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End of the bear?

A recent survey showed 70% of Australians think the world is heading into — wait for it! — a depression and that we’re going into recession. Apart from the concern that we have all turned our sentiment to the panic setting, it’s extremely worrying that good news is not getting through to mainstream Australia.
Let me help to right the wrongs.
US may be in for second-half recovery
For starters, most economists think we won’t have to pull out the D-word and that the world is in a severe global recession. Many economists and analysts think the US will show signs of economic recovery later this year.
Only last week, the chief US economist at Goldman Sachs, Jan Hatzius, predicted an American economic recovery in the second-half of this year. Goldman is an august financial institution, which Warren Buffett was prepared to lend a load of money right in the depths of the financial market meltdown.
Someone like Hatzius must have his computer models telling him that the US can recover this year to make such a claim. And as the US emerges out of recession it will not only add to global demand helping other countries’ economies, it will bolster global business confidence.
Look at history
In fact, if history can be believed, the stock market should head up well before the economy starts to give out better statistical readings on its health. Usually this happens six months before and so if we saw good economic figures in November, the market should be looking good in May.
Of course, the US economy could look good in September and so the current run up of Wall Street and other stock markets could be the start of a bull market run. Note that I used the word ‘could’ as I am not 100% certain that we are out of bear market territory just yet.
Ringing early
On my Money Makers program on Sky Business last week, economist Clifford Bennett from Kinetic Securities stuck his neck out and tipped the bear market was over. In effect, as his email said, he was doing something that no one ever does — ring the bell at the end of the bear market!
He was slightly wrong — people do ring it but they get it wrong. I have had four guests on my show who have rung too early.
Geithner’s plan
That said, there’s an increasing number of analysts using the word “bullish” and the recent efforts from the US Treasury Secretary, Tim Geithner, has excited the market but there may be some more work to be done before we’re out of the bear market.
In a nutshell, Geithner’s plan is to rid the US banks of toxic assets that stop them from lending to consumers and business. The Government will partner private investors such as hedge funds to buy these parcels of loans which have both good loans and sub-prime ones.
Until this plan was put forward, the price offered for these toxic loan assets was 22 cents in the dollar. Now with the new plan, an investor might offer 60 cents in the dollar and when the US economy recovers, they could be worth 80 cents in the dollar.
To sweeten the deal, the Government is providing low cost loans to these potential buyers of these toxic assets.
Keep your eye on it
Over the next few weeks we have to see what deeper analysis thinks of the plan and then the US Congress has to support it. Over this time the stock market could have some ups and downs but if the plan eventually ticks all of the boxes, then shares could head up big time.
The interesting test is whether we can avoid previous lows when the sellers outnumber the buyers. If this happens, confidence will come back with a vengeance.
The Australian outlook
On the local economic front, there’s less to worry about. Last week I surveyed household name economists — Craig James (CommSec), Saul Eslake (ANZ), Rob Henderson (NAB) and Shane Oliver (AMP).
All but one had us in a mild recession with unemployment topping out next year a tad over 7%. Shane Oliver went for 9% but even this is a lot lower than the 1990-91 recession where unemployment got up to 10.9%.
All said our economy turns positive in 2010 and some can see it by the second-half of this year.
The main man
The big hope is for Wall Street to buy Geithner’s new plan and a nice rebound of share prices will help investor, business and then consumer confidence.
Then we should see some much better economic readings and this rough patch will gradually become old news.
The ball is in the US Congress’s court and the pockets of the potential investors who have to get on the queue to buy the US banks’ toxic assets. The global economy really needs to see a big win for Obama’s team in cleaning up its bank problem.

Geithner is not only Obama’s main man, he’s ours too. 

Published on: Wednesday, March 25, 2009

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