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It's all in the timing

Now comes the tricky bit. Confidence is the key and we’re in the hands of central bankers and governments — if they get it wrong, my key belief that Australia will avoid a recession could prove wrong.

Right play and surprises

This is a new thought and it follows the negative Wall Street reaction to the AIG bail out. That was the right play by the US authorities. And it followed the Federal Reserve’s decisions not to rescue Lehman Brothers and not to cut interest rates.

When no change in interest rates happened, there was booing from the pits in the New York Stock Exchange. The no rate change surprised me as I reckoned that we needed a double dose of positive injections to offset the surprise of seeing Lehman Brothers, America’s 4th biggest bank, go into bankruptcy. The guys at Bear Sterns must be thanking their lucky stars that they ‘fessed’ up early and received a lifeline.

Face the music

It’s all a bit dramatic right now but the Yanks at least are facing the music of their disastrous lending policies and the quicker we get to the truth, the quicker we start to rebound. Right now investors would be doubting smaller financial institutions and even bigger ones which have not owned up to big losses.

A matter of trust

Like many companies such as Centro and Babcock & Brown carrying too much debt, some banks would have been hoping for a reasonable return to better stock market conditions along with better share prices. If this had happened by now, then the magnitude of losses would have reduced and asset values would have risen. However, nagging doubts have brought the whole sit, wait and escape strategy and it just isn’t working right now.

The reason is the people with money don’t trust those who have not been as forthcoming as we needed them to be. This drags out the recovery from one reporting season to the next and leaves the stock market captive to the bears.

Good timing essential

Good and believable news is needed. Even though I didn’t like the Federal Reserve’s decision to leave rates on hold, I figure there was method in the madness. You see they would have hoped for a good market bounce on the AIG rescue but they didn’t get it.

They now can wait for the right time to cut rates again — timing will be crucial. Imagine if they rescued AIG and cut rates but still got no bounce! That would have piled a negative on a negative, in terms of market perceptions.

Historical medicine

The tech wreck of 2000-2002 brought after it official interest rates of 1% and that was needed to pull the USA out of its economic slump. The same medicine will be needed again but metering out the relief in a timely fashion will be very important.

The current market slump will undermine consumer and business confidence which could send the Yanks into an official recession with GDP going negative for at least six months. This would rob people of jobs, making mortgage repayments tough, creating walk away owners and this would make the sub-prime loans even less valuable.

Tell the truth

Once the key financial institutions on Wall Street and Europe look like they have told the truth, saving the US consumer and worker becomes the main game to turn around stock market fortunes.

Some smaller US banks will go under but some will be bought and these nagging doubts would not be helping the US market right now and this affects us.

Question mark over Europe

The better results by Goldman Sachs and Morgan Stanley were positives but Wall Street’s negative reaction after the AIG rescue is a major concern.

Europe and the UK worries me and this will become the big question mark going forward.

Not long ago the European Central Bank did not cut interest rates as it was too worried about inflation. I hope they are right but I doubt it. To me a global recession looks more a threat but I hope they are right and I am wrong. This is why I say central bankers and to a lesser extent governments have to get their policy decisions right.

Back in Australia

I hope our central bank boss Glenn Stevens is right too as this week he seemed relaxed and ready to hose down the prospects of too many interest rate cuts. He doesn’t seem too worried that all of these “Bloodbath on Wall Street” headlines won’t translate into consumer and business negativity making recession rather than inflation our greatest threat.

Global recession

If Wall Street remains in the grip of the bears, central banks around the world will have to cut interest rates to stave off a prolonged, global recession. China is seen as the world economy saviour but it won’t be able to lend an economic hand without lower global interest rates.

This is why our hip pocket futures are in the hands of a team of central bankers right around the world.
Let’s hope they are the smartest guys and gals in the room.

Published on: Thursday, September 18, 2008

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