This is the most important Email that you will read today, and maybe for the whole year: One of the best of the many great attributes of living in Australia is the laid back approach to life. Nothing sums it up better than “she’ll be right mate” and for generations, that has been true. However, the biggest issue with being comfortable or laid back is that there is no urgency or indeed reason to want or need a plan B in life.
Financial security is a big challenge with 50% of us suggesting it’s difficult
Last year News’ exclusive Galaxy poll made for very interesting reading. Like any survey, it’s not so much the numbers, but what they reflect. Here are a couple of stats and excerpts for you:
According to the report, “it is twice as important to Australians’ quality of life as having money to buy things. 75% of us are optimistic on our Future.”
“Money only leads to success and happiness as far as it delivers financial security and provides for a happy family”
Looking in more detail. It seems that “82% of higher income households are satisfied with their lives. Compared to only half of those on lower incomes.” Money doesn’t buy happiness though – right?
Are things about to change?
Living on our island continent. The rest of the world and its problems can often seem a long way away and really very little to do with our day-to-day life. The GFC was a good example of this. Where down to “good Government” aka history’s biggest ever resources boom and some luck with the world’s strongest economy needing our raw materials. We avoided much of the pain that has hampered other parts of the world, particularly Europe and the US.
The Early signs are starting to show
Looking at some of the economic indicators. The official level of unemployment hit 6.4%, a 12 year high last month and caused quite a shock. At a youth level we can now boast the 8th highest level of youth unemployment in the G20 – not the kind of climb up the leader board that you would want!
Part of this can be attributable to our “two speed economy” with mining and non-mining representing a very different story. Outside of mining, things have been tough and getting tougher in the job market. However, this has been offset by the bonanza in the mining sector, albeit up until early this year.
Are the cracks about to become chasms?
This year we have seen several big news stories of slowdowns in the mining sector – Clough Limited (ASX:CLO), Bradken Ltd (ASX: BKN) and even behemoth BHP Billiton Limited (ASX: BHP) letting people go, while in previous articles (SEE Imagine not being able to live on $180k a year article) we have discussed the re-contracting on short term basis, mining employees. This is continuing to happen and given the price of iron ore. Many can expect not to have their contracts renewed at all.
Australia’s biggest export
Iron ore represents Australia’s biggest export – by a massive margin. In fact, Iron Ore accounts for our second and third exports combined (coal and gold).
One fact that cannot escape anyone’s attention is that Iron ore prices have fallen to a 5 year low in recent weeks to around $82/tonne a fall of 40% for this year.
This is a MASSIVE move on our BIGGEST export. Yet the majority of people out there are either unaware of this, or, if they are aware, are adopting the national laid-back “she’ll be right mate” mindset.
Is our biggest export about to become Australia’s biggest problem?
Ok that’s sounds a bit dramatic! But lets crunch some numbers. With Iron ore at $80 a tonne, not north of $137/tonne where it was this time last year, $57/tonne of profit margin has evaporated from the exporters’ cashflow. While this is a problem for all, it is less a problem for the major producers. Given their lower production costs. But for the higher cost producers it is game over, if these levels are sustained.
What is causing this?
Well the root of the problem is about 8000 km away. In places I could probably not even show you on a map. With names that are hard to spell and even harder to pronounce. These are of course the housing bubbles in mainland China, where suggestions of huge oversupply and imploding prices have just about put the hand-break on demand for steel and from there, Iron ore.
Can a problem be a good thing?
I suppose the answer to that could be it depends on if you see “your glass half full or half empty”?
With this collapse in margin and earnings. Here is no question that things will get tighter for employees and contractors in the sector. Equally, for the stocks, things have the potential to get ugly. As I write, Fortescue Metals Group Limited (ASX: FMG) has broken down further and has the potential to be in free-fall. Fortescue Metals Group Limited (ASX: FMG) position is compounded by production costs as well as its cash reserves potentially being drained by early repayments of its unsecured notes. Our traders are currently working through a smart way for our clients to have little/no-cost bearish exposure to the stock, in other words, have the chance to profit from a fall in the price of the shares.
But that is not the real problem
The elephant in the room, the big kahuna of a problem is “she’ll be right mate”.
What will it take – what needs to happen for us to get uncomfortable enough to want to do something. So we aren’t caught in the headlights of the Iron Ore Road train?
After all, if you are employed in the mining game or your business is tipped toward that sector. Then you have a big problem – where is your income going to come from if you are laid off. Downsized or have your contract re-negotiated?
Alternatively, how are you going to support your negatively geared property portfolio when you have a big potential change in your income and therefore tax?
What is going to be the capital depreciation on your investment properties in any one of the major mining towns, if we see the cool wind of slow down blow through town?
Alternatively, maybe you don’t have anything to do with mining. Well actually you do – through your managed funds, your Superannuation, your home, your cash at the bank, and the tax you pay and so on. Everyone will be affected by this. The great thing is you can chose whether you are affected positively or negatively by this.
Is there a solution?
I was always taught never answer a question with a question and in the same way, never raise a problem without offering a solution.
So here it is, take 5 minutes and have a chat with one of my trading team. Let them talk to you about what we can do to help – not next year – but right now. After all, if you want to have the potential to not simply rely on a pay check (which may not be quite so reliable) for your income, then we can help.
What if I am wrong?
Well I suppose that depends – do you want to be right or do you want to be rich?
You see, even if I am wrong, you are going to have access to some great new skills that will last you a lifetime and give you the potential – the opportunity to have a second income – and that cant be a bad thing, can it?
And if I am right – well I am glad we have been able to help you avoid the pain that will face many Australian households that took the “She’ll be right mate” approach and ignored what is actually happening
You see, in that survey I talked about earlier half the respondents said that it was difficult now. Imagine how much harder it could all be on a Newstart allowance of about $550 per fortnight. And that is before you are means tested! Now that is not the quality of life that we dream of, have experienced and is our normal yet for some, it will very sadly be the reality.