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It’s 2003 all over again

Nov 17 2008, 12:42 IST
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SummaryThis is the fourth steep meltdown that I have seen in my lifetime in the capital markets, but by no means is it the steepest among the four.

This is the fourth steep meltdown that I have seen in my lifetime in the capital markets, but by no means is it the steepest among the four. At least not so far. But anyone who has been in the markets after 9/11 and leading up to the current times will be amazed at the similarity between these two times, separated by half a decade.

Man-made crisis
The last time the bloodbath in the markets was caused by events in the United States when terrorists sought to bring the most powerful nation in the world to its knees. That time the destruction was caused by foreigners who wanted to harm the US but ended up doing far more. This time it was US citizens who recklessly sold out their nation and most of the world to make money for their companies and for themselves. But what is similar is that both the carnages were man-made.

After September 11, economies in much of the advanced world were in shambles as business confidence was severely shaken. Today much the same has happened, but on a much larger scale. Manufacturing and services were critically affected then: remember the drop in oil prices and vacancies in airlines and hotels. That scenario is repeating itself. Banks, of course, are facing the brunt. But as after September 11, there is a meltdown in commodities, and sectors such as auto, airlines and hospitality are also under pressure. Only this time round the magnitude of the problem is much bigger.

Liquidity infusion
In 2004, the Bank of Japan (BoJ) infused a massive amount of liquidity into the system that sent every asset class spiralling upward. Much of the investing population across the world subsequently reaped the benefit of this upward spiral. This included the hedge funds and the commodity traders of the world, but also the homeowners in the US and the rest of the world. Today, most of the world’s central banks, and not just the BoJ, are shovelling in billions of dollars worth of liquidity into the system in the hope that this will make the banking industry stronger and more amenable to providing credit to manufacturers and service providers. Again, the response so far has been much the same as in 2003. The only difference lies in the scale.

Lessons for investors
What lessons does this sequence of events hold for Indian investors? Should you begin investing now or

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