The world is complex!

Seeing all the financial turmoil which is happenning makes me feel that world is not as simple as we think. Old assumptions and old correlations don’t always work. Take a recent example:

When Fed cut rates for the first time in Aug/Sept, our markets did a wonderful rally. What was the reason given- excess liquidity!And now Fed is on a rate cut spree and still people are talking of “inadequate liquidity”! The same markets are viewing the “fed cuts” as negative because it means more problems are in store.

Clearly the financial markets are driven more by sentiment rather than “logic”. The Fed is trying its best to improve the sentiment but it can’t cure all the problems of bad debt. The US economy which was fueled by debt has to take it on its chin and people have to experience pain in this phase of transition. All these rate cuts shall only delay this pain but won’t eliminate it completely. The US consumer has to finally learn the importance of savings and the meaning of financial literacy. A nation can’t run on a credit card forever.

US recession is a done deal now but we need to see how the current credit market problems and a US recession impacts global economies in the coming months.

Now the problem with India is that we have heard so much of “India growth story” in the last couple of years that we refuse to consider the possibility of big slowdown! Even when IIP numbers come at mere 2%, we call it an aberration rather than trend reversal! Another example of confirmation bias.

Even when inflation is on a rise and RBI can’t cut rates, we remain optimistic about super duper growth. Even our FM tends to put all the blame on the “global sentiment”.

We can’t view the current situation through the lens of the past. Who knows things might have changed? Remember US stock markets started to fall much before all these problems came into limelight. May be the markets have a hint about the coming quarter results and are adjusting to them in advance!

Coming back to equity markets- certainly we are in a bear territory. This doesn’t rule out couple of sharp bounces but till we consolidate and move up again,it still remains very risky.

On the investment side-the world is witnessing a move to “real hard assets” like gold. With rising inflation and falling currencies, I won’t be surprised to see Gold hitting new highs in the coming times. Anybody for $2000/ounce Gold? May be I am too bullish!