Foreign Correspondence

[fuagf]

Figures help us breathe easy - for now
IAN VERRENDER
September 3, 2009

Australians all let us rejoice, for

we have a bullish economy,

If only we could shut the doors

and just be girt by sea.

There's no denying the resilience of the Australian economy. It may not be powering ahead at full steam, but the numbers
yesterday clearly indicated that while the rest of the world's economy nosedived, we side-stepped recession altogether.

It was also clear the economic stimulus packages here and overseas have done the trick. They spurred consumer demand
while the enormous bail-outs of the US and European banking systems staved off a collapse in the global financial system.

The sense of relief that we were pulled back from the abyss has been at
the heart of the surge on international sharemarkets since March. But what now?

Now comes the difficult bit, the part where the survivors are supposed to clean up the
wreckage and rebuild the system. That takes time and there is still plenty of scope for problems.

As the Treasurer, Wayne Swan, reminded everyone this week, Australian interest rates have been
at emergency settings, even if they have been substantially higher than any other developed nation.

Given we avoided recession, and that our vital signs - both official and anecdotal - are improving, Australia is likely to be the first developed nation to raise interest rates on the way up. That indicates just how strong a position we are in and that we are returning to normal settings quicker than anywhere else.

We entered the maelstrom in better shape than any other developed nation. Our banks were in rude financial health, had virtually no exposure to the toxic assets that came close to blowing up the system and, on a national level, we had no sovereign debt.

But that does not make us immune from the mammoth task confronting
authorities in the US and Europe, even if our future is tied more to China.

The euphoria of avoiding catastrophe carried over into the recent corporate earnings season here and offshore. It was dominated not by massive losses but by unfettered optimism, talk of green shoots and the general sentiment that it 'wasn't as bad as expected'.

In the past few days, though, just as statistics emerged to support the argument that we have
hit bottom and things may be looking up, markets have again caught a dose of the jitters.

Some large hedge funds have figured the bull run has been overdone
and some analysts are calling the imminent arrival of a 'second wave'.

Robert Prechter, the US analyst who predicted the crash and then urged investors to buy into a recovery in February, now
says sharemarkets are in 'extreme overbought condition', forecasting an even bigger slump than occurred last year.

Others completely disagree, arguing stock prices are not overly expensive relative to the earnings that underpin them.

But that's analysts for you. Sometimes they're right and sometimes they're wrong. And in any case,
sharemarkets always overshoot. Fear takes hold in bad times, and when the inevitable bounce occurs, greed
kicks back in until everyone needs to take a cold shower. That's probably where we are at right now.

Market sentiment can have an impact on the broader psyche. But
ultimately, it is the economy that drives markets, not the other way round.

For mine, the biggest threat to a sustained recovery has been the very emergency provisions that prevented total meltdown.

As a triage procedure, the bail-out of General Motors and Chrysler and the massive
handouts to the very Wall Street institutions that caused the financial chaos worked a treat.

But if all that effort has only served to transfer the pain - and the ongoing debt -
from the private sector to the taxpayer, then there will be no quick or easy fix.

http://business.smh.com.au/business/figures-help-us-breathe-easy--for-now-20090902-f8hh.html