(Part 1: Market Fundamentals: Sprinting or Exhausted)
Have you ever been on a roller coaster or a Ferris wheel? You know that sickening feeling you get when everything seems to be in the wrong place and one loses all sense of control?
Is your money and therefore your emotions in the markets? Are you having that same yucky feeling? Well then you are probably very anxious to know when this freefall is going to stop!
We shall address this question over 4 posts. In this post, we will look at the “fundamental” or the basic underlying economic factors that have gone astray.
Here’s just a list of the major events we need to appreciate:
To keep the Big Picture in focus and to keep things short, I am sure we will all agree that all the above are going only in one direction – UP! Of course, they are all interlinked and we can discuss a thesis on each one topic but the bottom line is this: Till at least some of these items cool off, we are NOT going to see anything substantially different in the stock markets. (Anyone guessing which items have to cool off?)
For the last 5 years and till 6 months ago, all the above factors were within “acceptable” levels and the world was nicely chugging along at a nice clip. Then came the realisation that we have been ignoring some rot in the system and that some of the items in the list (Energy prices & Debt mainly) just can’t keep going up at the rate they were.
The markets had a fit and (slowly) collapsed under the combined burden of their weight. (Slowly, you ask? Yep, it’s been 6 months since the highs.)
How far will you get if you are walking slowly vs jogging vs sprinting? Typically, the answers are: 2km, 500m and 100m – or less! Now, the far more important question: For some reason, if you were sprinting for 2,000m (when you capacity is say 500m), then how long would it take for you to recover from your exhaustion? Bed rest for how long?
This is exactly what has happened to the markets. We were sprinting when, at best, our stamina is for jogging. This happens in life (quite often) when we like to test the limits of our capacities. It happens in the markets too; and like the body, it hits back when the limits are reached. (And till the backlash comes, we don’t heed the signs that we are overdoing things!)
One part of the answer to our question is given by how long it will take for the levels of the items in the list above to settle down? When will interest rates start coming down? When will energy prices start coming down? When will real estate prices come down and become “affordable”? When will inflation start coming down?
There are really no easy answers to these questions but I can tell you this: it takes several months for the effects of high (and low) levels of these (and other) items to trickle down into the economy and start showing results. So, for now we will just have to wait.
In the next post, we shall look at (an equally if not more important aspect), the human emotional side of bear markets. In the 3rd post, we will look at history to see if we can come up with a number that will tell us how long to wait. In the 4th post, we shall follow that up with thoughts & suggestions on when and what to do in the present circumstances.
In the meantime, I look forward to your questions, suggestions and well, anything else you have on your mind. Send them to askmusa@gmail.com
( Dr. Musa R Kaiser is a Bangalore-based doctor, equity investor, derivatives trader, investment advisor and most importantly, a financial educator who is passionate about supporting individuals and families achieve their dreams. He is the founder of www.bangaloreinvestorsclub.com )