Short-term pain but gains in the long run

Making the right call on the world economy could make, or lose, businesses a lot of money.

PSST, wanna make a fortune? Then all you have to do is decide who’s right between BHP Billiton and the International Monetary Fund when it comes to the future direction of commodity prices.

Now that you know what’s required to get rich, perhaps it might be easier to place a bet on the next flip of a coin because, in theory, both of those organisations ought to know what’s happening, yet both see the future differently.

They’re not alone. The world today is full of disputed opinions about the future of everything, from property prices to commodity prices, to investment trends and even to the effects of climate change.

We are, effectively, at a watershed of economic and political events and whoever picks the winning side of the multiple debates taking place will make their fortune. Get it wrong and deep regrets will follow.

Consider some of conflicting arguments, starting with the IMF versus BHP.

Last week, both organisations gave their views on commodity prices. The IMF, the same mob telling Europe how to reorganise its affairs, reckons most commodity prices (other than oil) will fall by an average of 14 per cent over the course of 2012.

“For non-oil commodities, improving supply conditions and slowing global demand are expected to cause further price declines,” the IMF said in its latest World Economic Outlook.

BHP Billiton responded by unveiling its latest set of plans for a mega-harbour development at Port Hedland, a statement that echoed new-found optimism in China that the brakes are being eased on tight finance controls to permit increased purchases of commodities.

That one decision in Beijing is credited with the 16 per cent rise in the price of copper over past months, and appears to support BHP Billiton’s view of the world, which is increasingly Asian (growth) focused as opposed to the IMF’s view as seen from its Washington headquarters, and through the eyes of its French boss, Christine Lagarde.

Can both BHP Billiton and the IMF be right? Oddly, the answer is yes, because the IMF is simply looking at the next 12 months. BHP Billiton, and its great rival, Rio Tinto, are investing today for profits to be made over the next 20 years.

The risk, and it is a mighty risk, is that management teams at the mining companies are looking too far ahead for today’s investors and ignoring the short-term signals from the IMF and local forecasters, such as Deloitte’s Chris Richardson who famously invented the word ‘eurogeddon’, a nifty way of saying Europe is dragging the rest of the world into a great slowdown.

The key point in the case of the IMF versus BHP is timing. Investors with a long-term view will see eurogeddon as a short-term phenomenon, albeit a rather painful one that will eventually be swamped by China’s demand for resources.

Today’s investors might have to pay a price for the long-view, which has evolved at the senior management levels of BHP and Rio Tinto.

Property pugilists

CLOSER to home is a more amusing, but increasingly rancorous dispute between the differing sides of the property price debate.

There is no need to discuss the merits of the arguments, simply to note that some people believe property prices, especially residential property, has a long way to fall. Others argue that the period of price correction is over and the trend is up.

What is amusing is the anger being generated on both sides, with the best display of that emotion evident in the exchange of views between Christopher Joyce and Steve Keen – including this latest dose of vitriol from Joyce: “For most of this year Australians have had to read asinine media articles reporting purported experts predicting catastrophically large 20 per cent, 40 per cent and even 60 per cent falls in domestic house prices”.

That opening salvo was just the start from Mr Joyce, a financial economist writing in the January 25 edition of Property Observer.

In the blue corner, because this really has become a slugfest of opinions, is Steve Keen, professor of economics and finance at the University of Western Sydney, and a man who delights in demonstrating that high mortgage and personal debt has driven property prices up, and the contraction of debt will bring about the end of “one of the world’s last and greatest house-price bubbles”.

Just as with the IMF versus BHP Billiton, it is tricky for outside observers to know who’s right in the Joyce versus Keen debate over property prices; but it is certainly amusing to feel the heat rising, with Mr Joyce getting warmed up with this verbal assault on doomsayers and the media who dare report them.

“The fact that these individuals have no experience successfully forecasting housing market conditions seems to be utterly inconsequential to the journalists desperately seeking to peddle doom and gloom.”

In the next round, Mr Joyce might really say what he means.

Gas gamble

MEANWHILE, back with BHP Billiton, there is another fascinating divergence of views on display in the US gas market, where BHP Billiton is ploughing full-steam ahead with its multi-billion dollar punt on shale gas, just as other companies pull back.

If those pulling back were of little consequence then perhaps no-one would notice, but ConocoPhillips is not small fry, it is the third biggest US oil company, and it is planning a second year of substantial gas production cutbacks.

The problem for ConocoPhillips is that the US gas price has collapsed thanks to fresh supplies flowing from shale rock once regarded as too tight to release its gas.

But, while a big American oil company reckons better profits can be made elsewhere, BHP Billiton is sticking to its shale-gas plan in what could turn out to be one of those classic decisions that deliver huge profits, or one that costs a few senior management careers (and shareholders a lot of money).

Now the good news ...

ENVIRONMENTALISTS can see nothing funny in climate change, but in Britain a government report paints a sunny picture of a warmer climate, including fewer winter road deaths, more fish in the sea, increased blueberry production, and quicker shipping to Asia thanks to the opening of the famous North West Passage across the top of Canada. 

As the famous saying goes: “one man’s fish is another man’s poisson”.

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“Absurdity: A statement or belief manifestly inconsistent with one’s own opinion.”

Ambrose Bierce