Between yesterday and today, not only our markets but also global markets collapsed. So what has happened that caused such a crash? What caused the panic is nothing short of being silly. Following Bernanke's speech last night it suddenly looked like the collective wisdom of the market- which is what determines stock prices- metamorphed into one of a 5 yr old. How so? Oh ! the stimulus will end Its going to be very very bad indeed , worse than ever before. And so sell whatever you have and run .
Question is did we expect that the stimulus is going to be a perpetual affair. Did we expect that money will be flowing into stock markets perpetually and as a corollary we will have good times till eternity. And yet US markets saw a dream run to reach newer and newer highs recently.
But more probable is that markets had run up too high and had to correct. Last night's announcement was just the excuse. Bernake's message was clear. it was that , if the economy improves the stimulus goes, albeit gradually. Following the withdrawal of the stimulus and with a gap in between, raise interest rates. Further, depending upon the situation the stimulus will be increased or reduced. So all one has to do is to keep watching the economy instead of trying to conjecture on when will the stimulus be withdrawn etc and make all sorts of assumptions.
But what could lie underneath is that most marketmen are in utter desperation. The desperate need to scalp returns. We now hear of high frequency trades with all that algorithms in it. Asset clases are rotated . So are allocations to different geographies. And why so? For, deep inside is that lurking fear that "all is not well". It is not difficult to see that.. Take for instance one single parameter. Unemployment. Fed assumes a figure of around 7-7.5% by the the stimulus is withdrawn say sometime around Q3/Q4 14. Now, it has to be seen to what extent jobs are brought back. Ground reality appears to be not so very hopeful. Poverty is on the rise. Rising poverty doesn't indicate a falling unemployment scenario. Inflation just doesn't seem to budge. It has to rise to indicate any rise in demand.So things could get worse. Upwards of 8% unemployment will start ringing alarm bells Imagine with all that stimulus so far, inflation is where it is. It is entirely possible for it to go sub zero, not to say that it will, but it is possible.. And that is negative inflation. And in such a scenario it is difficult to see how Fed will be able to do away with with the stimulus.
And in case growth picks up with the economic cycle picking up, that should be cause for cheer and is a vastly desirable situation After all, anyone who has broken a leg would want his leg to heal so that he can throw away his crutches. Thats what the stimulus is - crutches for the broaken legs of the economy. It is only necessary till the economy is on its own.
Mean while good quality stocks are approaching mouthwatering levels. Investors can start accumulating these stocks. Stocks mentioned in this blog are all at more attractive levels with no significant deterioration in their fundamentals. And with uptick in the environment, are expected to give good returns.
Until my next then,
Happy investing
Basudev
P.S. There has been a lapse of a day between commencing and publishing this post. So there is inaccuracy in respect of the date of the Fed's announcement. This has been retained deliberately to maintain the spirit of writing.
Question is did we expect that the stimulus is going to be a perpetual affair. Did we expect that money will be flowing into stock markets perpetually and as a corollary we will have good times till eternity. And yet US markets saw a dream run to reach newer and newer highs recently.
But more probable is that markets had run up too high and had to correct. Last night's announcement was just the excuse. Bernake's message was clear. it was that , if the economy improves the stimulus goes, albeit gradually. Following the withdrawal of the stimulus and with a gap in between, raise interest rates. Further, depending upon the situation the stimulus will be increased or reduced. So all one has to do is to keep watching the economy instead of trying to conjecture on when will the stimulus be withdrawn etc and make all sorts of assumptions.
But what could lie underneath is that most marketmen are in utter desperation. The desperate need to scalp returns. We now hear of high frequency trades with all that algorithms in it. Asset clases are rotated . So are allocations to different geographies. And why so? For, deep inside is that lurking fear that "all is not well". It is not difficult to see that.. Take for instance one single parameter. Unemployment. Fed assumes a figure of around 7-7.5% by the the stimulus is withdrawn say sometime around Q3/Q4 14. Now, it has to be seen to what extent jobs are brought back. Ground reality appears to be not so very hopeful. Poverty is on the rise. Rising poverty doesn't indicate a falling unemployment scenario. Inflation just doesn't seem to budge. It has to rise to indicate any rise in demand.So things could get worse. Upwards of 8% unemployment will start ringing alarm bells Imagine with all that stimulus so far, inflation is where it is. It is entirely possible for it to go sub zero, not to say that it will, but it is possible.. And that is negative inflation. And in such a scenario it is difficult to see how Fed will be able to do away with with the stimulus.
And in case growth picks up with the economic cycle picking up, that should be cause for cheer and is a vastly desirable situation After all, anyone who has broken a leg would want his leg to heal so that he can throw away his crutches. Thats what the stimulus is - crutches for the broaken legs of the economy. It is only necessary till the economy is on its own.
Mean while good quality stocks are approaching mouthwatering levels. Investors can start accumulating these stocks. Stocks mentioned in this blog are all at more attractive levels with no significant deterioration in their fundamentals. And with uptick in the environment, are expected to give good returns.
Until my next then,
Happy investing
Basudev
P.S. There has been a lapse of a day between commencing and publishing this post. So there is inaccuracy in respect of the date of the Fed's announcement. This has been retained deliberately to maintain the spirit of writing.
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