Wall Street tumble shows recovery will take time: Gottliebsen

Yesterday in my column I suggested that all the elements for a major sharemarket correction were in place. Last night on Wall Street those forces exploded and we saw a big fall.

Now is a good time to stand back and see where we are.

On the plus side we have had a 24% rise on Wall Street so at this stage we are looking at a correction and the major international pillar I identified yesterday – the fact that the global banking system is not likely to collapse – remains intact.

But there are a lot of global and Australian nasties in the system and many are going to come out in the next few months and worry sharemarkets.

There are three main global nasties. The first is that if we can believe the IMF, the big global banks are hiding losses and those losses have to come out. We saw some emerge last night at Bank of America.

Second, the US has experienced a deep downturn and although the stimulus packages have helped stabilise the economy, there is no quick fix. And so Wall Street got way ahead of itself.

Third, no one is sure exactly what will happen if the synthetic collateralised debt obligation (CDO) market explodes, as now seems likely.

Last night we saw oil battered by the fundamental impact of the downturn in demand from around the world, which is a reflection of the very tough times in the real economy. Just because we have saved the world banking system does not mean that we go back to the good times quickly.

When it comes to Australia, yesterday’s second pillar, the Chinese buying of metals, will now be tested. The Chinese decision to stockpile copper and other metals is a major global development. But they do not want to allow the traders to come in behind them and push the price up too far.

Last night copper, lead, zinc and nickel fell in the 4% to 5% range. This may be a chance for China to squeeze the traders out. What’s very important for Australia is that, once the metal markets have settled down, the Chinese return.

It is also important for Australians to realise that, irrespective of what happens in the minerals market, this downturn is not going to be short-lived. We are looking at two or three years of tough times. Many companies are going to collapse and unemployment will rise, so consumer spending will recede.

Australia sprayed a lot of money around early to reduce the downturn, but I fear we used too much of our powder too early. Kevin Rudd needs to think more about confidence building rather dropping the recession word to divert attention from the boat people affair.

Our sharemarket did not rise as much as other markets in this recovery because the world fears that life down under will be tough for a long time. The extent of the fall in Australian shares and other market-based assets have been severe and there can’t be a quick recovery. But if the Chinese keep stockpiling metals it will help.

This article first appeared on Business Spectator