A model to follow in An Age of Turbulence!
We live in extraordinary times. After leveraging till January 2008 and averaging till October, market participants are still gauging what hit
them hard. Former Fed chief Alan Greenspan, who authored the bestseller An Age Of Turbulence, is now accused of causing much of the
turbulence by keeping interest rates too low for too long and failing to check the explosive growth of risky mortgage lending. He admits he
was ‘partially’ wrong in opposing the regulation of derivatives.
After years of unmonitored growth, the world is finally having to pay for the huge pile up in leverage, its casual attitude towards risk
management, asset froths due to cross-border carry trade flows and step up in weapons of mass destruction (read derivatives). In a matter
of months, the world has gone from a state of profound optimism to that of deep pessimism. The outbreak of US Subprime crisis in August
2007 has had a cascading effect on the world economy. Carry trade, the main liquidity driver, continues to unwind and a global flight of
capital is taking place. Risk aversion has reached historic levels and even while central banks are cutting rates, financial institutions are
unwilling to lend, resulting in capital turning insufficient and costly.
After nearly five years of unprecedented rise, the Indian stock market hit a roadblock in January 2008 and the Nifty’s then high of 6,350 has
vanished from public memory. The tsunami of relentless selling has taken its toll on commerce. The cracks are now appearing in the profit
cycle of companies. Volatility has risen sharply and it is fair to say that confidence is at an all time low. We are part of that world and
theories like decoupling remain literature to be read at leisure.
History suggests that Indian bear markets last 3-4 years with up to 58% price corrections. In terms of price, we have already fallen below
historical levels. Whether we will spend another 2-3 years from now in the bear zone is difficult to gauge at this