A breath of fresh air in the White House ... but recovery is still a way off.

Where's the recovery?

If only economists were held accountable for their myriad mistakes in predicting the turns in economic cycles. I have been reading all year with great alacrity predictions by prominent economists who got 2008 blatantly wrong. According to one prominent media-based economist, the recovery should have started last July and by now we should have been riding on the wave of surging financial markets. Wrong, wrong, wrong!

The truth of the matter is that the depth and pain of this recession is yet to be felt. The Rudd Christmas Cash injection may stave off the wolves of unemployment and negative growth in the short term, but it is unlikely that the tumult experienced in 2008 will end with the calendar year. It is widely acknowledged that 2008 saw the worst economic crisis since the Great Depression and the question is whether governments around the developed economies have the tools to avoid a full-on, extended recession. The USA is scraping ground zero with a 0.25% cash rate that leaves little room for further interest rate reductions.

Let’s look at some sobering figures for 2008 and, as the gambler says, “Read ‘em and weep.” For the week ended 12 December 2008, the BNP Paribas Securities Services reports the following market returns from 1 July 2008:

§ Australian Equities — S&P/ASX 200: -31.13

§ Listed Property — S&P/ASX 200: -35.72%

§ International Equities — US S&P 500: -31.27%

It is widely acknowledged that poor regulation of the financial sector in the USA led to practices such as sub-prime lending, pyramid selling and questionable hedge-fund structures which contributed to the breakdown in confidence in the international banking system. Regulations put in place early in the 20th century were inadequate and able to be circumvented by unscrupulous traders.

The questions now are:

§ How can the international community put in place regulation of the financial sector which ensures integrity and restores confidence in the world of investment?

§ Will the new American President and his team be able to reduce unemployment and provide a stimulus to the world’s largest economy?

§ Will institutional and private investors resume pouring capital into complex investment structures such as hedge funds, private equity and absolute return funds?

Superannuation, of course, feels the pain of this market collapse, and self-funded pensioners have seen their balances whither. Most “balanced” funds would have 60–70 per cent of assets invested in growth products such as Australian and international shares, property, infrastructure, hedge funds and private equity. As the above figures illustrate, anyone holding a large component of growth assets in a super account will experience a significant loss after this year’s negative return.

We are facing a daunting 2009 with potential failures in the American automobile industry, a US Government acquisition of distressed mortgage backed securities, an increased bank default environment, falling property prices and growing unemployment in most developed economies. A decreasing demand for Australian commodities will be of major significance to the domestic economy.

However, a breath of fresh air in the White House in the form of President-elect Obama will have some effect on the confidence of financial markets, but the restoration of economic order will be a Herculean task. Let’s hope that governments around the world can collaborate to curtail the fear in financial markets and put in place strong regulatory structures to restore confidence in international trading and lending.

And that’s only the start of the recovery ...

Bernard O’Connor