On the Edge: Stocks Plunge, Rupee Weakens, and Investors Need to Act

The global stock markets continue to be hammered by fears that more banks and insurance companies around the world are on their way to bankruptcy. Across the world governments are stepping in to guarantee the bank deposits held by individuals.

According to a news story on Bloomberg: "We've approached the edge of the cliff," Leon Cooperman, 65, who manages $6 billion at hedge fund Omega Advisors Inc., said at the Value Investing Congress in New York. "Do we go over the cliff or begin to recede? History says we recede, but there's no guarantee. This is the most difficult financial environment I've lived through."

How close to the edge are we? Given another terrible day for stocks in the US on Tuesday, October 7th, we must be at the edge. According to the Bloomberg news story, "the S&P 500 slid 60.66 points, or 5.7 percent, to 996.23, extending its 2008 tumble to 32 percent in the market's worst yearly slump since 1937. The Dow Jones Industrial Average dropped 508.39, or 5.1 percent, to 9,447.11, giving it a 29 percent retreat in 2008 that would also be the worst in 71 years. The Nasdaq Composite Index lost 5.8 percent to 1,754.88."

The Indian economy – with little connection to the mess in the global economy – is home to a stock market that has plummeted over -50% when measured in US Dollars. India has little economic connection with the mess in the global financial system. But India is guilty by association. Our markets are sliding in a free - fall.

The P-Note bridge we have built with the casino gamblers on Wall Street has made the Indian stock markets a lot less tempting for many of the large pension funds and pools of long term capital. The P-Note owners are an unknown entity. These unknown owners of unknown quantities of shares are selling unknown amounts of shares for unknown reasons. We continue to see known losses on the value of our ownership in the Indian stock markets.

Meanwhile, BusinessWeek, the US magazine, says we are in the "Ice Age".

The dollar, branded as one of the weakest currencies in the world at the start of the year has emerged as one of the strongest currencies this year.

The Indian Rupee, which was expected by most people to be a strong currency, has slipped by -20% against the US currency and lost -11% against the Euro.

Gold has gained about +6% in USD this year and about +32% in Indian Rupees.

And that is not all: The ozone layer, found some 25 km above the earth’s surface, has a hole in it. The hole in the ozone layer above Antarctica is now about the size of North America. If the turbulence in the financial markets does not drive you over the edge, the ultraviolet rays from the sun will probably toast you.

Bunkering down

So with the barrage of financial bombs and ultra-violet rays raining down on us, what should one do?

Maybe it is time to put those black cardpaper sheets on the windows again. In 1971, as a child I went to the local kirana store and bought rolls of those black sheets. The Pakistani planes were on their way to bomb us. The blackened windows would allow us to keep our lights on in the night – without letting the Pakistani pilots spot our room lights and drop the bombs on our heads. They had no reliable radar, I guess, in those days. And the US arms companies had not yet developed those USD 20 million dollar missiles that stealth their way across the arid desserts and bomb the wrong targets. Blackened windows saved us in 1971.

During World War II, all of Europe "bunkered down". Planes were zipping on both sides of the English Channel and cities were bombed into oblivion. The hapless residents had only one escape: they huddled together, kept their heads down and hoped the bombs missed them.

We have seen financial panics before.
We have seen wealth evaporate before.
In 1987, the Dow Jones Industrial Average crashed from 2,641 on October 2nd to 1,739 on October 15th.
That was a decline of -52%.In 2 weeks.
In 1998, the Dow Jones crashed from 9,338 on July 17th to 7,539 on August 31st.
That was a decline of -24%. In 6 weeks.
The current decline in the Dow is -49% from its peak of 14,093 established on October, 12, 2007. In 51 weeks.
If things are bad now, they were also pretty bad in 1987 and 1998 yet we survived as a species.

The India strategy

At the start of the year, I thought the worst case scenario for the Indian stock markets would be an Index level of 15,000 to 16,000.
We are -40% below those levels.
With little idea of where this carnage will end or when it will end.
My suggestion was to invest 80% of your portfolio in the Quantum Long Term Equity Fund, 15% in gold, and 5% in the Quantum Liquid Fund.

I continue to stay with this approach.

The logic is the underlying belief that India’s economy will continue to grow at an impressive 6.5% every year for the next few years. And economies grow because companies and businesses are growing. Over time, this means more profits for the companies. And – in the long run – higher profits means higher share prices. It is this fundamental belief that makes me retain that large 80% allocation to stock markets.

But, what if I am wrong?
What if the world is indeed on the edge and – god forbid – falls of the cliff?
Then gold is my insurance.
A world falling off the cliff means that people have lost faith in the central banks and the paper currency that they print.
So far, this year, the US Dollar has emerged as the world’s strongest currency.
That is because the world believes that the Europeans and the Japanese have little clue on what to do next.
The Japanese are still trying to figure out how to get out of the recession that they entered into in 1990.
The Europeans, also working by committee across various languages and various cultures, will debate for the next few years on what to do next.

The Americans, meanwhile, are taking action.
Over the weekend, if necessary.
They are letting firms go bust, they are rescuing firms, they are forcing shotgun marriages and mergers.
No one knows if it will work – that is why the stock markets are still falling – but the Americans are trying to fix the problem.
In times of crises, the world votes with its money.
And they are flocking to the US Dollar.
The source of this global financial problem is the excessive debt in the USA and yet – paradoxically – the US Dollar has gained ground.

In the war of paper currencies, the US Dollar has won.
It is the undisputed king.
But there is another currency out there, one that has survived wars and famines and centuries of history.
Gold – the currency of last resort
What if – a terrible thought – but, what if…the world does fall over the edge?
Into a deep abyss.
Then, in my opinion, even the US Dollar will fall.
And it has only one other currency to fall against.
And that is gold.

Gold is your life insurance for this equity portfolio.
If the equity markets fall of the cliff, the value of the gold you own could increase dramatically.
How much? Maybe 4x the present price. Maybe.
So your Rs. 15 in gold will be worth Rs. 60.
Your Rs. 80 in equity will be worth Rs. 40.
You add up the portfolio and you are sort of safe.
Your insurance of buying gold has helped.

Table 1: Into the deep cliff?

And what if the world does not fall of the edge.
And survives, then thrives?
Then the Rs.80 in equity is worth Rs.160 – a 2x increase over the next 18 to 24 months.
And your Rs. 15 in gold is worth Rs. 7.5 – a 50% decrease.
Not bad for your overall portfolio: valued now at Rs. 173.

Table 2: Back from the brink?

Look at the sky
So, yes, keep the black cardpaper on the windows.
Avoid the bombs.
But live your life.
Dance.
Hug your children.
Hug your wife.
Hug your family.
Be kind to your neighbours.
Send a thank-you note to the P-Note owners who are selling out of India.
Visit a church, gurdwara, mosque, synagogue, and temple.
And bask in the joy of the sun’s rays (before the ozone hole gets larger).
As my old friend, Eduard, emailed me yesterday: After the dust settles, there might be new stars in the sky.
Yes, Eduard, you are right: I will peek behind the blackened windows to look for those stars in the sky.

Suggested allocation in Quantum Mutual Funds

Mutual fund investments are subject to market risks read all scheme related documents carefully.

Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.

Above article is authored by Quantum.

View All