The five pillars of global recovery are working in a remarkable way creating a huge demand for shares and metals. The fifth pillar was last night’s completion of the General Motors / Chrysler rescue. Had General Motors and Chrysler been allowed to go to the wall some three million US jobs would have been lost – the industrial equivalent of the Lehman failure.
The General Motors ‘rescue’ via bankruptcy has been conducted with remarkable surgical precision and out of it will emerge a very strong General Motors without its legacy issues. Significantly it will be able to make money on far lower volumes. The people that divided up the global group into good and bad assets clearly valued the Australian General Motors design and manufacturing capacity in this environment. Accordingly, Holden has been retained among the continuing GM assets when it would have been easy to cut it off and sell it to the Chinese.
To expand on what I wrote previously, the five global pillars of the rescue effort are:
1. The rescue of the global banking system which was engineered by unprecedented international cooperation between national governments and central banks.
2. The massive Chinese demand stimulation via consumers and long-term infrastructure – yesterday I reported on the wave of new computers being made for farmers and city dwellers as just one part of a stimulus required to lift China’s growth rate to around 8% in calendar 2009.
3. The unprecedented injection of money into the global economy as governments around the world go into deficit and spend huge sums.
4. The recapitalisation of so many enterprises that have taken the opportunity created by the rise in the stock market to raise capital. Australia has been a leader in this movement.
5. The rescue of General Motors and Chrysler.
And the five pillars have created their own momentum, sending the US dollar down, which provides further stimulation to the US and is sending metals, priced in US dollars, up sharply. That rise in metals is boosted by people who want ‘real’ assets rather than US dollar paper. Last night among big rises in all metals we saw copper reach its highest level since last October and aluminium kicked further ahead boosted by the Alcoa statement.
The Australian dollar is being fanned by this momentum and reached 81 US cents last night.
While we rejoice in all these developments it is important to remember that global governments have flooded the world with money as part of the five pillars. There is going to be a very large demand for funds to pay for this spending later in 2009 and in the years beyond. The banking system will need extra funding and there are still nasty losses in the system. In my view, are going to see higher global interest rates which will moderate the rise in economic activity being predicted by the stock market.
And finally, President Obama says that he wants to quit the US Government holding in General Motors as soon as possible. If the stock market up-thrust has any validity, GM is going to make a lot of money once its legacy problems are removed and if the consumer demand that the stock market is foreshadowing comes to pass. The US Government has taken the risk and should share in the rewards.
This article first appeared on Business Spectator.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
