Australia enjoys two-pronged recovery – for now: Gottliebsen

The dramatic global rescue efforts undertaken little more than six months ago are working better than anyone could have imagined.

Accordingly a series of events have combined to create this remarkable rally in global shares. Australia is in the front line of beneficiaries because we are benefiting from the twin forces of the better than expected US position and the global stockpiling of metals.

However, if both forces are maintained – and with the metals stockpiling anything could happen – in the longer term these forces will clash.

The so-called stress tests on US banks are showing that the IMF was wrong in estimating that they were concealing another $US1000 billion or so in bank losses. According to the leaked results of the stress tests, we are talking about Bank of America and Citibank being forced to raise only $10 billion each.

Who do you believe? The market is betting on the stress test and casting the IMF estimates aside. If the US stress tests turn out to be right, there will be a lot of soul searching at the IMF (and vice versa if it’s the IMF that turns out to be right).

And the US stimulus package is clearly starting to work with the American economy bottoming, while in China there are reports that manufactured exports have begun to recover. In addition it seems that the Chinese domestic rescue package is also starting to drive the local economy.

To the above we then add the second dimension of metal stockpiling, which, if continued, will affect the long term course of the recovery. Fear that the US dollar will fall a lot further has caused Korea to join China in stockpiling metals – this is led by copper, but the range of metals is increasing.

And as the US dollar slips under the weight of the money printing that is yet to come, the traditional store of value, gold, is attracting buyers, causing gold futures prices to rise above $US900 an ounce.

In the longer term, if this switch of money from American dollars to metals gathers momentum then the global recovery will take on a whole new dimension. American interest rates will have to rise and global inflation could break out.

That’s bad news for the global markets, so these twin forces, which currently are both boosting the sharemarkets, will eventually come into conflict.

Locally, our domestic recovery will be affected by the rising Australian dollar. The designers of the global recovery package reckoned that anything was better than the crisis they were looking at following the Lehman crash.

They will deal the fall-out when it arrives.

This first appeared on Business Spectator.