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Commentary

So Exactly How Bad Is The Subprime Problem?

Satyajit Das, who wrote the excellent Traders, Guns and Money, answers this question in an interview[Emphasis mine]:

I started by asking the Calcutta-born Australian whether the credit crisis was in what Americans would call the “third inning.” This was pretty amusing, it seemed, judging from the laughter. So I tried again. “Second inning?” More laughter. “First?” Still too optimistic.

Das, who knows as much about global money flows as anyone in the world, stopped chuckling long enough to suggest that we’re actually still in the middle of the national anthem before a game destined to go into extra innings. And it won’t end well for the global economy.

Das is pretty droll for a math whiz, but his message is dead serious. He thinks we’re on the verge of a bear market of epic proportions.

If Das is right – and I think he knows more than I do – the bear market that will follow will stick around for years. I think we would be kidding ourselves if we think this won’t hurt us – but to be honest the first on the line to fall are exports. The fall out will be the financial market, and as a result of that, real estate, cement, auto, etc. will be hit. Some stories like Power, Infrastructure, Oil etc. may not be affected quite as much though.

The subprime crisis is fairly big, but we have to lose interest in it fairly soon so that it can hurt us when we are not looking. If history is a teacher, the lesson has been that markets hurt the most number of players when they are most vulnerable. What the US market is facing now is probably just a small tiny part of the eventual downturn – which could take years to unravel – and eventually we will also need to take some of that damage in our markets.

But does it mean the end of equities? To most of us reading this blog, it might seem like it. And when you come to the conclusion that “equities are dead”, my suggestion to you is: think immediately about buying some.

Disclosure: Short Nifty, long RIL and some stocks not mentioned here.

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