By itself, the fact that General Motors and Ford are in deep trouble should not have caused last night's late session Wall Street falls. The only way those companies could get out of their problems was to go into official administration and rid themselves of their past employee health guarantees. Their operations would then have a chance to be restored to health and play a role in the global society. It should have happened years ago.
As Alan Kohler explains, the problems at GM and Ford exposed a so far hidden problem – that the US hedge funds have a deep leveraged exposure to Wall Street and they are facing unprecedented redemptions and borrowing reductions. They must raise cash, and raise it quickly.
At the same time there is still heavy leveraged investment on Wall Street both by private individuals and the big firms. Both groups were desperately looking for a rally on the back of the rescue package to get out. Last night in the last hour of trade on Wall Street, it was clear that the rally was not going to happen. So one or two key players began to sell. And as those big names started to sell, it was like the starting gun at Sydney’s City to Surf race or the Melbourne Marathon – there was a massive surge to get out, especially in the final 15 minutes.
But the hedge fund exodus and the deleveraging of Wall Street will have lasting effects through the entire US economy. And it will spread around the world and to Australia. However it does not mean that the global rescue package is going to fall over.
Unfortunately most commentators are linking the Wall Street fall with the rescue package, when in fact it is more about the hedge funds and a reduction in borrowing to hold shares.
In some ways the timing of the latest collapse is good, because it means that global politicians will be driven into co-ordinated action at their next round of meetings. Steep falls in any share market affect the entire economy, so the US recession will be much deeper that forecasters are currently discussing.
And profits will fall much more sharply that the younger analysts are predicting. Most of the youngsters on Wall Street had not even experienced the 1987 crash and they have much to learn. This one is now bigger.
Here in Australia those US hedge funds that are exposed to the local market will accelerate their selling of our top miners and others stocks. And like the US, it will lock in a severe economic downturn.
As I pointed out yesterday, we must bank on China to cushion the US and European blows. China will need to really stimulate its economy to offset the decline in their exports. They have the money to do it. Part of that stimulation will be in infrastructure, which will require commodities.
It's important that all Australians understand that we are going to see a fall in asset values across the board because we are watching a deleveraging of the global economy as the excesses of the past are wound back. Globally it will be severe and nasty.
This article first appeared on Business Spectator
