The first step to recovery
A rally on Wall Street overnight will feed into a strong performance in Australia today. Over the longer term, US banks will need to be much more upfront about their position if they want to be helped.
Today's surge on Wall Street is an important reminder of the latent bullish forces in the market. There are large sums of money building up on the sidelines wanting the chance to invest, and at the same time we will have periods of short covering that send the market up.
When the US sharemarket rallied oil and copper rose, gold fell and the Australian dollar moved up a notch. Our shares will therefore do well today. Once the world is satisfied that the worst is over, positive forces will be unleashed and Australia will be a major beneficiary of the rally.
The rally was started by US Federal Reserve chief Ben Bernanke when he said that if the rescue packages work the US could be in recovery mode by next year, although tough times would last for an extended period. In addition there was the anticipation of renewed optimism from the President. There is no doubt that Bernanke is right but the key part of the rescue is the insolvent US banking system. Until ways are found to uncover its hidden losses and fix the mess there will be no lasting recovery.
Japanese banks hid their losses from the community for a decade during the 1990s and no matter what the government of the day did, Japan could not turn the corner. The scars of that time are still there because a generation of shocked Japanese are still reluctant to spend even today.
The Americans on the other hand are well known for facing their problems head on, making the necessary adjustments and getting on with it. Yesterday's statement from Bank of America that everything is fine was chilling in this context (Banks play battleships, February 24).
In the President's speech later today we should pay careful attention to what he says about the banks and the banking system. Nothing else counts.
When the US sharemarket rallied oil and copper rose, gold fell and the Australian dollar moved up a notch. Our shares will therefore do well today. Once the world is satisfied that the worst is over, positive forces will be unleashed and Australia will be a major beneficiary of the rally.
The rally was started by US Federal Reserve chief Ben Bernanke when he said that if the rescue packages work the US could be in recovery mode by next year, although tough times would last for an extended period. In addition there was the anticipation of renewed optimism from the President. There is no doubt that Bernanke is right but the key part of the rescue is the insolvent US banking system. Until ways are found to uncover its hidden losses and fix the mess there will be no lasting recovery.
Japanese banks hid their losses from the community for a decade during the 1990s and no matter what the government of the day did, Japan could not turn the corner. The scars of that time are still there because a generation of shocked Japanese are still reluctant to spend even today.
The Americans on the other hand are well known for facing their problems head on, making the necessary adjustments and getting on with it. Yesterday's statement from Bank of America that everything is fine was chilling in this context (Banks play battleships, February 24).
In the President's speech later today we should pay careful attention to what he says about the banks and the banking system. Nothing else counts.
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