Oct 20, 2008 01:24 AM
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(Updated Oct 20, 2008 01:29 AM)
Economics is not my cup of tea. I have very little idea how a nation’s GDP is calculated or how things like investment, spending, consumption, price indices etc. balance each other out in the parlance of macroeconomics.
But I have been getting some very distressing news from my friends abroad, particularly from the United States. One of my closest friends rang me up yesterday. Until July this year, he was in Atlanta, working for the global telecom giant A T & T. In August, he opted for a change, and moved to New Jersey to work on a project with Bell Labs.
Last week, he was axed. Worse, when he approached his former employer, they flatly refused to hear anything.
Geetanjali(my best friend’s sister) married Ravi Menon, a graduate in electronics from Delhi, in May last year and they moved to US, anticipating a great future ahead. Last December, Geetanjali was diagnosed with a non cancerous brain tumour, and advised surgery. They contemplated whether they should get the job done in US, or return to India. After much thought, they approached one of the best neurosurgical centres in New York, where she was operated for a whopping$1, 30, 000 in September. Thankfully, she was covered by insurance. A few days later, she developed a minor complication and had to undergo a second surgery. This time the bill was$20, 000. Everyone hoped that the ordeal was over. And then the insurance company sprang a surprise. Said, their insurance doesn’t cover for complications or something like that. Ravi is aghast. The last he had thought was paying nearly Rs.10 lacs from his pocket.
I caught up with some of my old friends working with large Indian and foreign financial institutions and sounded them for an insight into what was happening. Then I did a little bit of homework myself and tried to decipher what looked like a messy jigsaw puzzle to me. And what I found out looks disturbing. Very disturbing. So, without getting too technical, let me state the facts.
The Facts
To begin with, there are the stark stock market drops staring in the face – 53% for Sensex, and nearly 45% for Dow Jones. The world over, stock markets have plummeted.
*Significant stock market decline is a strong predictor of recession.
The global banking system is reeling under a severe grip of credit freeze. Though governments world over are trying to save banks from going bust, there is little to cheer about, and the few hundred billion dollars of taxpayer money injected so far by the behemoth economies have already been soaked up without even a ripple. Unless financial institutions are recapitalised sufficiently, and until they are able to lend at lower interest rates, the crisis is far from over.
We must remember – liquidity freeze is a harbinger of impending economic disaster. Collation of data from various sources broadly point out three things. One, unemployment is on the rise. Two, there is a global industrial slowdown. And three, inflation is still very high.
Rising unemployment, industrial slowdown and inflation form a deadly cocktail leading to a net decrease in average income. So, what we have before us is a rather worrying set of facts. And as to how these facts would affect us, here is how.
Money invested into equities and mutual funds have been eroded by upto 70 – 80%.
Market linked insurance plans have taken a major hit. Effectively, the insurance premiums paid in the past few years have gone down the drain for now.
Home loan interest rates are at an all time high. That too at a time when real estate prices are falling. It won’t be a surprise if a subprime like crisis hits ICICI and HDFC in the ensuing months.
The recent alliance between arch rivals Jet and Kingfisher, and the subsequent Machiavellianism displayed by Jet in axing its employees is an indicator of things to come. Be prepared for large scale job and pay cuts.
It is my personal opinion that all so called market analysts and financial advisors are nothing but hollow headed incompetent as*holes. Not one had a clue to this disaster, and when Mark Faber shouted from the rooftops in June that the markets were going to fall to 10K-12K levels, he was hounded and branded a loony. Not one broking house advised its clients to reduce exposure to equities until woefully late, and the whole wretched lot only passed farcical comments on how Reliance had a strong support at 2100 levels.
So guys, here are my two cents.
We must be prepared for tough times ahead. We must reduce unnecessary spending, and try to shore up our small savings. We must cut our exposure to equities, and absolutely avoid new positions on the stock markets. We must refrain from buying new equity linked mutual funds or insurance plans. To cut further losses, a selective redemption of mutual funds is not a very bad option. We must stay away from taking new loans – either personal, vehicle or home loans. If there are plans for an investment in the real estate sector, they must be shelved for now.
Absolutely no job hopping now, unless direly needed. With the economy facing the most serious crisis our generation has seen, job and pay cuts are expected. Job hoppers carry the risk of being axed first. Gold and other precious metals as an asset class is not foolproof. Best advice – stay away.
Remember, money is the best thing to have in hand in difficult times. Your views and comments are welcome.
