Forecast: batten down the portfolio, we're in for a bumpy ride

MARKETS around the world have imploded. World stockmarkets have lost more than $US4.4 trillion ($A4.2 trillion) since July 26 as speculation mounts that the global economy is heading into a new recession. Is this GFC part two? Working out the real reason for the crash will be debated for some time. At this stage, everyone is guessing.

Experts say the big difference is that in 2008, the banking system was close to breakdown, but this time the banks are in better shape. Don't believe it. Banks overseas are in trouble because of their links to governments that made bad decisions three years ago.

There are several forces behind this meltdown, starting with jitters about a slowdown in China.

The biggest problem, though, is the basket case known as the euro zone. It's dangling on the edge with more debt than it can handle and sovereign risk worries. Bailouts for Greece, Portugal and Ireland are just Band-Aid solutions they are not fixing the problem. This week's turmoil threatens to engulf Spain and Italy and they're too big to bail out. According to one analysis this week, companies such as Budweiser, the world's biggest retailer Wal-Mart and technology giant Microsoft are now seen as more reliable at paying back their loans than Greece and Spain.

Add to that the US. On Friday, ratings agency Standard & Poor's cut its credit rating on US debt from AAA to AA for the first time in history. That's telling the world the US is no longer a rock-solid investment.

Analysts are still debating what impact it will have on the global economy, pointing out that there has been some discussion of this going on for weeks so markets would be prepared.

Still, there's one thing for sure: it won't be positive. The US debt burden has topped $US14.6 trillion and the US government continues to borrow 40? in every dollar it spends at a time when its economy is not growing.

Obama's debt ceiling deal has not fixed the fundamental problems. Unemployment is at 9.1 per cent, the housing market is dysfunctional, with many home owners owing more on their properties than they're worth.

Then there's the destruction of the middle class, which has driven demand - and US banks are not lending. At a time when the US needs stimulus and job creation, the politicians have gone for budget cuts. The big fear now is the US government has run out of resources to save the economy, which many now tip will slide into another recession.

So what impact will that have on Australia? It will hit markets, and superannuation will suffer.

But there is a plus side. Australian banks are vulnerable but are in much better shape than their overseas counterparts, corporate indebtedness is low, households are saving more than spending, our terms of trade are at historic highs and unemployment is low. As a result, Treasurer Wayne Swan on Friday reassured investors that the fundamentals of the economy were strong.

Still, there are worrying signs. Our traditional growth engines aren't ticking over properly. There is no more stimulus, retail and manufacturing are shrinking, the construction industry, always a driver of post-downturn growth, is just limping along and gains from our mining boom are being offset by the impact on manufacturing, retail and tourism.

Significantly, the bond markets and the Sydney Futures Market are now betting on interest rate cuts this year. That might be telling us that the economy could be in trouble.

With all these events in the global economy, it looks as if we're in for a wild ride.