Calming the markets has come at a huge price: Gottliebsen

The big rise in the Australian market which was followed by Europe and the US tells us a lot about the forces that are governing global markets at the moment.

But first we should offer top marks to our commentator Adam Carr. Last week he threw caution to the wind and declared that the markets, at least in the short term, were calling it wrong and that there had to be and would be a solution to the Greek/European problem.

Here are just a few of his quotes:

“This has become insane. Greece has been bailed out – it’s done and the story should be dead. Nothing to see here people. Those recalcitrant Germans are on side, the papers are urging citizens to buy bonds, German politicians back the bailout, and so (now) do German banks. Yet Greek stocks fell 6.7% last night…”

“This latest bout does highlight one thing to me though. Greece cannot default. They cannot restructure their debt. They cannot leave the euro. These are not real options in this environment and it’s ludicrous to discuss them as if they were sensible alternatives. Not only are they the least palatable under any general scenario, but we find ourselves in a world where they simply wouldn’t work. Nothing would guarantee contagion more quickly than one of these options being employed.

“If an ECB announcement about buying bonds doesn’t work or something like it, then I think we can look forward to very aggressive regulation. The disintegration of the Euro zone isn’t a desirable option for policy makers and I reckon they’ll most certainly be trying a few other options first (market friendly or otherwise) before we get to that stage.

I have quoted those Carr comments because they graphically underline that every time we hit a crisis that looks like affecting the world and its banking system, the politicians are prepared to be almost anything to overcome it. They take the view that whatever the long-term effects will be from their actions, they will be better than a total collapse. And because there are enormous funds available via US low interest rates for market trading, we see major short and long positions.

There is no doubt that until yesterday the traders had shorted global markets and so when markets started to rise those shorts were covered and replaced with long positions. That’s why we are see major fluctuations in our markets on a regular basis. Therefore it is very dangerous to assume that after such a huge fall in our markets we are back to the strong rally. Many chartists say we are still in a bear market rally.

What we all understand is that whether it is the global financial crisis or the PIIGS problem, each time the world moves into crisis mode it locks in more debt, albeit government debt. And each time we do that it mortgages the future. BHP CEO Marius Kloppers in his Inside Business interview with Alan Kohler underlined the BHP concern about the effects of this excessive debt in looking at the 2011 and 2012 outlook.

Not only will these years see great pressure on interest rates, but the populations that have been subject to harsh measures will grow tired of tough times and one day Asia will also be sick of funding the rest of the world.

In the case of Europe, the real problem is that the euro covers a multitude of countries and cannot work in the longer term.

In the case of Australia, while our markets rose with Europe, we should focus more on what is happening in China.

Yesterday at one stage the Shanghai Composite Index was down 1.6%, taking it to an overall fall of more than 20% from its November peak. It recovered and closed up 0.4%, but that’s still down 18% from November.

What happens in China will affect us more than any other country. It will be fascinating to see what assumptions the Australian Treasury makes in today’s budget about China.

This article first appeared on Business Spectator.