Even the pundits dont know

Nov 17 2008, 12:00 IST
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SummaryNobody really has the answers. Because if the so-called experts did, we wouldnt be in such a mess in the first place.

Nobody really has the answers. Because if the so-called experts did, we wouldnt be in such a mess in the first place.

Every rise in the equity markets brings hope and every correction soon after, despair. Investors stuck with portfolios that are showing large losses are a confused lot. Should one book the loss and move out? Or should the portfolio be allowed to hibernate until the next boom? Or is it the best time to buy? If no one knew that the fall in the markets would be so deep, and that financial institutions across the world could collapse so badly, then it is also true that no one knows when markets will revive or what can set the financial system right. It will, therefore, be a long process of discovering what has gone wrong and how it can be fixed, before markets stage a comeback. Never underestimate the impact a financial crunch can have, even on otherwise strong and profitable businesses. Many companies have lived through crises and reinvented themselves, but they are not easy to spot in the middle of a storm. Rather than look for advice about what to do next, understand that we know too little to be able to do meaningful analysis of any kind. Humility is a trait that markets enforce on participants from time to time. And thats a valuable lesson.

Keep an eye on the yuan
The biggest surprise in the current crisis is the strength of the US dollar. For all the weakness in the economy, the currency is holding up, more due to the actions of exporting countries to manage their currencies and to stash away reserves in US dollars. The G20 meeting scheduled for November 15th is likely to be crucial for currency markets. While nothing dramatic such as downgrading the dollars status as the international reserve currency is likely, we need to see how exporting countries faced with a US recession plan to deal with their managed currencies. Much has been made about the Chinese rescue package. But the real story is the slowing down of its growth numbers. Chinas woes have their roots in the reduced demand for its exports. Allowing the Yuan to appreciate may not be in its interest. In a country with a high saving rate, consumption growth has been difficult to achieve. The system of government-led investment and its financing means that

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