What's behind the global sharemarket surge? A SmartCompany Q&A

The US sharemarket surged almost 7% last night following the release of Obama Administration’s plan to bailout $US1 trillion worth of debt held by America’s ailing banks.

The Australian sharemarket, which rallied above 3500 points for the first time in a month, has also enjoyed a good performance on the back of the good news from Wall Street.

Across the globe, some financial commentators are daring to mention the “B” word – as in, we might finally be at the bottom, and on the cusp of recovery.

Time for a SmartCompany Q&A.

So Wall Street was up 7% last night. This bank bailout plan must be a real winner.

Well, not completely. US Treasury Secretary Timothy Geithner has been largely panned since taking the job a few months ago, and it’s fair to say reviews of his latest plans are mixed. Some critics say the US Government has not done enough to clean up the banks’ toxic debt, while others say the Government is spending too much taxpayer money to help out some pretty rotten corporations.

Better Tim than me. So what’s in the plan?

The plan is essentially a giant public-private partnership to buy the toxic, mortgage-backed debt that is making banks unwilling to lend to each other and clogging up the global financial system.

The US Government will chip in $US75 billion to $US100 billion, and subsidise private investors to contribute a similar amount, with further funding coming in the form of loans from the Federal Deposit Insurance Corp.

The idea is that when these debts are taken off the balance sheets of the banks, they can get back to the business of lending money and the economy can start to recover.

Sounds good, but will it work?

Hopefully, but it’s going to take time, as President Barack Obama cautioned this morning, and so often with these things the devil is in the detail. But the market’s ringing endorsement of the plan is a good sign.

Is there any chance we are at the bottom?

That is the question being asked on trading room floors around the world. Certainly the problem of how to deal with this toxic debt is one that has been weighing heavily on markets and particularly financial stocks – until this problem was sorted out, we couldn’t have even entertained the thought of recovery.

The US sharemarket is now up almost 15% since the start of March, while the Australian market is up around 9%. Sure, both markets have fallen heavily since the start of the year, but these are positive signs at least.

So we are on the road to recovery…

Not so fast. This small sharemarket recovery is positive, but volatility is likely to remain high for at least the next six months – in fact, it won’t surprise to see markets retreat in the next few days as profit takers step in.

It is also important to remember the extremely worrying signs in the real economy, including rising unemployment, falling property prices and sagging consumer and business confidence.

We’re not out of the woods just yet, but tentative signs of hope are starting to appear.