Demystifying the Financial Crisis

The last few days have been quite nerve-wrecking for investors across the world and for the Average Indian Investor (AII) in particular, who would have seen his portfolio come crashing down by almost 125% vis-a-vis the peaks achieved in the early parts of the year. World famous financial institutions have fallen like nine-pins erasing trillions of dollars from across the world. Goverments have been spending sleepless nights trying to saving the erosion of public welath even it means putting some more taxpayers money back into the same hands that caused the crisis in the first place. Oil prices have widely fluctated from all-time peaks to depressing lows which makes one wonder at the potential of that eternal hope spoiler - Speculation. The crisis is definitely out there and it is time for us to sit back and understand what is going on so that we are prepared for the economic famine in the days to come.

I would probably call it as the wake-up call for the AII to realise that the honeymoon is over and it is time to get to the reality of an integrated world built on the platform of globalization where the pains as well as spoils are quite universally distributed. I have recently had a number of questions from colleagues/friends about the sub-prime crisis, the continuous collapse of financial institutions around the world and the impact of this on their personal wealth creation/erosion. While i am by no means an expert, i decided to put up a list of material (put together by other experts) which would help demystify the chaos that is currently pervasive all around. Nevertheless i am still a fan of globalistion/capitalism as this does hold the hope to a world of creativity and independance where people can compete and excel as per their choice

• The hindu carried an interesting article a few weeks back which explains the sub-prime crisis in a simple and lucid manner. This is definitley something which a layman can understand.
• There is understandably a wiki on the sub-prime crisis which gives a detailed view of the housing crisis - the genesis for the current disorder
• Mr. Warren buffet, the Oracle of Omaha who bailed out Goldman Sachs with a pyshic investment of 5 billion dollars has advised investors to use this opportunity to build up a portfolio of good stocks with good fundamentals at a low price. As he says, fear is the best time for investment.

Here is my view on 5 trends that are likely to hit the AII in the days to come

• There is going to a bloodbath in the construction industry as people have jacked up the housing prices based on the eternal hope of housing prices never coming down. Though i dont see prices coming down over the short term, the number of quality properties in the market is going to go down which will subsequently lead to a price decline and the evolution of affordable housing will once again become a reality. So for guys planning to buy a house, your dream house will still be some distance away but it might be worthwhile to wait.
• Interest rates will come down as there is an imminent need to put in liquidity (not just to boost the stock market but also to keep investments going to keep up to our GDP rate)
• The Sensex will probably bottom out at the 7000 levels, keep fluctuating for a year or two and will then again start rising in a more systematic manner. The bull run during 2006-2008 will be a distant dream
• Inflation will come down but will still be a cause of concern over the next 2 years as the growth in salaries is likely to become more flat.
• Sizeable investments in alternate energy sources (Wind/Solar etc.,) as well as next generation automobiles which will run on alternate energy (Barack Obama has committed to massive investments in this area)