……and sanity is going to prevail soon. I am an eternal optimist and my understanding is that the extreme volatility seen in the global markets signals that the capitulation is coming to an end. 6 months from today, we will looks back at this point and think what a fantastic opportunity it represented.
After the worst is over, the markets will return to a level which it would have achieved with a steady state of growth rate reflective of productivity gains over the last 5 years. What we are witnessing is a global crisis that can be gotten over as easily as it has come to the fore. The billion – rather trillion – dollar question is – will the central banks of the world get together to guarantee domestic deposits from domestic and international investors? If a sovereign guarantee prevails over everything, the contagion will be contained. There will be causalities but most will be spared the collateral damage that could result from taking individual non-coordinated steps. The way market players are committing hara-kiri every passing trading session, it seems that the central banks have really no other option but to put their act together.
Now its difficult to predict the market, but having seen the selling spree of the past few days one could hazard a guess that we may be very near the bottom, if not already there. When you have very stable companies like Microsoft and GE having a tough time borrowing funds, stocks of A category companies selling at 80% discounts…..bargain hunting has never been this good in the past 5 years.
What has changed…..well a few things. First all the investment banks are gone. Unlike banks, I-banks had the ability to create liquidity at will. In the absence of strong regulatory framework, they could lend many times more than a traditional bank for each dollar in their capital base. They are gone now. And many other lending institutions are facing a severe crisis of lack of capital. But other than a temporary squeeze in liquidity due to erosion of capital, nothing has fundamentally changed…..people still work in those institutions, people have not suddenly stopped eating food or going to the movies, the world still has a reasonable supply of water, oil, coal and uranium, there isn’t any other sizable bubble waiting to burst, employment is still at reasonable levels (at least as of now) across most economies and the sun still shines brightly!
As I said, the only thing that is really hurting is the availability of capital. But that is something which can be infused at will and with not too many side products if (and at that a big if) central banks act in cohesion. If they let a sovereign guarantee prevail over all deposits and guarantee financial inter-bank financial obligations, the contagion can be tamed. This approach works only when you have all of the major central banks working in tandem……taking individual steps can either backfire or cause counter party damage – something akin to the “begger-thy-neighbour” approach.
So well….these may be tough times….but you can certainly buy cheap when everybody’s selling! I am.