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Of downs and Dow - Views on News from Equitymaster
 
 
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  • Mar 27, 2007

    Of downs and Dow

    We read that the US stock markets lost US$ 900 billion between February 27 and March 5. Imagine all the work that you do in one year. And your neighbours. And everyone in your city. And everyone in your state. And everyone in India. The value of what everyone in India does in one year is about US$ 900 billion - we call that the GDP of India.

    And the US investors lost that in one week. Ouch! But, guess what? By the end of trading on March 23rd, the US markets had recovered 80% of those losses. One India lost and in the next one month, 80% of that lost India is back. So what caused the loss in the US? Fears over a slowing US economy. Lower economic growth means less jobs. Less jobs mean less money to spend. And when the average US consumer is in debt anyways and his major asset - against which he has borrowed all that debt - is losing value every day, there is reason to worry. So the market lost US$ 900 billion in value. Then why has it recovered most of those losses?

    We don't know. The US central bankers met and kept the US short term interest rate unchanged at 5.25%. Everyone is happy because by "staying pat" the US central bank may be about to reduce rates and help save the US economy and the world once again. We are not sure. Maybe they did nothing for 6 meetings because they did not know what else to do. Why should be believe that a group of people knows more than we do - or that they can battle common sense. Ask President Bush's wise men why they went into Iraq when common sense said they should be careful? Or ask our own ministers why they were keen on the SEZ policy when everyone else saw it as a land grab? Common-sense is actually a rare character trait. And there is nothing to lead us to believe that a group of men - no matter what their background - will always know more than what a "common" person with "sense" will know.

    But what if we are right? What if the central bank in the US does not know what to do and in the next six months the global economy is looking down some deep, dark, bottom-less pit? And what if all that Foreign Institutional Investors (FIIs) money which has discovered India with the same gusto that a Vasco de Gama landed on our shores five hundred years ago suddenly chooses to leave? Vasco de Gama's fellow Portugese gave away Bombay as a dowry, a seemingly pretty but worthless gift for their new British son-in-law. What looks valuable today could be worthless tomorrow. Unless it has some intrinsic value to it. In all this global mess of US$ 900 billion being wiped out, and then being recovered with alarming frequency what is a simple person supposed to do? And now the Dow has had another bad day - what is a common person to do? Luckily, we can pray to Lord Ram to ask him for advice.

     

     

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