The Key Ingredient to "Bubbles"? - Cheap Money

Greed, arrogance and corruption contributed to the financial crisis, but one essential element topped them all.

If you'd like to see somebody -- lots of somebodies, if I had my wish -- go to jail for helping create the global financial crisis, then $8 million looks cheap.

That's the budget for the Financial Crisis Inquiry Commission. If, just for starters, some of the folks responsible for the massive fraud at two of Washington Mutual's California offices went to jail, I'd think the money well-spent.

Global impact of iron-ore mining

But for investors constantly looking over their shoulders to see when the next bubble is going to pop and devastate their portfolios, that $8 million is a waste of money.

And that's because the investigation is looking in the wrong places for an explanation of the second bubble to hit U.S. financial markets in less than a decade.Msn.Video.createWidget('PlayerAd1Container', 'PlayerAd', 304, 314, {"configCsid": "MSNmoney", "configName": "player-money-4x3-articles-inline", "player.vcq": "videoByUuids.aspx?uuids=bcd7a27e-6ab9-402f-8590-1b22a33407f6,4def27da-b1dc-482d-8d84-ce73e2804801,a6cbe70e-dd12-4b94-8e19-814debb6184b,b4810b11-bf11-43d0-b019-092802f6fc62,96f21d9a-08db-415f-a038-52d6d7423f63,3d93044c-493e-46d6-936c-aadbac183495,043b0cf1-c85f-457e-ab03-6b2f02d90e68,a864f0a6-4b77-4553-aa62-1d6bb28e7303,a20f05ec-ec2f-4d08-af84-ca5f655f615d", "player.fr": "iv2_en-us_money_article_Investing-JubaksJournal-inline"}, 'PlayerAd1');Msn.Video.createWidget('Gallery4Container', 'Gallery', 304, 150, {"configCsid": "MSNmoney", "configName": "gallery-money-articles", "gallery.linkbackLocation": "bottom_left", "gallery.numColsGrid": "3", "gallery.categoryRequests": "videoByUuids.aspx?uuids=bcd7a27e-6ab9-402f-8590-1b22a33407f6,4def27da-b1dc-482d-8d84-ce73e2804801,a6cbe70e-dd12-4b94-8e19-814debb6184b,b4810b11-bf11-43d0-b019-092802f6fc62,96f21d9a-08db-415f-a038-52d6d7423f63,3d93044c-493e-46d6-936c-aadbac183495,043b0cf1-c85f-457e-ab03-6b2f02d90e68,a864f0a6-4b77-4553-aa62-1d6bb28e7303,a20f05ec-ec2f-4d08-af84-ca5f655f615d;videoByTag.aspx%3Ftag%3Dmoney_dispatch%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1;videoByTag.aspx%3Ftag%3Dbest%2520of%2520money%26ns%3DMSNmoney_Gallery%26mk%3Dus%26vs%3D1"}, 'Gallery4');The investigation will uncover:

Greed. It's always with us.

Arrogance. Wall Street breeds it. Masters of the universe, indeed.

Bad judgment.

Corruption. Payoffs. Lies of omission and commission.

Need I go on?

But this cavalcade of human sins wouldn't have been enough without one essential ingredient -- something that would magnify greed, arrogance, bad judgment, corruption, wishful thinking and more until they were powerful enough to just about take down the global financial system.The secret sauce of bubbles Identifying that ingredient and watching it at work now tells us that 1) we haven't seen the last bubble in our lifetime and that 2) we've done just about nothing to make sure that a bubble and its bursting aren't in our relatively near future.

What's that ingredient? Cheap money.

It's still at work in the global economy right now.

Let's take a single instance in the global iron-ore-mining industry. That sector is a sweet place to do business right now. Iron-ore miners have just negotiated price increases of 80% to 100% for 2010 through 2011.

Steel-makers aren't especially happy with that price increase, but none of them has the clout to take on the three big iron-ore miners -- Rio Tinto (RTP, news, msgs), BHP Billiton (BHP, news, msgs) and Vale (VALE, news, msgs) -- that control more than 80% of the iron-ore export market. Even China's steel-makers, even though China is the biggest steel producer in the world right now, don't have the size and power to challenge the iron-ore oligopoly.

But China itself does. And China seems determined to bust the iron-ore trust -- if not this year, then the next or the next or the next.

So on April 1, China Railway Materials Commercial, a state-owned steel trader, put up $258 million for a 12.5% stake in African Minerals (AMLZF, news, msgs). That money should be enough, African Minerals says, to fund the first phase of production at its Tonkolili mining project in Sierra Leone. China Railways Materials has agreed to buy ore from African Minerals for 20 years.

African Minerals, which until August 2007 was known as Sierra Leone Diamonds, is an exploration-stage company. It does have a report from a consulting company, SRK Consulting, of an iron-ore resource of 10.5 billion metric tons. Besides that resource, the company has the potential for 800 million metric tons of hematite iron ore. (The larger resource is magnetite.)

The company has also completed a lease agreement and is in the process of completing engineering studies to refurbish (Sierra Leone saw a brutal civil war from 1991 to 2002) or build rail and port facilities so the company can get the ore to market.

I'm not in any position to comment on the quality or quantity of ore at the Tonkolili project, but from the perspective of global cheap money, two things leap out at me about this deal:

First, the $258 million that China Railway Materials paid for its 12.5% stake in African Minerals works out to a market valuation of $2.06 billion for a company that hasn't yet mined a ton of iron ore. For comparison, Brazilian iron-ore giant Vale, with $23 billion in annual sales, has a market cap of $180 billion. Outside the iron-ore industry, Canadian molybdenum miner Thompson Creek (TC, news, msgs), with $373 million in sales, has a market capitalization of $1.95 billion.

Continued: An ambitious undertakingMore from MSN Money and MoneyShow.com

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Many thanks to Fed Chairman Alan Greenspan, our Great Leader George W. Bush, and Invincible GOP.

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Need I go on?

But this cavalcade of human sins wouldn't have been enough without one essential ingredient -- something that would magnify greed, arrogance, bad judgment, corruption, wishful thinking and more until they were powerful enough to just about take down the global financial system.The secret sauce of bubbles Identifying that ingredient and watching it at work now tells us that 1) we haven't seen the last bubble in our lifetime and that 2) we've done just about nothing to make sure that a bubble and its bursting aren't in our relatively near future.

What's that ingredient? Cheap money.

It's still at work in the global economy right now.

Let's take a single instance in the global iron-ore-mining industry. That sector is a sweet place to do business right now. Iron-ore miners have just negotiated price increases of 80% to 100% for 2010 through 2011.

Steel-makers aren't especially happy with that price increase, but none of them has the clout to take on the three big iron-ore miners -- Rio Tinto (RTP, news, msgs), BHP Billiton (BHP, news, msgs) and Vale (VALE, news, msgs) -- that control more than 80% of the iron-ore export market. Even China's steel-makers, even though China is the biggest steel producer in the world right now, don't have the size and power to challenge the iron-ore oligopoly.

But China itself does. And China seems determined to bust the iron-ore trust -- if not this year, then the next or the next or the next.

So on April 1, China Railway Materials Commercial, a state-owned steel trader, put up $258 million for a 12.5% stake in African Minerals (AMLZF, news, msgs). That money should be enough, African Minerals says, to fund the first phase of production at its Tonkolili mining project in Sierra Leone. China Railways Materials has agreed to buy ore from African Minerals for 20 years.

African Minerals, which until August 2007 was known as Sierra Leone Diamonds, is an exploration-stage company. It does have a report from a consulting company, SRK Consulting, of an iron-ore resource of 10.5 billion metric tons. Besides that resource, the company has the potential for 800 million metric tons of hematite iron ore. (The larger resource is magnetite.)

The company has also completed a lease agreement and is in the process of completing engineering studies to refurbish (Sierra Leone saw a brutal civil war from 1991 to 2002) or build rail and port facilities so the company can get the ore to market.

I'm not in any position to comment on the quality or quantity of ore at the Tonkolili project, but from the perspective of global cheap money, two things leap out at me about this deal:

First, the $258 million that China Railway Materials paid for its 12.5% stake in African Minerals works out to a market valuation of $2.06 billion for a company that hasn't yet mined a ton of iron ore. For comparison, Brazilian iron-ore giant Vale, with $23 billion in annual sales, has a market cap of $180 billion. Outside the iron-ore industry, Canadian molybdenum miner Thompson Creek (TC, news, msgs), with $373 million in sales, has a market capitalization of $1.95 billion.

Continued: An ambitious undertakingMore from MSN Money and MoneyShow.com

 1 | 2 | 3 | next >

Check out Jim's top stocks for the next 12 months.

Read how to invest with Jubak's showcase portfolio.

Follow the long-term portfolio from Jim's book "The Jubak Picks."

See Jim's new portfolio to help navigate the treacherous interest-rate environment.

Many thanks to Fed Chairman Alan Greenspan, our Great Leader George W. Bush, and Invincible GOP.

Read Full Article »