Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial

Remarkable Upmove, but the credit crisis isn’t over.

Firstly – fantastic upmove. In the last week, the markets have gone up some ridiculous 18%. Which is good, because a bounce was expected. There are a number of “reasons” for it – including the government vote, whatever. The reasons are always available after the fact.

Excellent move now, and where do we stand? We’re still below the 200 day moving average – which is somewhere around 4800 on the Nifty. So technically, we should hit somewhere around that before we start the slow grind downwards again.

We’re still going down, I think.

The U.S. problems aren’t topping just yet. From Calculated Risk, it seems mortgage rates for loans are now reaching the 7.8% mark for “jumbo” loans.

Some of these people could just about make a 0% interest payment (i.e. only principal) for the last two years. Now they are expected to pay principal + 7.8% interest. This has literally taken their monthly payments up 25% or more, and given that their houses have lost more than 25% in value, and they have very little or no down payment, these guys are bound to default. I remember reading that most “resets” – the end of the zero interest period – was set to June/July 2008.

This means this is the last quarter that the big banks are going to have “decent” results. Freddie Mac and Fannie Mae are fairly screwed; they have $5 trillion worth mortgages, many of which are defaulting, some say the hit may end up being nearly $1 trillion. (read the comments here). They have shareholder equity of some $80bn together – means they have like leverage of 60 to 1. The other part of the money is debt, some of which is held by China and Russia, who hold it as part of their forex reserves (in FannieMae/FreddieMac bonds).

To give you an idea of what a trillion dollars is – that is the GDP of India. That is more than the market capitalisation of all the stocks on the NSE, put together. Obviously that is a lot of money. The US has just passed a bill giving the government a blank cheque to save the GSEs (as the Freddie/Fannie types are called) – meaning the government can lend them more money or buy their shares. Either ways they aren’t going to let the debt get hurt – that means they will protect bondholders as much as they can. The stocks are likely to end up going to zero.

If that happens or not, the GSEs are going to be loath to take on more MBS or mortgage bonds. That increases the cost of carry for the banks who perhaps have hoped FRE/FNM would buy the mortgage bonds of the loans the banks carried – and the increased cost of carry will impact the retail interest rate, which means they are going to hurt the homeowner more – simply put, they’ll jack up rates, people who were ok to pay will suddenly not become ok, and thus, more foreclosures.

The other impact is a falling dollar. Not against the euro, which is as screwed as a region and a currency going forward. But against Japanese Yen, Indian Rupee and most importantly against the Middle east currencies. The US may be a great country but there’s no way it can literally double the national debt without flushing some value out of the dollar.

Inflation will soon no longer be a concern, I think. The issue will be deflation. And while I hope that concern is limited to the US, it is very likely to spread to Europe soon. This is going to be a bigger crisis than I thought – deflation is not easy to fight.

Given all this I have little hope that the Indian markets will stand out as a knight in shining armour. Our growth story needs a recession just to be a growth story going forward. But I am trying to brace myself for a lousy two years ahead, and would focus on “income” strategies rather than “capital appreciation”.

If you are reading this blog you are already the 1% of the population which is not going to be ultra affected – a recession affects the poor first, and then the affluent – and your biggest problem might be stuff like no one giving you a decent rate loan to buy a house, or the lack of enough shops in the mall nearby. But for many people it is likely to be a matter of survival, and in the political theatre of today I would expect even a violent impact – think of a “Sena” attacking anyone who seems well off. I hope it doesn’t get to that, but I am watching out for signs of right wing activity.

One thing I am very happy though. The stupid left is out of the government. Yay. Unfortunately it changes very little; this is like playing cricket without a crotch guard – you are focussed more on protecting your vitals than on scoring runs. We aren’t going to see much in the next year – perhaps a little here and there, but the big policy decisions will have to wait for the next round of idiots.

Like our content? Join Capitalmind Premium.

  • Equity, fixed income, macro and personal finance research
  • Model equity and fixed-income portfolios
  • Exclusive apps, tutorials, and member community
Subscribe Now Or start with a free-trial