In 1938, the famous Professor Andre Kondratiev was deported to Siberia and executed by the Soviets.
For telling the truth.
He used to publish a blog that showed people how to break the cycles of wage-slavery and get rich themselves. He let people in on big money’s secrets and big money wasn’t happy.
Well, not quite. But he did get punished for not towing the official line.
He became famous for a theory that capitalist economies move in broad 50‑year cycles. Up, and then down, and then up again. Trouble was that the Soviets weren’t interested in any theory that didn’t predict that capitalist economies would eventually end in a smouldering wreck of cigars and fancy cars. And so they got rid of him.
Publishing the truth is risky business, let me tell you.
But Kondratiev left economics with an interesting idea. That there might be “monster money surges” pushing through the system on a regular basis.
And now people are looking for these monster money surges (or K-waves to the pointy-heads in all sorts of things – GDP, stocks, property, commodity prices etc).
It turns out that the 50‑year phenomenon doesn’t hold much water. But the broad idea – that there are these monster money surges that regularly push things up, and then even further up over a long run – is sound.
Take commodity prices. Right now a lot of the commodity guys are arguing that we’re in the middle of a powerful commodity monster surge.
Commodity prices have been a strong upward trend since the beginning of the millennium. They have come off a bit in the last few years, but are still 2 to 3 times what they were when the monster surge kicked in.
But I’m not a technical trader. I like to know the story behind the trends, if I’m going to back it up with my own hard-earned money.
So what’s the story with the “monster money surge” in commodities?
In a word, Asia. It’s their century and because we are the next-door neighbours, it’s ours too.
The same fundamentals that have been driving the mining boom in Australia are driving global commodity prices.
I think this chart here tells a very interesting story. How are these apples?
It compares GDP per capita in a range of Asian countries. The key reference in Japan. They began their economic upswing in 1962, and took them over 30 years to fully ‘mature’.
In comparison, China and India, have barely started down the development path. Even though we’ve heard so much about them in the news and so on, really, we’re only getting started
In fact, this graph would suggest that the boom in China’s got at least 15-20 years to run. In India it could be more like 20-30.
And think about it this way: if the last ten years, as China took GDP per capita from $2000 to $5,000, could have such a massive impact on commodity prices and the resource sector, what will the next 20 years have in store, as China takes GDP per capita from $5,000 to $40,000?!?
And key to the story is ‘urbanisation’. In the last twenty years, 400 million Chinese people have moved into the cities. This means that about 50 percent of China’s 1.4 billion population is now ‘urbanised’.
And as the pace of urbanisation took off, a massive construction boom started sucking in more and more commodities – like Australian iron ore, coal and copper. Swelling demand then started sending the prices north. The monster was loose.
But the pace of urbanisation in China isn’t slowing down anytime soon. China plans to reach 70 percent urbanisation by 2030. And then 80 percent, something comparable with the US, by 2050.
So really, we’re only 15 years into a fifty year process.
It’s much the same story in India too. Urbanisation is still just at 30 percent, but is heading for 50 percent in 2030. That means building cities for another 280 million people.
But the important thing to remember is that it’s not just China and India. There are a whole range of developing countries waiting in the wings.
Take Indonesia. The economy there has been growing at 6-7 percent for most of the decade and at current rates will be bigger than Australia’s in fifteen years. With a population of 250 million it’s already twice as big as Japan.
And what about the Philippines? There are 100 million people there and the economy is growing at 7 percent a year.
In sum, there are almost 4 billion people across China, India, Indonesia and developing Asia, all treading the path that Japan followed from developing to developed nation.
The projected resource needs required to bring that many people into the first world are truly staggering.
And that puts Australia squarely in the box seat.
The development of Asia has launched a resources super-cycle that will support massive demand for Australian minerals for many years to come.
At the same time, with supply only physically capable of so much, prices will rise, and a massive monster money surge through commodity prices will define the next 20 to 30 years.
The resources boom has, in turn, let loose a monster money surge on the Australian economy.
It is the main reason why we’ve come through the GFC unscathed. And going forward, with incomes rising, property prices will ride the surge higher and higher, particularly as the tide of easy money around the world keeps rising.
The stars are aligning.
It’s a good time to be Australian, that’s for sure. There are a lot of doom merchants out there, but it’s important to remember just how lucky we are. That’s the honest truth of it.
Now, just don’t send me to Siberia.