Wednesday, November 12, 2008

Economy of Denial and Cartels

Last year, in this blog I had screamed out loudly about global recession at the very first signs of bad fiscal practices and major slowdown in US housing market ( the only gold mine that we have been digging since 2003-2004).

Never the less, every company /organization had faith in the hedge funds and overseas investments and took the downturn as a momentary loss of inertia. In the field of Macro-economics inertia is most dangerous and can be attributed to 90% of economic downturn.

The malicious practice of hedging in large scale takes the eye of innovation and reality check on the real market. The manufacturers of real goods must produce new products which outperforms the best brand in the market. If any manufacturing organization condemns itself by looking for new and emerging market at the time, then they should not be in manufacturing space in the first (Try retail if yours is one such).

Every downturn in major labour intensive sectors such as Housing (Lets call it Construction please), Automobiles, Steel undoubtedly results in severe downturn in service sectors. Service giants of our times is the Financial sector (Banking, Stocks & Insurance). During the growth of 2004-2006 the financial sectors promoted hedging instruments, clubbed them with Security-based products and promoted credit beyond their means.

The noted economists of our times failed to anticipate the pitfalls of agressive retailing of financial products promoted by the banks. This products do not have any guaranteed asset value but were considered (and be carefull, are still being considered) as real assets of high value. This resulted high profits and great PE values for stocks. Things could go at this level as long as credit was available.

Now in india, which has the best performing fiscal market among BRIC countries. The RBI and state owned banks and LIC have been injecting funds in the stock market thoughout 2008. The Govt was in complete denial of economic reality, they kept saying the fundamentals are good and our internal demand is strong enough engine. They ignored the fact the blue-eyed segment of indian economy stays in the city and serves mostly the outside world. They ignored the fact that inflation in double digits hurts the rural and semi-urban population the most, and takes away their possible capital investment powers.

Now as we had more than 8% fall in manufacturing,we are looking are recession at our cards. Fixing the GDP number by ignoring major economic data like inflation will not be of any help.

Huge job losses are on the way, the service sectors are to be affected as well. So stay wise in these difficult times.