The correction we had to have: Gottliebsen

Late last week, as I worked on an article for Business Spectator’s sister publication Eureka Report, I had a sudden change of heart. I dropped what I was working on and instead wrote a commentary that explained to readers why world share and commodity markets needed a correction.

If the correction did not come to pass in the short term, I wrote, then we faced the risk of a much more serious setback later. Just as importantly, if the correction did arrive, then it would represent a magnificent buying opportunity.

And of course for some months now Alan Kohler has been warning readers that global stock markets have been getting way ahead of what was happening in the real economy.

And so last night it seems markets began that correction, driven by three events.

First, the World Bank estimates the global economy will shrink by 2.9% in 2009, whereas previously it had predicted a 1.7% contraction. This was not what investors wanted to hear because the recovery in the stock market since March was based on the so-called ‘green shoots’ that had been emerging in the US and other economies. As you would expect, the World Bank forecast hit oil and metals and boosted the US dollar as investors retreated to the ‘safe haven’ of the greenback.

Second, reports spread around the commodity markets that the Chinese had taken ‘a breather’ from their aggressive buying and physical stock-piling of copper. This buying has not only driven copper higher but also attracted hedge funds and the up-thrust spread to other minerals. It has been a great driver of the Australian share markets and our mining shares have responded. Last April copper was below $US2 a pound. Earlier this month it peaked at $US2.4 dollars a pound and last night had fallen to $US2.1 a pound.

Third, and most importantly for Australia, when global shares and commodities fall the Australian dollar is sold down and the American dollar rises. Last night our currency fell from above US80 cents to below US79 cents. If that trend continues it will multiply the Australian fall.

Is this the end of the world, as markets have understood it since March? Some analysts say that the bear market will continue and they may be right – but the fears of a breakdown in the world banking system have subsided and the world’s a much safer place in June 2009 that it was in the final quarter of 2008 after Lehman had crashed.

I much prefer the concept that our share and commodity markets got ahead of themselves and they are beginning a very healthy correction.

This article first appeared on Business Spectator.