Thought for the day
“Truth is so obscure in these times, and falsehood so
established, that, unless we love the truth, we cannot know it.”
-
Blaise Pascal (French, 1623-1662)
Word for the day
Cathexis (n)
The investment of emotional significance in an activity,
object, or idea.
(Source: Dictionary.com)
Teaser for the day
“Compulsory Tweet and FB in Hindi” is not exactly language
of compliance, inclusiveness and development.
I feel it’s my constitutional right to communicate in a
language me and my audience are most comfortable with.
A
crash not expected till it actually happens
The sharp market correction last week was as much a reminder to
the unmindful bulls, as it was an opportunity for the investors sitting on
fringes waiting for a correction to occur. Besides, invoking an element of
fear, it certainly did revoke memories of 2008 market fall.
Greece, Syria, Iceland, Libya, Crude Oil, have all caused
serious corrections in global markets in past six years. The latest instance of
unrest in Iraq is therefore nothing new or unpredictable.
Perhaps, with US
petroleum production at 44yrs high and crude
exports at 15yr high, consumption growing at slowest pace in
decades, the crude shock appears less likely. Moderate growth in China and
other emerging markets may also be providing some comfort.
The world markets, under deluge of liquidity pumped in by major
central banks therefore presently do not appear too concerned about the
consequences at this point in time. This also is not completely unpredictable,
given that most markets, including India, were scaling new highs every day when
Sr. Bush invaded Iraq for the first time in summer of 1990 to protect its interest
in Kuwait and gulf of Persia.
I am bringing this subject as many readers have raised doubts on
the ability (or otherwise) of economists and market analysts to predict market
crashes. Though many celebrated economists (including our own RBI governor Raghuram
Rajan) are credited with foreseeing market crash at various times, no one has
presented a definitive model that can forecast a crash. It had been more about
epiphany rather than economic or technical forecasting.
In my view, the conventional method of trusting and respecting
the collective wisdom of market to predict future course of asset prices is the
only sound method available to us.
It is true “that financial markets process new information
faster than any one individual, government or institution could, and so for
most people they may seem to behave unpredictably”. The economists cannot be
expected to understand these sudden movements better than anyone else, so
expecting them to foresee market crashes is absurd.”
Remember, the information that would cause excessive market
volatility and eventually lead to crash is usually not new. For example,
information about sub-prime loans was available with all market participants,
investors, regulators and government authorities much before 2007. In fact many
bankers and investors had gained tremendously from such instruments. Many had
also taken contrarian bets on these instruments well before July 2007, when it
started dominating the headlines. These investors and bankers also gained from
these hugely post crash. What happened in 2008 was perhaps everyone suddenly
wanting to exit these instruments for one reason or the other.
Similarly, the precariousness of the
geo-political situation in Middle East Asia, and North Africa is well
documented and known to all. Recent escalation is also not a surprise
occurrence. Therefore, the battle in Iraq on its own cannot cause crash. For
that a majority of market participant need to simultaneously believe that it
can cause markets to crash.
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