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The Going Gets Tough

The markets are in turmoil because of a combination of different things happening at the same time

Have you ever seen a road accident happen? You must have, since we generally drive like idiots and have a high accident rate. Whenever I see a road accident and later think about how it happened, I can't help feeling that while most of us drive like idiots, most of the time accidents happen when two idiots do something idiotic at the same time and at the same place. One guy is happily speeding, while trying to read an SMS and just then another one in front of him decides to turn right without revealing his intentions beforehand. Either one would have got away but the two in combination becomes an event.

The stock markets are just like that. While one company or one industry may be driven by some particular factor, a prolonged bull market or a bear market only happens when many different factors come together. Sometimes, some of these factors may be related but at other times, they may be unrelated. It could just be a coincidence that they are happening at the same time.

Nothing is more confusing than trying to understand such a situation by taking only one factor into consideration. The weak stock markets that we are seeing now are happening because of a combination of factors.

Interest rates are rising, and corporates just aren't going to become more profitable while they are rising. There could be individual exceptions, but for all practical purposes, this is an inviolable rule. Most of the blame for high interest rates goes to high inflation.

If one reads the government's pronouncements and insinuations, then at various stages the blame for high inflation has been laid at the door of oil prices, steel companies, cement companies, foreign inflows, and others on a list of now-usual suspects.

As far as the stock markets go, all this coincidentally came at just the same time as the international credit crisis. By the way, there are some straws in the wind that indicate that we may soon be in for act two (or would that be act three) of the credit crisis. Apparently, over the last two weeks the cost of insuring oneself against a credit default by big Wall Street firms like Goldman Sachs, Lehman Brothers and JP Morgan has shot up. No one seems sure of what this means but this is unnervingly similar to the way things started to worsen the last time around.

There's a third part of this combination that I feel is the least recognised: after a few years of headlong growth, many Indian businesses are facing a natural pause as the easy part of their markets have saturated. Whether it's about selling phones or cars or clothes or fancy flats in the middle of nowhere, the low-hanging fruits have been picked. Their markets may be larger, but from here on, they'll be tougher to crack.

However, going forward, the kicker here is oil prices. In this entire combination of problems, oil prices are a test match scale crisis while the rest are mere Twenty20s. Permanently high oil prices could invalidate the business models and working methods of large swathes of the world's economy.

Make no mistake, we are in a tough situation. A momentary relief on any one of these negative factors may make good headlines, but they won't mean that the good times are back.

But being an optimist I can’t help recall the inspiring quote ‘When the going gets tough, the tough gets going’.