confiscated gold from everyday Americans at US$20/oz and repriced it at US$35/oz. That’s a 75% mark-up profit for the government that was taken from Americans’ pockets at the time. The ESF has been growing ever since, and the Treasury can use the money without Congressional authorisation (Robert Rubin used it in 1994 to bail out Mexico when Congress refused).

More to the point, the rest of the money comes from the FDIC insurance fund. This will be badly depleted by the SVB and Signature bailouts. It will be replenished by increased FDIC insurance premiums on banks. The banks will pass the insurance costs along to consumers in the former of lower interest or higher fees.

So, in the end, the everyday US taxpayer always pays. The cost is simply disguised through the FDIC. The winners are billionaires like Bill Ackman, Mark Cuban, and others.

Regards,

Jim Rickards,
Strategist, The Daily Reckoning Australia