'Capital' Conversation

This post is the result of an argument with a colleague.

A Gmail Chat

K: After Dubai, Which is the next blowup???
Me: NSE, BSE. They are on the terror list ;). Who cares? Only a handful of 'Investors'
K: No Everyone has to take care. They are the true indicators of the economy.


The conversation carried on, and both of us presented numerous arguments in support of our own viewpoints. And, as is the fate of all arguments, even this one could not get to a conclusion. However, this never ending discussion did get me ticking.

So, are the Stock Markets real indicators of the economy?

Most analysts, corporates, and my friends from the business media fraternity, will say yes. And then,they will also go on to great lengths, and to great heights, to convince you. Market enthusiasts, often, justify, this statement, by quoting incidents from recent history, and how markets and more or less always preempt...

Join the Dots type of Scenario.

Impressive.

On the first glance, it looks and sounds credulous too. Yes, it does preempt. It did anticipate the Slowdown, and yes it is all set for the revival also. The enthusiasts, in the same breath, will add ten more incidents to the list, and will present before you a very convincing argument.

And now allow me to present my argument. But first, let me share, a little bit of background information, just to make you more comfortable with the questions that would follow. The Dubai Crisis/Crises, effected markets globally on 25/11. For a day and half, markets around the globe, mourned the demise of Dubai, and shed tears in form of points. However, half way through day two, they decided, enough is enough, and started soaring. The analysts, being true to their profession, backed the markets, by saying, that the scale of Dubai's economy is small, and impact of the crisis limited.

And now, a basic question.

If the scale of the crises was small, and the impact limited, then why did the markets crash to begin with?

And why was there a recovery in the markets? Only because the GDP numbers came out, although, it was widely known and accepted that, the stimulus fed industry, would show good numbers (The IIP numbers gave a fair idea about how the industry was behaving under heavy dosage of stimulants)

Thus, can we come to the conclusion that the crash happened, because the Bear Cartel of Brokers needed a fall to cover their shorts, and the crisis in Dubai just gave them an opportunity to pull the markets down. And once the shorts were covered, the market was pushed up again, on GDP numbers.

And this has been the case always. So when, analysts say, join the dots and you'll get the real story, they are, actually stating the truth. Join the DOTS and if you are intelligent enough, you'll see the picture in the picture.

This is inherent to the dynamics of the market.

And what it underscores, is the fact that shares, are always bought to be sold, a far cry, from the concept of becoming shareholders in companies, to 'share' the profit. The mechanism, has completely turned itself upside down> You buy to sell. And stock prices have nothing to do with the state of the company or the profits it is making. That prices are manufactured is a fact universally known, but not acknowledged.

And unlike what 'experts' try and make you believe, Stock Markets are not run by logic and statistics. If that would have been the case, then the most successful players would not have been school drop-outs, who cannot even put two and two together. They are talented, no doubt, but not at what you think, but at what most brokers call, 'timing'. That enigmatic word which is often used to justify the irrationality of the means and the mechanism.

Markets have gained such an important stature across the world because it is the easiest, and the fastest (legal) way to make money. And that is why, the numbers keep on getting bigger and bigger and bigger.And that is also why, the dirt and the murk, keep on getting darker and darker and darker. And that is also why, the arguments in favour of stock markets, keep on getting stronger, and stronger and stronger.

Na Baap Bada Na Bhaiyya, Sabse Bada Rupaiyya.

3 Comments:

  1. Bhartesh said...
    excellent piece.
    Puneet Bhambhani said...
    Sidy boy, the impression i had of u was that u have nuthing to do with stock markets and thats what u have conveyed till now...But this post of urs speaks a lot in itself. Completely agree that mkts is all 'TIMING' game and are not run by logic and statistics. GOOD PIECE, keep it up....
    Kunal Majumder said...
    I find it amusing the way Dubai debt crisis is being presented as a 'crash' or a 'meltdown'. Of course, Dubai is an extension of the same problem faced in the US: Lack of Regulation. Free flowing credit without any check. Some individuals even landed up with debts worth 10 times his income. Sudden boom than fall in the property and real estate sector. Loser: thousands of Indian living there. But having said that all that has happened is delaying in replaying a debt! It is certainly not a downfall of the Dubai economy.

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