US woes

Published in Daily Telegraph July 2006

War in the Middle East. Oil tipped to hit $US100 a barrel. Higher inflation. Rising interest rates. Market nerves. Economies in a "super cycle".

The question now is: are we headed for a "super crash"?

The answer from stock analysts and economists ranges from "not yet" to a resounding "never".

But, as StockAnalysis author Peter Strachan puts it: "(Crashes) usually happen when you least expect them."

So it is the fear of the unknown that is unnerving him.

While it is generally recognised the world's growth engine - the US economy - is in trouble, it's the lesser-known Chinese economy that could prove everyone's downfall - or continuing saviour.

"What we need now is a pullback," Mr Strachan said.

"Commodities prices have gone berserk on the back of Chinese demand.

"China, mind you, doesn't show any signs of slowing down. But sooner or later it will, because imput costs are rising so dramatically that there will be a downturn in demand.

"The biggest threat is a crisis in the US dollar which would send the American and world economies into a tailspin."

Most of China's growth came from its exports to America, he said.

Mr Strachan continued, "And who's funding American economic growth? China: it's the biggest example of vendor finance ever.

"If there was any (loss of confidence) in the Chinese economy ... it would have a domino effect on the rest of the world."

That crisis could be looming, as Chinese banks and lenders already sit on about $US1 trillion in bad loans.

Japan fuelled the last resources boom in Australia, and risky lending is what ultimately put the Japanese economy into a tailspin.

"Gold prices often are a proxy for bad news and the gold price has more than doubled since 2002," he said.

Hogan and Partners resources analyst Gary Le Bas is also cautious.

"Oil is a real worry," he said. "I think the (stock market) volatility is a warning sign - the market doesn't know which way to go.

"I think there is some chance of a severe pullback. There's a lot of nervousness around."

But while Mr Le Bas expects a "sharp pullback", he did not foresee a crash: "No crash. Not yet. The conditions are there though, I must say."

Wealth Within chief analyst Dale Gillham is even more adamant there won't be a crash: "The US economy is in trouble and has been for a long time - so it's not something new on the horizon - but (the Australian economy) is still too strong."

While he predicted oil would hit $US100 a barrel within a year, Mr Gillham said fundamentals would prop up the Australian market.

"I'm 98 per cent certain the bull market has finished," he said. "And if the US dollar falls, and other countries stop trading in their currency, it will create big problems which will sink some of the world's economy.

"But our share market is one of the most resilient in the world."

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