Looking at The Future

CA Rohan Samant: Before we look at the future we have to understand what led to the financial meltdown in the global markets.

Decoding the crash:

The main reason being given for the pain is the mortgage crisis in the US. But it is much more of an “effect” rather than the “cause”. Mortgage crisis was caused by loose monetary policy adopted by Federal Reserve to save US economy from slowdown after the “Dotcom bubble” burst. This cheap money fuelled growth in the house prices which was speculative rather than demand driven. Finally when the house prices started to erode, the sub-prime borrowers started to default on their mortgage payments. Most of these mortgage debts were securitized. Valuation problems arose for the big banks as interest obligations on such securities were not being serviced. Securities lost their liquidity and banks had to take huge write-downs. Inter-bank lending slowed down and the highly leveraged investment banks that did not have any deposit backing suddenly realised how flawed their model was. Lack of capital forced many of the Investment banks like Lehman Brothers, Bear Sterns, Merrill Lynch, to either close the shutters or put the taking over companies name on their offices. Lack of confidence in the system and de-leveraging led to a massive credit crunch which started in the US and spread across the globe.

When things look Bleak be an optimist:

Always ask the question why? When the Sensex was at 21000, people were talking about 25000. If asked why? The common answer was “The India Growth Story”. Now suddenly it has turned into a fairy tale for all.

One of the most important things we should understand is that, in the last 4-5 years India alone hasn’t seen the stupendous growth or rise in the Stock market, it has been a global phenomenon. It was a period when all asset classes, be it equities, commodities or fixed income instruments, saw substantial appreciation. This was caused mainly by devaluation of dollar against all asset classes and also cheap monetary policy followed by worlds central bankers.

The world hasn’t changed in a year. What has changed is the mindset. Optimism has given way for pessimism. Even though the eternal optimism in the last 3-4 years (especially in 2007) was uncalled for, today we surely are not in dire straits.