Irrational Minds, Irrational Markets....

Few months back, I was worried because the way in which the SENSEX was soaring up did not relate to the growth story of the emerging Indian economy or the earnings potential of the individual companies... The equation seems to have reversed now. The interesting part…My sentiment is fear in both the situations ( both @ above 21000 levels and @ below 10000 levels) though the cause of fear and the reaction to it looks totally different..

Now, the worry is, the correction seems to be much worse than what it should have actually been considering the fundamentals. The correction in the GPP growth of India because of the US sub prime and Global recession is close to 2%. But then the market has fallen down from 21000 to less than 10000 levels which looks unreasonable. A P/E of 12-15 for top notch companies in sectors such as IT and telecom definitely looks like a very low valuation considering the EPS projections of these companies.

My take on this issue:

#1, I don't agree to the argument that this fall in SENSEX is because of the liquidity crunch. Every earning Indian seems to have a secured mindset with quite a bit of reserve funds which does not get into equity markets. Confidence of Indians in commodity and realty space as an asset class looks to be really good. Probably because we feel that we understand these asset classes as an investment opportunity much better than the equity space. The current downfall is more to do with the confidence and sentiments of people. Lack of awareness brings in fear that reduces our confidence and finally becomes panic….And the current levels indicate that it is a panic struck market..

#2, Even if FIIs has to pull out the money from Indian markets, I tend to believe that we have got the capability to absorb it locally and provide support at these levels to SENSEX.

So the fundamental problem with us is that we are either overly pessimistic or overly optimistic. We seem to lack rational thinking. We seem to get carried away just with what the media says. Our awareness and understanding of the economic system looks to be superficial that lacks common sense. We as investors should try and learn how this system works before we invest our money into it.

Should we be building an economy just based on the sentiments of the people?? We need level headed media persons, economist, politicians and decision makers to reduce the impact of the sentiment factor from the economic growth though a complete decoupling may not possible.

I believe that in situations such as this the media has to act in a responsible way with a lot of awareness and courage about the issue. It's high time that they realize the fact that they make up half of our economic consciousness. Media can have a great impact on our day to day decision making process and ultimately on our economy.

"While morality is all about how this world should work, Economics is all about how it actually works". Is Morality in economics a distant dream for this human race???

The "NEXT"ism

There is no fun in being a capitalist being in a capitalist era...Perhaps this is the best time to bring out the critic in me to write about capitalism....A free fall in the free economy ...Banks running under losses buying bankrupt banks. A classic example to study the impact of "Greed vs capability", “Consumption vs production” puts me back into the "What's next" thinking mode while it puts others in the Regulatory mode.

History gives us enough evidences to prove that every phase of human evolution has seen three kinds of thinkers...

1. Obsolete thinkers who try in vain to put us back into the old system
2. Cotemporary thinkers who are very happy with the existing system and seldom critique it.
3. Futuristic thinkers who make us realize the problems with the existing system and thereby help us to move forward..

The fact that a believer is happier than a skeptic is no more to the point than the fact that a drunken man is happier than a sober one – Bernard Shaw

So, in the economic front we have seen the
"ism" for "equality in poverty"
"ism" for "inequality in wealth"
Can we have the NEXT "ism" for "equality in wealth" ?????!!!!!!!

Looks impossible and against the LAWS of nature for a common mind. When there are inherent variations in the human capabilities how in this world, is it possible to have an equidistribution of wealth. Honestly, I don't have an answer to this. I don't think any other economist in this world can have an answer to this question

But then, let’s look deep into the teachings of nature. If the imbalance in a system goes beyond a threshold the only way by which it restores it back is by unusual, unpredictable, chaotic phenomenon which usually results in undesired consequences. I think each one of us can relate to some examples over here (Pressure difference to formation of a cyclone...)

The true contemporary capitalist in me goes of to SLEEP mode for a while and the futuristic NEXTist in me consciously wakes up to the call of humanity before the imbalance becomes too huge to create a Chaos.

So I start off with an oversimplified economic scenario.....

Let's think of a economy with just three of people in it .. 1. Ishwar 2. Chen 3. Adams

Let's assume Ishwar produces product X ( 2 units every month) priced at Rs. 10 with a profit margin of 50% and the buyers are Chen and Adams who procure 1 unit every month

On the other hand Chen produces product Y ( 2 units every month ) priced at Rs. 20 with a profit margin of 50% for which the buyers are Adams and Ishwar who procure 1 unit every month

Adams produces a product Z ( 2 units every month) priced at Rs. 30 with a profit margin 50% for which the buyers are Ishwar and Chen who procure 1 unit every month

Do you see the inherent logical problems in the scenario explained above. Some questions related to the above scenario which might help us expand the horizon of our economic thinking.

a) For the product produced by Adams do Chen and Ishwar have the real buying capability..??
b) Adam and Chen – do they have a security (savings) based mindset i.e., even if they have the buying capability would they want to maintain sufficient liquidity without consuming?
c) Should the bank "XYZ" give credit to Ishwar and Chen to consume what Adam has produced?
d) Should Adams improve consumption just by working on the GREED/NEED factor or CAPABILITY factor of "Adams" and "Chen"?
e) If Adams is not able to sell his Rs. 30 product then who will consume Chen and Ishwars product?
f) Are these products (X, Y, Z) an essential necessity or others without which Ishwar, Chen and Adam could live with?
g) Is there any interdependency in production (is product X a raw material for production of Y or Z etc…)?

The above questions do not mean that I undermine the awareness of great producers about the demand factor and their understanding of priorities for human survival and happiness.

The point that I want to convey over here is that in a capitalist set up we have got great people (say 10% of overall population) capable of increasing production, reducing cost, world class marketing etc., etc., Usually in their case the consumption in monetary terms should be far lesser than what they produce in monetary terms..

But then on the other side we have got people who are unable to produce (for various reasons such as incapability, lack of opportunities etc.,) as much as they would want to consume.

While these people work on their aspiration factor and Advertisements of capitalist work on their need/greed/status factor, EVERYONE/SOMEONE has to take the responsibility of working on their OPPORTUNITY and CAPABILITY factor. The deep rooted philosophical nerve in my mind says with some conviction that we are in for a CHAOS if we don’t listen to this fact...

The million dollar question..Do we need to call just CONSUMPTION as growth or CAPABILITY coupled with CONSUMPTION as growth ???

Oh.. NATURE why did you create us with inherent differences and expect to create a equilibrium in everything we do…??!!! That’s unfair ..