Alert for a bear attack

Most of the commentary over the Christmas-New Year break has been concentrated on single regional or country issues, whether it be about Europe, the US, China or India. And of course there has been extensive writing about the domestic outlook in Australia. This morning I want to step back and look at the combined message.

Let's start with the US, where there are signs of a modest recovery, remembering that the proposed big spending cuts do not take place until 2013. If and when they take place, the US recovery will begin to stall.

But in the 2012 election campaign the really big global issue will be relations with China, and a series of American commentators are now intensifying the blame for the sluggish employment recovery in the US on the level of the Chinese currency. For example, Professor Peter Morici at the University of Maryland has quite bluntly blamed US employment sluggishness on a 40 per cent overvaluation of the Chinese currency. He advocates a tax on dollar/yuan conversion equal to China's currency "market intervention that would neutralise China's subsidies that steal US factories and jobs.”

The China issue is going to be a major one in the American election and it comes at a time when China is about to change its leadership (The Distillery: China trials, January 16). China is slowing down and needs a major stimulus which might not be easy in a ‘leadership change year'. Any anti-Chinese rhetoric that comes out of the US will further complicate the situation.

All this is happening while Europe is slowly disintegrating. This was described graphically by Wolfgang Munchau of the FT (Europe's point of no return, January 16). And at the same time, again as set out in Distillery, India is slowing down more rapidly than we had expected and this has been reflected in the India sharemarket, which has been one of the worst performers in the world. Here in Australia, we are also showing considerable signs of domestic strain.

I think any one of these situations is probably manageable, although it will be a bumpy ride. The greatest danger the world faces is that all or most of these issues will take on lives of their own and then combine. The sharemarket bears have had a hard time during the Christmas and New Year break as markets have performed well. If any of the above problems get very serious and/or they all combine, then the bears will return to the front line.