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Year End Pessimism

Everyone seems to be saying that the worst is over, but in reality that might not be the case, says Dhirendra Kumar...

The big question about 2008 is not whether it was a terrible year-everyone knows it was-but whether it will end on December 31st. I'm sure you know what I mean. Is the worst really over, as so many in the financial, investment and business communities are declaring it to be? In the last couple of weeks, many voices have said that while things may not improve immediately, there will be no dramatic worsening. The disaster that has been foretold so often lately-and which we all glimpsed in late October-will not actually come to pass.

In the week just before Diwali, investments were in free fall. From speculative small-cap stocks to the most conservative mutual funds, everything seemed to be destroying months of accumulated wealth in hours. Now, we are being told that that things have changed. Businessmen in even the most beleaguered industries like airlines and automobiles are telling us that well, the worst is over. In fact, 'the worst is over' seems to be the world's favourite phrase right now.

I hope all these people are correct but I'm not so sure. In the year past, the worst has been declared over at least three times. Each time, there's a period of stability and then it turns out that the pessimists were correct. Hidden under the apparent stability, there was deeper layer of worst that was much worse. A hard-headed examination of the situation seems to suggest that there's plenty of bad news that still needs to be worked through. The closer you get to the ground, the more concrete the bad news is. A few days ago, a car dealer told a friend that of the last hundred-odd loan applications that he had sent to banks, only seven had been approved. A young programmer who works for a mid-sized software company told me that dozens of overseas projects had been cancelled and hundreds of programmers were on the bench. Many of his colleagues have house loan repayments that amount to half or more of their pay cheques. A businessman who trades in replacement parts of consumer durables says that volumes have dropped to near-zero. I've talked to dozens of people and all of them paint a picture that is far worse than one sees in the media.

At the macro level, all the good news seems to be centred around lower inflation and oil prices. These do create temporary relief but actually both are advanced indicators of an expectation of sharply lower economic activity. Meanwhile, the governments' collection of advanced tax is reported to be down by 22 per cent. Not only does this indicate how bad things are, it also foretells sharply lower taxes, which in turn sets a limit to how much the government can stimulate the economy by spending more.

From an investment perspective, the only cheerful news is that all things said and done, stocks may still have over-reacted on the way down. Eventually, there will be a recovery. It may not happen for months, or perhaps a year or more. However, it is inevitable that your investment portfolios will respond strongly and early to the recovery.

But is there any good news around right now? Well, as I write these words on Sunday morning, my newspaper man has just delivered a business newspaper whose first page carries an optimistic story. It says that 2009 will have a happy ending but is based entirely on astrologers' predictions. Any optimism is welcome, but if astrologers are the only optimists around then that's actually not good news.