Can We Panic Now? Why Not Ask Harry Potter
Look at any bear market and even at its lowest point you will find stocks that do quite well. Similarly, in any bull market there are stocks that do poorly. It is true that market risk – the danger that a declining overall market may affect your stock – is real. However, investors who have done their homework know the difference between a general market decline and something wrong with their stock.
There’s this bit in Harry Potter and the Chamber of Secrets when Harry and his friend Ron Weasely go into the dark forest and come upon a giant spider. When Ron, who is mortally scared of spiders, looks like panicking, Harry shuts him up with a stern “Don’t Panic.” A short while later, when the duo are attacked by a huge hoard of giant spiders, Ron turns to Harry and asks matter of factly, “Can we panic now?”
That’s the question that many people are asking about the economy, the continuing credit crisis in that country and the hastening collapse of the dollar. Back in August, when the sub prime crisis first broke, there was a worldwide panic but the US Federal Reserve stopped it by lowering interest rates and generally acting like it was determined to not let things get worse.
Lately, in a testimony before the congress, many seemed to suggest that the worst is yet to come and it could be a lot worse. They admitted that the credit crisis resulting from soaring defaults of sub-prime mortgages had become worse since it first broke in August. Bernanke predicted that growth would fall sharply at least over the next two quarters. He also said the crisis would worsen in the coming months and appeared to hint that the crisis on Wall Street could spiral into a full-blown recession.
Counting everything that US banks and financial institutions have owned up to so far, about US$ 55 billion have been lost in the credit mess. By some counts, this is just the tip of the iceberg. Last week, the chief credit strategist of the Royal Bank of Scotland Group (Europe’s second largest bank) said that total losses may touch US$ 250 billion. We’ve all become immune to large numbers but that’s a shocking sum of money by any standards. Could it be that the world’s banks and financial institutions can lose so much money and the ill-effects don’t ripple across the globe? There’s no shortage of optimists but I have my doubts.
The crisis throws up a set of questions that are interrelated but not quite the same. The larger question is how a recession will impact the global economy as a whole and in what ways-if at all-could it impact the global growth story. The more immediate question would be the impact on the inflows into the stock markets. Curiously, there is a street-level opinion among some investors that a crisis would be good for the Asian markets because it would increase FII inflows.
This is probably based on a highly selective memory of what happened the last time around. When the subprime crisis broke, the markets crashed. It was only when the Federal Reserve dropped interest rates did the inflows started in earnest that the Indian markets started zooming again.
All things said and done, there’s no way of predicting what exactly will happen if the worst-case scenario comes to pass in the and spills over to the rest of the world. There is no shortage of experts who sound very confident while predicting what will happen but experts are not in the business of making correct predictions, they are in the business of sounding confident.