They all fall down

Welcome to a bright and cheerful week. The temporary change in sentiment is most welcome as we just got over a tough week in the Indian stock markets. In fact, not just India, but across the globe, equity markets took a pounding. China, the harbinger of bad  news usually was shut for a week but that didn’t spare the world and its markets.
 
A look at the table below show whether it is for the last six months, or one year or year to date or as I mentioned the last week, a sea of red has engulfed stock markets world over.

Hence, it is wrong to spin stories of doom only in India. In fact, global doomsday predictions are crawling out of the woodwork. If you talk to anyone on Dalal Street, you may be forced to believe that bulls are on verge of extinction. The stories doing the rounds are Japan, Europe and USA will enter into deep recession. Russia, Brazil, Saudi Arabia and maybe China will go belly up. Deutsch Bank will go under and that will make Lehman appear like a stroll in the park. Coming to India, PSU bank NPA problems are insurmountable. Long term capital gains tax will come back in the budget and STT on derivatives will increase. The pendulum has shifted to the other extreme – from Modi euphoria to despair.
 
My take is yes, the world is facing a problem of lack of growth and central bankers are firing bullets but the bullets are failing to hit target. USA is not in such a bad place if you look at the unemployment numbers. We have seen such commodity cycles in the past. To refresh public memory, crude oil (March 2015 inflation adjusted) was $18.64, $11.91 and $16.56 per barrel in 1997, 1998 and 1999. I have taken these figures from a Google search. The collapse of USSR was a bigger worry in the 90s. The world has handled such collapses. 
 
What is spooking is the fear of the unknown unknowns given the current global linkages. What if a large bank has trillion dollar exposure to China or crude that can go horribly bad?  
 
The latter part of the last century and early part of the current century were bad years for commodity manufacturers. The commodity super cycle, which ended sometime around 2010 started around 2003. Look at SAIL price charts; it was available in single digits sixteen years ago.
 
Whenever people talk about stress in steel sector, I am reminded of my ICICI days. In the late 90s, ICICI, IDBI, IFCI and other banks had stressed accounts like Essar, Llyod Steel and some more then respectable names. Then came the commodity super cycle and most of the survivors became blue chips. People were falling all over each other to fund their expansion plans.
 
I am reminded about an anecdote that did the rounds of ICICI corridors of my time. A Delhi-based steel manufacturer challenged Tisco’s claim as least cost Indian steel manufacturer saying – Mera aur uska raw material aur power cost tho same hain aur main interest nahin bharta hoon, tho main sasta ya woh? (Translated – Our raw material and power costs are the same and I don’t pay interest, then who is least cost, we or Tisco)
 
At the cost of sounding philosophical, this too shall pass. There will be deaths along the way, and the survivors will make money and again get loans from everyone when the cycle turns, hopefully after another 3-4 years. Public memory is short and long term investors should remain long.