The rules for the world's capital markets have now changed.
Since the US began printing money vast sums have found their way into investment banks and have been distributed around the world – often chasing high yields in either Europe or emerging countries. Now those investment banks understand that the money will not keep coming in the next year or so, they will start repatriating funds to the US, where interest rates are likely to rise. No one knows the level of risk that has been taken by the global investment banks and associated money managers.
Hopefully the ‘false alarm’ earlier this year alerted those who’d been taking risks, particularly in emerging countries such as India and Indonesia, that there’d be big potential losses on the taper. But nobody knows.
The US sharemarket last night gave a thundering vote of confidence in its investment banks by rising, although my friends in New York tell me the investment banks were trying to engineer a December rally by covering short positions to get good Christmas bonuses. The real test of market reaction may come in January.
As I have been pointing out, the money printing has actually been deferring US investment because countless businesses were frightened to invest or employ, fearing what might take place when tapering started (A world-class flaw in the Fed's jobs plot, November 21).
The Federal Reserve has woken up to the fact that quantitative easing is now having the reverse effect and holding the American economy back. Nevertheless the US economy has great momentum and even if we discover that there are big problems, the difficult time will pass and the inner strength of the US will emerge.
I believe the Australian dollar will decline, because US money managers have been using Australia as a safe haven and will be selling the Aussie to bring money back to the US. As the dollar falls however, the momentum of Chinese investment in Australia could increase.
Initially, the Australian markets will move with Wall Street. Longer term, the problems facing Australia are more profound. Whereas the American economy is on the rise, the Australian economy faces a series of blows; the end of the mining investment boom; big reductions in government expenditure; and large-scale retrenchments in retail and motor. In addition, whereas America has low-cost energy and labour, our gas and electricity prices are high, as is labour.
America has gone through its period of adjustment and the taper indicates that process is being completed. In Australia it is just beginning.