Sunday, October 26, 2008

The Greatest Trick

“The greatest trick the Devil ever pulled was convincing the world he didn't exist.”
The famous dialogue from the movie “The usual suspects” can be the headline for the financial collapse in the world. They are calling it the “Financial Tsunami”, “The Meltdown”, “Nuclear Winter” and so on. Yes ladies and Gentlemen the biggest financial crisis of the last 75 years has hit us. Now this blog entry will not be about explanation of sub-prime crisis, it will be about economy, lies, human behavior, financial modeling and a bit about the impact on the Internet space. It will be a bit long, but if go the whole way, I promise you the kicks…

The guy who predicted all this is “Paul Krugman”, the Nobel Prize winner for economics, the columnist of New York Times. Here is his now famous article from back then in 2005, titled “Greenspan and the Bubble”:

Here is the important excerpt, If you do not want to read the whole thing:

“If, in particular, the housing bubble bursts before the trade deficit shrinks - we're going to have an economic slowdown, and possibly a recession. In fact, a growing number of economists are using the "R" word for 2006.”

And some part of the problem was challenged by Texas congressman Ron Paul, wherein he criticized Ben Bernanke on money supply, trade deficit and oversupply of dollar across the world. But what was the feedback to their issues, they were criticized and some (Bill O’Reilly) called Paul Krugman stupid and unpatriotic. The Greenspan’s, Bernanke’s and the Paulson’s played along like ignorant parents, for kids like Lehman, Merrill Lynch and AIG to create mayhem.

Let us come back to India, Aren’t we sick and tired of listening to finance minister (FM) and RBI governor’s rhetoric that everything is fine in India. Now that is not the truth, and everyone knows that. The market has crashed from 22 K to 9 K and SEBI believes everything is fine, it is not. The rupee has touched its lowest, still our FM says, No problems, do not panic, we are in control.

The real estate and banking stocks have crashed, with real estate firms crashing 80% in six months, and these firms are still releasing full page advertisements in leading Indian dailies, Is that not misappropriation of funds raised from public? SEBI doesn’t care a damn, and you (the shareholders) are given an impression that it is nobody’s fault. Mr. Subbarao was all out to back ICICI; the RBI even released a press statement for their guarantee. Amazing, everything is great, all the banks are well funded, liquidity is good, not only good, according to RBI, ICICI is better placed by 4% in terms of liquidity over statutory requirements. Now ICICI is our number one bank, if they are so well placed for liquidity, so we do not need to free up liquidity anymore, but RBI is cutting 2.5 % CRR and freeing up thousands of crores, is that not contradictory? If that was not enough, repo rate was reduced by 1 % and another repo rate reduction, will come with 15 days to one month. Now why is all this happening if everything is fine?

There is a real estate firm offering 20% interest on a public fixed deposit, one will be surprised to know that a leading media firm, which reports business, is offer 13 % interest. The stock market has fallen, rupee has fallen, Inflation still in double digits, food grains prices are rising in an economy with 80 crore people making less than Rs. 20 per day and inter-banking lending was stopped by our beloved RBI, and still there is no problem.

This is the greatest trick. Lehman brothers were never in problem, all their press statements were bubbling with confidence till the last three weeks of their existence. Recently Greenspan admitted the error in vision, and the American politicians are blaming it on greedy Wall Street players. But there is bailout for all on taxpayer’s money.

Let us rewind, the India of six months back, everyone buying shares, MFs, ULIPs and biggest of all, real estate. “They asked me to take a loan for property, as even if I would not be able to pay the installment, the house will always be worth way more”, this is the statement of an American Home loan consumer, who had to foreclose. Does this remind you of anything? Yes all your friends and investment advisors were making the same statements. If you told them that the property is a bubble, and there is no change in civic amenities (electricity, water, roads, law and order), they would laugh at you. Every second person had become an investment consultant, throwing advice on shares, MFs and real estate, with zero background. All ULIP plans were sold like “guaranteed returns” plans, which they were not.

Three weeks back, one of our ministers was mocking US economic system, and boasting how we will have no impact of this, what now? Now Real estate firms do not have money to complete projects, is what they are saying. Complete??? That is a joke, go to Greater Noida and tens of other suburbs near major cities, where big townships are announced, and a single flat is sold over a crore. I just went there with someone; there is nothing there, absolutely nothing, no electricity poll, no road, nothing. The question should be if these projects will ever get started with the liquidity crunch and plummeting stock prices of real estate firms. These firms were raising debt at rate of 30% plus not so long back, where is the corporate governance on that in India, none what so ever.

But is the mainline media talking about it, Not much, they are running interview of the FM and RBI governor giving assurances!! At least in US, the mainline media is challenging the Fed and the regulatory system. Here, the King Khan claims ICICI is safe (as if he will bailout if there is a problem), and the word on the street is that RBI will bail us out in case of crisis. The FM, PM and RBI governor has promised the bailout, the question is should we not be doing something to avoid that situation? The mid-term credit policy kept everything status quo, they said it is not required, on the same day, when markets fell by 1200 points. This is the foresight of RBI.

More word on street, Real estate prices will never go down, especially from the people who have taken properties recently. Second assertion, even if prices will go down, rentals will go up. I checked in market both real estate prices and rentals are going down, in case of doubt please check for commercial rentals in the posh Con. Place area of Delhi.

There is a clear impact on internet space in India, the advertising propensity overall has gone down, and Internet is taking the maximum heat, followed by radio. The start-ups are going to have a tough time, check my piece on internet evolution on that:

Let us not think about the financial crisis for a moment. Let us question our intellect as to try and understand the truth. But instead most people are busy selling their personally benefiting confused thoughts.

So I leave it to you, do you see a problem or not, do fundamentals like high money supply pushed by RBI is last 3 years without requisite growth in GDP, or growth in products and services is the right decision. Now so many questions, where were the questions when markets were rising?

To come clean after all this mayhem(which is just the tip of the iceberg), is surely the greatest trick!!!