Not a way to end the year! - Views on News from Equitymaster

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Not a way to end the year!

Dec 28, 2007

A leading business paper shouts out - "Demoncracy! Benazir killed" - reporting the assassination of the former Pakistani Prime Minister Mrs. Benazir Bhutto yesterday evening. Terrorism has reared its ugly face again - spelling troubled times for the restoration of democracy in Pakistan. And global financial markets have taken note of the same. The US markets led the fall yesterday after the news of the killing made its way as breaking news across newswires. The Asian markets have taken the cues and are trading in the red with the Hong Kong and Japan leading the fall. While the Indian markets are yet to open for trading today, a knee jerk reaction could be expected, as uncertainty in Pakistan politics would mean uncertainty in our relations with them. The stock markets are not the only to take note of the unfortunate event. As would have happened with any such event that stokes uncertainty and instability, prices of bonds, gold and oil also shot up yesterday. The main worry stems not only from the fact that Bhutto's assassination would lead to a setback to the democratic process in Pakistan, concerns are also doe to the fact that the country possesses nuclear capabilities, which have a risk of going in evil hands. As if the natural disasters in 2007 were not enough (these cost US$ 30 bn in 2007 as reported by leading global insurers), the world might continue to pay a heavy price for terrorism.

In the meanwhile, investors shall continue to pay the price for financial 'terrorism' (terrorism is after all a destruction - this time of wealth) propagated by the likes of Citigroup, Merrill Lynch and JP Morgan. Reports indicate that these banks may write down an additional US$ 34 bn in securities linked to the collapse of the US subprime mortgage market. These losses have already totaled almost US$ 100 bn in 2007. But does anyone seem worried? Doesn't seem so! And why will anyone be worried when the central banks like the US Fed and ECB are ready to lend a helping hand (carrying low cost cash) to the defaulters?

While experts may believe that the Pakistan event might not have an impact on global (and Indian) markets for long, events like this (and the subprime led credit crisis) indicate that the world faces an overload of risks and uncertainties. We talk about the risks of global warming, but we cannot survive without the electricity that carbon dioxide producing coal generates. We talk about a nuclear arm free world, but work towards building a better missile than our neighbour. We crib about rising inflation, and then blame the banks when interest rates are rising. We 'seem to be' worried about rising default, but are very happy when central banks put more money in the hands of defaulters. And we seem to be worried when valuations of stocks become expensive, but are happy to speculate more because our friends, relatives and colleagues are doing the same! Where will it all end? We have no clue...seriously! What we can do is wait for a happy new year 2008! After all, there's more to life than just stocks and valuations!

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