When delegates arrived at CIE’s International Investing conference in New York earlier this month, many were quietly positive about the economic prospects for 2010 and beyond.
After all, Australia had avoided slipping into recession, and the stronger Asian economies were now underpinning our growth.
A recent International Monetary Fund report predicted Australia would be at the forefront of global economic recovery for the next two years.
Even some news coming out of the US seemed encouraging – the jobless numbers were stabilising and the Dow Jones is frenetically trading above 11,000. Even the housing numbers appear to suggest the worse was behind this vital sector of the American economy.
No one was expecting the US economy to roar back to life in 2010, but there seemed to be grounds for cautious optimism.
But after hearing speaker after speaker at the conference, I suspect most delegates left with a far more pessimistic outlook.
Quite simply, the negatives still far outweigh the positives.
And those positives are still, to a large degree, the result of Washington’s largesse – of repeated liquidity injections into the economy.
It’s not just the economic numbers – there is widespread disillusionment in the US with the political process.
The passage of a financial services reform package is looking increasingly unlikely. Although the House of Representatives pushed a bill through late last year, it has stalled in the Senate.
And with the mid-term congressional elections looming, the opportunity for Obama to achieve meaningful reform is slipping by the day.
This loss of political momentum for economic reform doesn’t mean Wall Street is regaining public confidence – the finance sector still bears much of the public opprobrium for the global financial crisis.
The latest imbroglio involving Goldman Sachs just reinforces the antipathy held by the average American towards the finance industry.
The emergence of the anti-tax Tea Party is another political wild card unsettling both Republicans and Democrats alike.
It’s now estimated this movement, which is largely drawn from white males aged 45 plus, can draw on the support of 20 per cent of the voting population.
Just how the Tea Party’s political influence will play out is uncertain. What is not uncertain is what is fuelling its appeal.
At its core, three factors are critical. US unemployment, officially at 10 per cent but unofficially much higher, is one cause.
What is often ignored is that when those Americans who are working part time because they can’t find full-time work, as well as those who have stopped looking for work because, in many instances, they have become too disillusioned, are added to the official unemployment number, then the real jobless number is closer to 20 per cent than 10 per cent.
As its name suggests, the Tea Party draws its inspiration from the Boston Tea Party, a crucial event in sparking the American War of Independence in the late 18th century. The colonists’ cry was “no taxation without representation”.
Today, that anger is not directed towards Britain – it is aimed at Washington.
The Tea Party knows that US public debt is unsustainable at $13 trillion and that taxes will have to rise, irrespective of which party occupies the White House.
Neither the Democrats nor Republicans will go to the mid-term elections with a platform of higher taxes – but it’s almost inevitable.
The slow improvement in the US housing market still can’t hide the fact the market is still oversupplied, prices are still low, and that many Americans have negative equity in their homes.
A recent survey suggested five million Americans would sell if they could get the right price.
At the same time, the political dominance the US has enjoyed after the collapse of the Berlin Wall and the Soviet Empire is being increasingly challenged by China.
The US is agitating for the floating of the renmimbi, but Beijing is unlikely to accommodate Washington. The best the US can hope for is for China to slowly revalue.
A surging US sharemarket is camouflaging a stagnant economy. But for how long Wall Street can continue to defy the underlying political and economic fundamentals remains a moot point.
More than one analyst at the conference suggested a fast-retreating Dow Jones index in the second half of this year was likely.
If this happens, the US could be back in recession at the same time voters go to the polls in November – a volatile mix that does not bode well for the rest of the world.
