Buckle up for apocalypse Dow
Some say that financial armageddon is nigh - and that it's already too late to stop it.
WHEN the respective heads of the World Bank, the International Monetary Fund and the Federal Reserve each warn within a day or so, as they did last week, that the likelihood of a double-dip global recession has increased and that ''we are entering a danger zone'', it's pretty hard to ignore.
Shares tanked on the news, with the Australian market ending 5.6 per cent lower for the week and at a 26-month low. So did commodity prices - copper was down 7 per cent on Thursday evening and another 6 per cent on Friday night. Gold wasn't spared, while silver was crunched 18 per cent overseas in the Friday session alone.
The Australian dollar was also dumped in the commodity sell-off, dropping firmly below parity with the greenback to finish at US97.7¢, and with Commonwealth Bank currency strategist Joseph Capurso deeming the near-term risks to remain on the downside.
Advertisement: Story continues below Everyone in a position of power in the northern hemisphere continued telling someone else to start acting decisively. But no one offered up exactly what should be done to solve Europe's sovereign debt ball and chain and the potential euro-zone banking crisis it is creating, nor how to kick-start a US economy with a dysfunctional US political situation and huge unemployment.
The G20 meeting of finance ministers said they would undertake a ''strong and co-ordinated international response to address the renewed challenges facing the global economy'' but offered nothing of substance on what that response may be. They'll come back to us from Cannes in November apparently.
So the bumbling along in the northern hemisphere continues as the economic indicators worsen and with Greece's next €8 billion ($A11 billion) bailout lifeline still up in the air as its default deadline looms. This is despite Greece pressing ahead with what Deutsche Bank senior economist Phil O'Donaghoe describes as ''incredibly draconian austerity measures''.
All major financial players agree global economic growth is slowing, but are we heading towards a GFC Mark 2, a double-dip global recession or simply a slowdown that will take economic growth to the brink but at which point we will be miraculously rescued by some as yet unknown circuit-breaking plan?
The consensus among local economists is still for the latter, primarily because they expect the US economy to scrape through somehow. Europe, on the other hand, is already deemed a basket case and AMP Capital Investors chief economist Shane Oliver says Europe is probably in recession already.
What will this mean? Well according to Mr O'Donaghoe, Europe will just have to rumble along for years, even though financial markets want a discrete resolution and certainty now so they can take their losses and start again. They want to take the hit and move on - but they won't get it, he says. ''We got certainty in 2008 when Lehman Brothers collapsed - yes, there was volatility and nervousness, but it recovered through time, and we cleared the slate and off we went. But you can't do that with an economy - you just can't shut the door and put a security guard out the front gate … That's why I think the GFC Mark 2 can't happen because Greece will not be allowed to collapse.''
Mr O'Donaghoe says Greece can't let its currency depreciate and run high inflation as has occurred when Latin American countries have gone down because Greece is locked into the euro zone. Alternatively, there's no mechanism for the other euro zone countries to kick Greece out.
That means there's no alternative but for a long grind ahead, he says, with an economic resolution that will take years not months to work through. It's like staring into the abyss of a lost decade of flat growth, like Japan has been going through.
Mr Capurso says on a number of financial measures things aren't as bad yet as they were two years ago. ''Pre-GFC, the premium banks charged each other for lending was about 10 points, now we are at 100 points but at the height of the GFC we were over 200 points,'' he says.
But he also notes that today financial markets are worried about governments as well as the banking system ''… and that's a different and more worrying characteristic''.
Dr Oliver agrees. ''At the start of the GFC there was a unanimity of purpose, the US political situation was such that they could get the stimulus through quickly and Europe saw it as a US problem and worked together to act quickly to try and resolve it.
''Right now financial markets are worried that governments don't have any bullets left to fire … and those that do have bullets - such as the European Central Bank - are incapable of firing them.''
Dr Oliver has a five-point plan:
■ Quantitative easing - QE3 - from the US Federal Reserve, possibly in November.
■ A major increase in the size of the European bailout fund - a vote on expanding the €440 billion European Financial Stability Facility goes before the German Parliament on Thursday.
■ Aggressive bond buying by the ECB of Greece, Portugal, Italy, Ireland and Spain.
■ ECB to cut lending rates from current 1.5 per cent to near zero.
■ Interest rate cuts in Asia and Australia before Christmas.
When you have companies the size of Rio Tinto saying they are now being asked by a few customers to reschedule deliveries of resources, you know we have wild times ahead.
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