My 2 Cents on how to risk your 2 cents!

Purpose: to assess if the current disruption in the global market is just another re-pricing of risk as the global expansion continues or it is the Real One like the 1928-29 market induced economic calamity! To see if we can really find a safe haven instrument that will protect us in either situation and see if we can be prepared to load them up when the opportunity is right!

Disclaimer: Do I drink my magic potion? NO!! I don’t - only Heineken! - as I still am controlled by those butterflies in my stomach & believe in panic & fear induced reactionary decisions and enjoy being a Monday night quarterback! A wise man once quipped when told that he should have his money work for him – “Let the money rest safely- While I do the Work!”

Am I Qualified? Heck NO!! As they say Clarity is better than Cleverness!

Set up: Global Market melt down spreading from London to NY to Tokyo to Bombay – every one trying to blame everything from US Sub-prime to CDOs & CLOs and the fanciful but less transparent Hedge funds. Indexes down in double digits- with Helicopter Ben along with his global Federal / Reserve Bank buddies dropping bags of currencies - only to see them drown in the flood of worries with no desired effect. May be it was deliberately orchestrated this way & waited long enough so that the system can flush out the bad elements and punish the not so deserving speculators so that it does not look like a bail out of the un-deserved. The unexpected move of a drop in Discount rate was timed for perfection so that it can punish those speculators who were shorting mercilessly – as speculative short sellers in the options and derivative markets using Index & Futures were burnt as the settlement price is fixed at the open on a expiry – and as it happened on an expiry day before market opened & the Index opened 2-3% higher leaving those speculators with heavy losses.


Sub-prime or no-sub prime: Unlike other economies & markets where the government agencies protect and cover all disasters for public popularity – the US market has worked out of its greed driven financial calamity by punishing those culprits with immense severity & immediate urgency- enabling the larger market & economy to bounce back and move forward. This time it is not going to be any different- speculators will be punished & a handful of individuals & entities (may be an understatement) will face severe financial penalty but the economy will be back to normal in a very short period.

Looking at the speed with which the market is readjusting to the unknown impact of the hedge fund from CDO/CLO/Sub-prime one wants to believe that this is the end of it. Volatility – globally is beyond anyone’s imagination; price fluctuations are capable of making or losing a ton of money if one’s luck is smiling for the right reason. There are enough analysts and reporters comparing this to various time lines in the past including – the great 9-11 when the market was shut down for a week, 1998 LTCM-Russia Debacle, 1994, 1991 , 1987 and even some to 1928-29 and a few other Financial events in between.

Let’s take a look at what it is being compared to-

9-11 Disaster: A combination of Telecom induced Internet bubble topped by the 9-11 disaster. Even though the tech bubble high is yet to be scaled back again there is lot of money that has been made starting shortly after that- and of course leading to the current day global dilemma!

1998 LTCM –All it took was a handful of brains and what should have been a non-event Russian default to bring the world economy to the brink of bankruptcy. Yes - there was panic and casualty but it was contained superbly by well co-coordinated global fed intervention.

1994 – Was it real estate or just the economy? May be the bank of England being disliked Either way, one has to dig deeper into the history to find that the year will be remembered for the beginning of the technology era and the great internet proliferation and definitely not an economic of financial event.

1991 – Is it war or inflation? Either way the fed over came its misjudged call in a hurry.

1987 – Talk about pain and suicide robbing the headlines from NY, NY! Fed Chairman – may not be Green (!) at that time but turned out to be one of the greatest in post world war economy- even though there are rumblings about the Greenspan Put and how he was the originator of Sub-prime & the wealth inflation to spread like cancer. May be if this event turns out to be a non-event – Mr Greenspan might still hold his reputation as the best of breed and might be forgiven for his asset bubble.

1928-29 – This is really one for the historians – No matter how much people blame it on speculation and greed by way of leverage and market manipulation one thing which is being ignored from the time period is – it was at the very early stages of modern Industrial civilization – when innovation was at the very basic level compared to what we are going through in the internet induced global era. From factory planning to material movements – everything was basic and primitive. Gold based monetary system, British imperialism still wagging its tail, war driven penalties, etc. The economy was still controlled by a few Industrial barrons or companies – starting from GMs to GEs and Du Ponts to JPMorgans of the world after the Rockefellers & Carnegies started handing over their torches. Disruptions and disasters where part of the evolutionary cycle of the modern industrial era. Lasted a while – but was not the end.

Panic of 1825 – Bank of England: take everything anybody wants to give and the crash lasted 2 days. Digging deep into the history books – whether it’s the gold or tulip mania or modern day currency / stocks / bonds era – speculation and greed has always led to newer and better financial instruments for the future generation to hide behind – only to be crumbled like a sand castle.

We could take a few more of those disruptions and I am sure we will still find same end result with differing market movers. The economic growth engine comes back with a vengeance –as the basic survival instinct leads to innovation and growth.

Does that mean doing nothing? Absolutely NO! Market indexes might scale new highs if waited long enough – but what seldom gets mentioned is that the components are not the same.

Now for the 2 cents for various expectations:

Scenario 1 - Scared of an Imminent Depression?: Go for the currency – based on conviction distribute between Yen, US $ and Indian Rs .

Why Yen: Japan is the only country which can self sustain & since their pride and feeling for independence is so strong that they will honor their currency no matter what.

Why US Dollar: US is the only sovereign nation that will honor its debt obligation no matter what & has the economic power & market strength along with product might & services with a free market capitalism that can punish the bad and reward the good immediately. This will increase the demand for US Government papers making the dollar stronger in such economic conditions (against popular sentiment). Post 9-11 and post German minded Euro-zone the predominantly US Dollar foreign reserves have been diverted to Euro along with some commodities. With the gyrations of commodity prices in a economic calamity most nations will move to safe haven instruments that is very LIQUID & will be honored – leading to a gradual strengthening of Dollar.

Why Indian Rs: India is the next stop for low cost manufacturing supply base & is the only free market (may be regulated but certainly not controlled) economy that has a very big consumer market next to US & hence will continue to grow organically before global stabilization & growth takes over. Rupee can only get stronger over time given its domestic market size & global opportunity for its base.

Gold is a no go as are other commodities & fixed assets as they will be re-priced like every other asset class as it will not be restricted to paper assets like stocks & corporate bonds. As gold is influenced by dollar value – it will go down as dollar gets stronger.

Euro is a no go – as the solidarity of the Euro Zone will be at risk and eventually crumble under lopsided benefits being reaped only by Germany while pushing the other members into unemployment, high inflation & stagnation. (maybe master minded by the Germans to eat the cake & keep it too; Details for another day! Preview: Look at the bottom line of German companies & economy & compare them to the other Euro-zone entities)

Scenario: 2

Economic Recession – restricted to the US Market – Reallocate into defensive areas, growth stocks with lot of domestic and non-US exposure & precious metals and domestic fixed assets.

Economic Recession – This time a Global One! – Defensive stocks & metals, local fixed income papers both government & corporate.

Scenario: 3

A Market Correction – may be a mild economic slow down- Average down on the previous allocation strategy that has worked for you.

Scenario - 4

Most likely scenario (OR is it My Wishful thinking?):

A mild recession with patchy global growth leading to a moderate Bear market (Bear market is 20% by most standards – which we have already achieved in many sectors/industries – may be not in the Indexes yet!). Most of the Mortgage lenders in US going under bringing down the hedge fund market along with a few brokerages globally only to be re-packaged & launched under a different name. US real estate market going into a prolonged price compression bringing down home builders & REITs and some specialty retailers. Most of the consumers will be spared as a majority of the obligations and risks are already distributed and buried under other speculative investment vehicles – the owners of which have already either been punished or will be shortly and mostly contained to a limited circle. The much anticipated slow down in retail – leading to a coal bag this Christmas will be averted for the following reasons: 1) Election around the corner in US 2) Most of the draw down from the housing market appreciation was used either for home upgrades or further investments in housing related expenditures 3) retail was always supported by strong labor market & wage increase and not from the real estate bubble as widely mis-understood – and hence will still be in tact even after the real estate bubble burst 4) with a possible change of guard in Washington – a new breed of government sponsored expenditures in industries other than Defense & Oil will take place as the focus will be Domestic & not on War & middle East leading to more expansionary measures leading to a moderate Growth in US economy. 5) With a strong Dollar and Washington ready to tap into the strategic petroleum reserve – oil will crash down to under $25/barrel, as the speculator and War/Republican premium will be wiped out. 6) Western dominated Pharmaceutical & Biotech will lose their charms to generics as Washington fast tracks the bio-generics and has less restrictions on patent copying as the largest capitalistic market moves towards a Universal health care system.

This scenario will lead to moderate global expansion and hence – reallocate to Emerging markets – infrastructure & growth stocks along with Hospitality & Emerging market Real estate. Going short on Defense, Oil & Pharma.