Monday 26 September 2011

Crisis of Confidence

It is so interesting to see investors oscillating between optimism and pessimism within a span of a few months. A few months ago, everything was fine. US was getting out of recession, although slowly. And small insignificant countries like Greece had some issues with their debt. Now, the reverse seems to be true. US is already in a recession (double dip, with ketchup, if I may add!!), as commented by George Soros and Euro is near disintegration!!

I, as a Munger devotee, think that a "Lollapalooza Effect" is happening here. There are too many negative external stimuli happening together. This is probably making it difficult for people make sense of the market. The major negative external stimuli at this point in time are:
  • US recession (single dip, double dip, who knows!!)
  • S&P downgrade of US debt
  • Eurozone crisis and possible default by Greece
  • Slowdown in emerging markets (India, China, Brazil the whole lot)
  • Policy paralysis in India
  • Rise in interest rates in the India
  • Continued inflation
People are not able to understand the implications of all these individual events are are running scared of possible worst case scenarios for all of them.

I think that the whole issue can be boiled down to a small phrase - "Crisis of Confidence". There is a lack of confidence in the political leaders throughout the world. Americans don't have confidence in their leaders to get to a solution without printing dollars or crippling the economy. Europeans don't have confidence that their leaders can sit together and thrash out an agreement to really do something. Indians have never really had confidence in their leaders post-independence, so nothing really has changed. But, this current UPA-II is fighting hard to be the worst government of all time - a government which does not govern!!

I think what will happen now is that the political class will start to get their act together. They have their back to their respective walls right now. In India, I am hopeful that some policy reforms may be announced along with some market friendly announcements to boost investor confidence. 

Till then, buckle up. The ride is going to get rougher.

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