A protectionist America and a restructuring Europe would spell bad news for a recovery: Gottliebsen

The big international sharemarket rises over the last 24 hours are part of the volatility which was forecast in the first stage of the global road map that was set out during the Hayman Leadership Retreat at the weekend.

Today I move to the second stage of the Hayman global road map, where we discover that part of the latest sharemarket rise underlines that the most dangerous situation for the world occurs when any major region does not understand the economic forces that are battering it.

Last night, the European Central Bank copied the Japanese central bank 20 years ago and underplayed the crisis facing European banks. They should have come to Hayman, where the bank problems were detailed under the Chatham House rule.

But I also want to make a sharemarket diversion from the road map to look at a market pattern that has been established.

Outside the ECB I am confident that many leaders in Germany and France understand the dangers facing them. China is on top of the situation, but I don’t think the land of the stars and stripes has grasped the dangers in its situation.

Last night’s jump in US consumer confidence and the decision of the Chinese to support the beleaguered Bank of America means that the American optimists had a boost and the danger was eased. But the Americans at Hayman underlined risks which the optimists, led by President Obama, put to one side.

With hindsight, one of the weaknesses of President Obama is that he has not always recognised the consequences of his actions. And so one of the reasons for American politics being log-jammed is that the Obama medical care program and its long-term unfunded monetary commitment was the driving force behind the establishment of the Tea Party.

The Americans at Hayman were genuinely frightened that if a recession envelops the US during the run-up to the 2012 presidential election, and unemployment rises, then protectionism and inward thinking could dominate the campaign. A lot will depend on who the Republicans choose as their runner.

Australia will soon be enveloped in what is happening in the US. The congressional agreement that saw the debt ceiling lifted encompassed major defence cuts and it became apparent in Hayman that Australia will be required to share some of the financial burden.

It is also likely that the Obama presidential visit being planned for later this year may include discussions about a major US defence facility in Australia replacing US facilities further north. This may be part of our ‘cost sharing’.

It is important to understand the two major weaknesses in the Obama administration that emerged at Hayman. First, the Obama medical proposal substantially boosted the demand for medical services but did nothing to lift the supply.

Thanks to brilliant lobbying over decades the number of US doctors is strictly limited, pushing medical costs to much higher levels than in Australia. Unless Obama boosts supply of medical facilities either through greater numbers of doctors or via technology, the US cost of medicine could skyrocket further.

Obama’s second mistake was to not direct the money printing exercise to home lending rather than allowing Wall Street to use it for global speculation, as we are now seeing in our sharemarkets.

US banks have slashed their home mortgage funding ratios from 90 per cent of the value of a dwelling to 50 per cent. If Australian banks did that the housing market would collapse – which is what has happened in the US, where almost one third of Americans have no equity in their homes. In addition there is a mountain of people who can’t or won’t pay their instalments.

Obama needed a plan to fix this. If the US goes protectionist during the election campaign at the same time as Europe is reconstructing, we are in for a rough ride.

China is watching the situation closely and believes it can handle a US and European downturn but a major collapse in European and US demand would require the Chinese to stimulate domestic demand quickly.

Whereas in 2008 there was international cooperation, in 2011 there is much less cooperation so the danger of a miscalculation is multiplied. But the message at Hayman was that while there is a possibility of a major short-term fluctuation in mineral prices, the overall underlying Chinese demand should be strong for eight to ten years.

The Chinese are not happy that they are hostage to the American dollar. In the coming years they will pressure Australia to write mineral contracts in the renminbi rather than in US dollars. And it also seems that the Chinese have worked out that Shanghai does not have the legal background to be the financial centre of China. That role is likely to be taken by Hong Kong. And as China becomes more and more important, Hong Kong will rival New York as the world’s main global financial centre.

But the Chinese will not always apply western rules and over time we may see the expansion of the Chinese rating agencies and different accounting and legal firms emerging. If the US were to turn inward, the pace of this would accelerate.

But at Hayman the belief was that the US would not turn inward and it would use the strength of its companies, its technology base and its workforce to propel the recovery once the required adjustments were made to its deficit. Tomorrow we will look at several unexpected twists in the road map.

This article first appeared on Business Spectator.