Investing

Peter Costello, the Australian treasurer, has warned that the resource boom can't go on. (see http://www.theaustralian.news.com.au/story/0,20867,18877827-2702,00.html).

"But Peter Costello yesterday warned investors who loaded up on mining stocks - like those who dived on dotcom stocks in the late 1990s - could be burnt when the boom grinds to a halt. "
"We think there's a couple of years left, but it will not be permanent," he said. "The resource boom won't last for ever. If you put all your eggs in the resource company basket, you'll be in as bad a situation in a couple of years as all those who put all their eggs in the tech basket in 2000."

What he doesn't understand ( and if he did understand he wouldn't be a politician he'd be a rich investor) is that there is almost no similarity between resources and tech in terms of valuation. In the end a bubble is all about valuation and major metal companies and oil companies trading well below the market multiple IS NOT A BUBBLE. A company with no plan to ever be profitable raising $300M is a bubble. A company earning a few million dollars, selling for billions is a bubble. Companies trading at 50 or a 100 times earnings is a bubble. A company trading at 10 times earnings is NOT. Was the treasurer forecasting the end of the tech boom in 2000???

Mr Costello said he did not foresee any faltering in China's economic development.

"I don't see any reduction in demand or global growth rates. The Chinese boom has a way to run. I think what may change the situation, however, is supply."

This is actually somewhat sensible but mostly wrong. Orthodox economics says rising prices bring on supply. What isn't factored in is that new mines can take many years 5 - 10 to come to production. With all the environmental controls, wacky governments etc it is hard to bring supply to market for most of the world. Furthermore, there are not massive supplies sitting in the ground waiting to come out; on the whole the easy resources have been found.

DON'T TAKE YOUR ECONOMIC ADVICE FROM THE GOVERNMENT!!