By krsna Khandelwal – A veteran market analyst
Friends,
Markets in India demonstrated some resilience in face of a crisis of yet small proportions but with big potential. The sub-prime woes in US would have to have its toll on the rest of the world’s markets. India has somehow become quite intertwined with US as most of surplus money is generated due to US related Indian software export industry which has been largely responsible for the decent earning of lacs of youths who would have not found it easy to make ends meet otherwise. Further, the investible funds come from US based Indians. What I mean to say is that the money that finds way in to stock markets and the banks has a larger than imagined proportion of US oriented flows. So we have to put up with the ripple effects that we will experience,however, we need not be fool hardy.
What has been happening has not come as a surprise, it has a logical sequence and is a reflection of a paradox about which I have many a times earlier pointed out. It is ingrained in the fact that the pool of savings of the savers of yester years have to have a parking place and to be generating some returns too and be available for future consumption continuously, safely and conveniently. It was for this matter that China was condoned for its non-democratic ways and was transferred a lot of money by the US institutions and later India was also roped in even by diluting the Pak related anti-India bias.The Europe and Japan happen to be in the same kind of boat if not in the same boat as US and could not have absorbed any money of US origin.
The rest of the world has much lower stability and size. Since the current flows and the pool still had more money,the US based so called sub-prime borrowers (as the name suggests it is a category which does not meet the prime borrowers criteria entirely) were also taken as good in the circumstances risk and were doled out funds for purchase of property. The whole scheme, though , had poor rating as per the old standards of banking practices , it was made palatable through risk transferring schemes like securitisation , CDO (collateral debt obligation) and the participants like hedge funds . There are further layers of leveraging. It was OK as long as the property markets was going up and when that is under price pressure something has to give way. I have tried to explain the whole thing in a brief manner only, restricting to what is necessary to be known as the back ground.
The complexities of business here and else where have increased. The point to note is the size of sub-prime market which is estimated to be $1.8 trillion. We can easily understand that any problem with this size of market would have ripple effects. However, it may or may not be as much damaging as it is perceived to be, in the short run at least. Supposing it has contagion effect than any thing my happen. It is this scenario that I warn against, time and again. The worlds’ central banks seem to have assumed the responsibility to save the situation from worsening. They are pouring in liquidity all over in billions of dollars. The remedy may prove to be more dangerous than the disease itself. The inflationary pressures and huge monetary flows around the world and difficulty in asset pricing and the spurring of speculative trading will be the ill effects that will have to be faced by the world economies. The vulnerable economies will find it difficult to weather the storm and to control the damage later. The south Asian melt down about a decade or so back may be kept in mind.
One welcome thing for India and China may happen too. Such crises will reduce the iron hold of US on worlds’ economy . Chindian space will matter more and would provide stability to economic world. It is not for no reason that Indian currency is appreciating.
HariOm
BIRDINFO Stock Rx – A prescription for stock market
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