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Markets Have Crashed: Why?

Out of the blue, the US market fell 500 points (Dow) yesterday. This has triggered a panic worldwide: the Nifty and Sensex are down 2.5% as we speak.

Honestly, I didn’t expect this drop now. Why? Because the reasons they quote for the drop – a global slowdown – has been written on the wall for over two years now. I spoke of a lost decade in 2009, for the simple reason that they won’t fix the problem and instead, flood the market with cheap money.

The shit has come back to attack the fan.

What happened last time was a failure of private institutions. So, the good western governments of the time decided to "rescue" them, by putting taxpayer money behind supporting the "banking system" which is too big to fail, they told us. Japan turned out well, no? And the US has seen the great depression, no? It turns out they f-ed it up.

The rescue involved converting private liabilities to public ones – transferring the risk from banks and companies to governments. At this point, it has become evident that even the governments can’t support themselves, because even they have borrowed more than they can pay. The problem surfaced in Europe, where countries can’t print their own currency; so the PIIGS became a problem. Peripheral Europe was a bad word.

But it wasn’t any worse than, say Japan or America, who had the ability to print their money, and therefore, keep on increasing their own debt while printing money to finance it. The US hit a wall recently with a debt-limit, a concept no other country (leave Denmark) has.

With last week’s debt-limit crisis (a silly one) solved, the focus has moved on to the fact that the result has been a sum total of nothing. There is no real plan to curb expenses; there is no plan to increase taxes. Such vast deficits can only be financed at the cost of private growth, and indeed, unemployment continues to stay high in the US. The debt limit crisis had masked the real problems in the economy, and when that crisis was resolved, everything else became evident. No growth in the US, peripheral europe is screwed, Japan is a bug looking for windshield, China is having trouble with inflation, India is corrupt, everyone’s kicking the proverbial can down the road, etc.

Why should we be impacted? If anything we have too much growth, which has resulted in too much inflation. This is stuff the central bankers of the west only dream of. But we are, at the same time, corrupt, and for a change, not standing for it. Our contradictions cause panics.

But this is utter crap analysis. Why? Because it is nothing new. Everyone and his uncle knew about this. Everyone talked about a crash because of this, since 2007 at least. Come on. That didn’t hit our faces today. So let me stop pretending this was the reason for the crash.

The reasons will be evident in hindsight.

There are reasons for the crash, no doubt. I mean something happened between yesterday morning in the US and today. But I don’t know what it is. I’m supposed to know, I know. I’m supposed to have answers to this stock market thing. But the answer is that they’re working on it and will soon have 1000 word articles that I can link to.

And really, I shouldn’t care why. The market tells you something. You listen, and the only thing you’re going to try and figure out is: Is it needless panic, or is it truly something sinister?

The technicals tell you 5200 on the Nifty is one heck of a support. If we stay above it, and my stop losses don’t get smashed into like ATUL and TTKPRESTIGE (1st stop) did today, I don’t think there’s a need to do anything. I might even want to buy, should the index bounce. (Disclosure: I’m still buying cash-rich companies)

As a trading input, such moves are welcome. It’s just -2% as we close, which we’ve seen as recently as June (unlike the US move which was a two year biggie) Disclosure: I’m still long, and bought a very small number of calls because of the close above 5200.

  • Yeah! Get it out of your system. This machine has too many moving parts to figure out the fundamental side. I still still think we have one suckers rally coming before things get really nasty.

  • Ramu says:

    The answer is so simple! Markets go up when buyer’s outnumber sellers and Markets go down when sellers outnumber buyers. Markets crash when sellers HUGELY outnumber buyers. Deepak, how long did you say you’ve been in the markets! 😉 😉
    Somebody woke up in the morning, maybe an FII, maybe a savvy MF Manager, and decided to SELL his equity holdings in the market, which could not be absorbed.
    The deeper questions are:
    1. Why do people sell during panics and not buy during panics? Seen inversely, why do we call a selloff a panic?
    2. Conversely, gold was making all-time highs in all currencies. Panic? What panic? If indeed its a panic, what’s selling off vis-a-vis gold?

  • Hari says:

    You are long the Index.
    Is it because –
    a) There is fear all round and you are a contrarian ?
    b) If you are long why cash rich companies. I would assume that
    they are good picks when there is a crisis as they are the
    first to rebound.
    c) With Inflation so high I wonder what Risk Premium the market is offering us at this moment.

  • MJ says:

    Now we know prob what happened- market got wind of impending US credit rating downgrade- something everyone feared but did not really believe could happen!

  • Arghya says:

    I think the bubble is bursting. It has already begun. I think everybody should exit market now. Transfer all your ULIP to protector/preserver fund. See ultimately fundamentals guide the market, and we all know that the fundamentals were pointing to go down. I believe the down cycle has already begun. There would be waves of rebound, but ultimate trend would be downward.
    Disclaimer – Same with Deepak, bought some cash-rich companies, but would not buy anything anymore. I have no stop loss with them, and expecting a downward risk(fall) of 50% of investment amount.

  • Arghya says:

    Deepak, just a small note – PE is also goanna to squeeze in all respect. So whatever is looking attractive now might be more attractive when overall market PE goes further down. That is why, I decided to stay foot and do nothing for some time. I would wait till NIFTY PE moves down below 15. Taking short position is also risky at this point…
    Please share your picks and also rationale behind it.

  • CARiD says:

    The economy is still unsteady. My guess is every little piece of news can make it go crashing down. It starts with media, stating experts expect the markets to plunge. The effect of such a statement is markets are going to plunge. Investors get cold feet and pull out. Unless the economy strengthens, things are likely to keep fluctuating on a daily bases depending on news and global events.