Our long & uphill road to recovery has only begun but we are better off now than we were before...
10-Nov-2008 •Dhirendra Kumar
Here's a joke someone SMSed me on the 23rd of October. 1st guy: "The financial crisis is making me really pessimistic. I'm starting to buy gold". Second guy: "You're an optimist. I'm buying rice." The joke is funny, but it's funny because it's an exaggeration. It will be a long and uphill road to recovery, and we have barely begun the journey. And yet, when we look back at how we got here, it seems clear that the worst of the panic and the fear is not justifiable.
Every one of us who is connected with equity investing in any way will never forget the nightmare week before Diwali. In this age of 'global cues', investors seemed to be caught in a 24-hour cycle of collapsing markets. I know people who would get up at 5.30 in the morning to check how the Tokyo market had opened, then wait nervously for Hong Kong, Korea, Taiwan and Singapore to come online. Then they would wait for the 9.55 bell from Mumbai with their hearts in their mouths. From 1.30 in the afternoon onwards, the European markets would open and their impact would be felt in Mumbai. Then, at 7.30 in the evening, Wall Street's bell would ring and the carnage would start again live from New York, being watched bleary-eyed in Mumbai, till 1.30 in the night. Four hours later, Tokyo would start again.
In the beginning it felt merely like the 9/11 of investing, but by the 27th October it had started feeling like the 9/11 of all economic activity. There were two important differences between what started happening in mid-October and what had happened till then. One, it became clear that the crisis was truly global, and the other was that it was clearly not just financial. The 'real' economy would be impacted and impacted severely. In fact, as the crisis started hitting countries like Iceland Hungary and Ukraine, people realised all things said and done, richer countries like the US and the Euro Zone would still be better off than smaller and economically weaker ones. Till September, the likes of Hugo Chavez and Mahmoud Ahmadinejad were crowing about the western world's problems. In October, collapsing oil prices made them realise that they were floating in the same boat as the rest of the world.
The news from the real economy is increasingly dire. Every day, one hears numbers about slowdowns on an amazing scale. Indian auto companies appear to have contracted by 8-10 per cent in October. International shipping rates are down 90 per cent. A steel giant like ArcelorMittal is cutting production by 30 per cent. In the US, the crucial Christmas retail season appears to have shrunk by 20 per cent from last year.
So we're all doomed, right? Then why am I saying that the worst of the panic is not justifiable? Well, not quite. I think we were over-optimistic on the way up and now we are over-pessimistic on the way down. The cheap and easy money of the last few years may have produced an overhang which is making us suffer now, but it also means that a lot of real resources and real infrastructure got created. When one compares the state of the economic fundamentals in India to what they were when the Sensex first reached 10,000, then it becomes clear that we are much better off now. The doom and gloom is contagious, but from this point on, the road up is much clearer than the road down.