Exit strategy for crash, recession

ravi_s_ghosh · #1 17th December 2007, 03:55 PM

People are really very enthusiastic now and very busy, counting returns they would get in future and that too not in terms of percentage but how many times their money will grow. That's pretty understandable specially in such times of boom (read bubble). Actually, I feel this is extension of that bubble, the last run before thing collapses. I know there is great possibility that I am wrong and it would be one of the best thing to know that I am wrong. But there are a few things that would make you worried.

Quote:

The riskiest economies, all with current-account deficits and relatively high consumer-price inflation, are India, Turkey and Hungary. Those with current-account deficits are vulnerable to a sudden outflow of capital if global investors become more risk averse. Economies where inflation and credit growth are already high and budget deficits large, such as India, have less room to ease monetary or fiscal policy if the economy weakens.

http://www.economist.com/displaystor...ry_id=10136509

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The worst thing in US housing bubble is yet to happen. Here is what fed says.

Quote:

First, the bulk of the first interest rate resets for adjustable-rate subprime mortgages are yet to come. On average, from now until the end of 2008, nearly 450,000 subprime mortgages per quarter are scheduled to undergo their first reset, eventually causing a typical monthly payment to rise about $350, or 25 percent. Second, the weakness in house prices and the resulting limit on the build-up of home equity will hinder the ability of subprime borrowers to refinance out of their mortgages into less expensive loans; as a result, more borrowers will be left with a mortgage balance that exceeds the value of the house.

http://calculatedrisk***************...c-outlook.html

So by 2008, mortgage thing will come out in full color.

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But at least, great minds must be correct in predicting whether there is a problem in the economy or not, at least partially. Here are some Greenspan quotes from the '90/'91 recession: (bear in mind that the recession started in July, 1990)

Quote:

“In the very near term there’s little evidence that I can see to suggest the economy is tilting over [into recession].” Greenspan, July 1990

“...those who argue that we are already in a recession I think are reasonably certain to be wrong.” Greenspan, August 1990

“... the economy has not yet slipped into recession.” Greenspan, October 1990

http://calculatedrisk***************...recession.html

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Yen-carry-trade is another story. As dollar depreciates against most currencies and yen is one of those currencies, those who borrowed in japan will definitely like to pull their money out of markets and pay back their yen loans.

Now one would say how far can Indian markets fall, may be 15000 in extreme conditions and that would be a great time to enter. So, even if the markets fall we have a reason to enjoy since it gives you an opportunity to make even more profit by entering at low levels. Well, think again. In 1989, Nikkei was trading at 38,000. In 1996, it dove to 22,000 and people called it long-term buying opportunities. It continued its downward journey to 7600 in 2003. Today, its trading at 15,000.

People are making beeline to buy companies trading at huge premium (read high PE) counting in how many days their million will become billion. The 2 basic problems with such people are greed and sluggishness. They are sluggish to enter the market and often enter when the stock has already appreciated quite a bit and if the party continues, they gain, but when things turn the other way round, they are even more sluggish to get out of the market. They wait for the market to return which never happens. So, be prepared to collect your booty and run before the building collapses.

But history shows that, mankind have predicted 9 out of last 3 recessions. The problem with a crash is that it presents a catch 22 situation to you. No one knows when its gonna crash and if its not a crash, then no one wants to miss the ride too. Sitting with cash and seeing the markets skyrocketing is painful as is investing and seeing them reduced to half or even less. A correction may be a buying opportunity as well as start of a recession that's gonna last 3 years or so. This is really critical to those individuals (read naive) investors who have missed out the previous rally and want to get in now or entered the markets in 2007.

It is a known fact that it is always better to react to the situation then predict whats gonna happen. But here I'm clueless as to what must be the strategy in case market turns bearish. I am unable to figure out what to do in such a situation. I really appreciate your valuable opinions as it is not only gonna help a few but a majority of investors, especially naive ones who are almost inevitably screwed in every downtrend.

PS: A part of this post has been posted in another thread in different context, and hence it is not a repetition.

sudoku1 · #2 17th December 2007, 04:54 PM

Quote:

Originally Posted by ravi_s_ghosh;138380

It is a known fact that it is always better to react to the situation then predict whats gonna happen. [B

But here I'm clueless as to what must be the strategy in case market turns bearish. I am unable to figure out what to do in such a situation. I really appreciate your valuable opinions as it is not only gonna help a few but a majority of investors, especially naive ones who are almost inevitably screwed in every downtrend.[/b][/color]

PS: A part of this post has been posted in another thread in different context, and hence it is not a repetition.

as per ur wish.....in technical terms...the intermediate uptrend for sensex ends today
read our thread ' 17 dec................................'

gvgs98 · #3 17th December 2007, 05:06 PM

Well said ravi, u really spent little bit of your time to point out the scenario.
Good post, atleast for me!
Cheers

[quote=ravi_s_ghosh;138380][color="Sienna"]
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Now one would say how far can Indian markets fall, may be 15000 in extreme conditions and that would be a great time to enter. So, even if the markets fall we have a reason to enjoy since it gives you an opportunity to make even more profit by entering at low levels. Well, think again. In 1989, Nikkei was trading at 38,000. In 1996, it dove to 22,000 and people called it long-term buying opportunities. It continued its downward journey to 7600 in 2003. Today, its trading at 15,000.

Aniruddha Mukherji · #4 17th December 2007, 05:09 PM

Don't worry. Sensex will zoom past 30,000 in 2 years time. I f you are along term investor your money will multiply 60/70 times in 10 years & you need not bother about temporary hiccups.

ravi_s_ghosh · #5 18th December 2007, 08:40 PM

Quote:

Originally Posted by Aniruddha Mukherji

Don't worry. Sensex will zoom past 30,000 in 2 years time. I f you are along term investor your money will multiply 60/70 times in 10 years & you need not bother about temporary hiccups.

Down Jones Industrial Average took 25 years to recover to the same level after 1929 crash. Prediction business makes money to media not investors or traders.

rajsingh · #6 19th December 2007, 08:16 AM

And the Q's never did recover, In fact they could get anywhere near the previous highs.

marcus · #7 20th December 2007, 06:11 AM

I would like to add the Nikkei went from 30000 to 10000 we saw something similar in Taiwan, South korea and most other asian countries when they were building their economy, this will happen to India as well however no one really knows when and one should always trade with caution, this is characterisitc of most asain countries when building their economy.

Long term investors should be extra cautious

ravi_s_ghosh · #8 20th December 2007, 10:07 AM

Quote:

Originally Posted by marcus

I would like to add the Nikkei went from 30000 to 10000 we saw something similar in Taiwan, South korea and most other asian countries when they were building their economy, this will happen to India as well however no one really knows when and one should always trade with caution, this is characterisitc of most asain countries when building their economy.

Long term investors should be extra cautious

what does actually "extra caution" mean? Does that mean do not invest any further and stick with whatever have already been invested or does it mean run at the first sign of drop and sell every single equity you have. Its actually a tricky thing to get the exact meaning of being "cautious" and it would be great if you could explain it a bit.

beginner_av · #9 21st January 2008, 04:26 PM

Quote:

Originally Posted by marcus

I would like to add the Nikkei went from 30000 to 10000 we saw something similar in Taiwan, South korea and most other asian countries when they were building their economy, this will happen to India as well however no one really knows when and one should always trade with caution, this is characterisitc of most asain countries when building their economy.

Long term investors should be extra cautious

thanks marcus for warning us. actually i have a chart of the nikkei stuck up in front of my workstation. whenever i get the slightest idea of holding a position overnight, a look at that chart brings me back to my senses.