The Global Crisis
We all know about the Global financial crisis that exists & still getting worse! Have you ever thought How this will affect our life?
Before going into this, let me say in a few words whats this crisis!
The Subprime crisis
“subprime” thats the name of the beauty! Unlike the dotcom bubble (which was unexpected) this one is a fully predicted type. We all were knowing that such a crisis is gonna happen!
Actually whats this?
A simple observation will bring you the knowledge that the core affected one is US Banks & Investment sector banks in united states. “so banks are the villain!?” hehe! Nope! The real villain is the attitude of “PROFIT….AGIAN PROFIT….AGAIN & AGAIN PROFIT”
What happened is, the US banks let people to take loans against their property to build homes, buy flats, buy apartments. Is that the big fish? Noo.. I will explain.
Suppose you have taken loan from a bank 5 months before (thats on June) to build a home. You have borrowed 30 Lakhs agianst your 10 cents of land & building. What happens in normal case is, you get a loan of 30 lakhs, you build your home & you have to repay this 30 lakhs+Interest by some 5 or 10 years.
Instead what happend in the US?
You got a loan in June..rite? A sum of 30 lakhs! This 30 Lakhs is actually the market value of your property in June! Now after 5 months in October its obvious that the market value of your property will be 35 Lakhs (it will increase..no doubt!) The US banks called people who took loan & said “Hello Mr.X , You can get a sum of Rs.5 Lakhs too against your property loan sanctioned on June” Mr.X will not think twice! He will rush to the bank & collect that money too. If you are aware of American life style then you will be knowing that their savings percentage is NEGETIVE (Thank God! we Indians have +30%…) So Mr.X & his family will spend this money in posh life style & later they struggle to repay the loan. After several months Mr.X will realise that hes trapped & in no way he can repay this huge amount! Now what happens if thousand & thousands or Mr.X exists! This is the way how american banks went into a huge amount of cash out flaw & later into such a worse stage that they were forced to file BANKRUPTCY! (Leeman & Merryl linch are examples)
Worse situation!
Such stage arised when the banks tried to sell out the properties (which was surrendered against loan). By that time the property market fell down & banks were forced to sell properties for half or even less prices. Eg: Mr.X got a loan for Rs.35 Lakhs, but property market fell down & now when banks try to dispose this they have to sell it for Rs.15 Lakhs or less… FULL LOSE!
The Derivative Market
Now to get rid of such a huge amount of cash drop banks did another trick. They brought up a derivative model in the stock markets. By this model, they tried to raise the value by projecting out the properties in stock market! This is the key activity that increased the pace of this unavoidable crisis.
So these are the core reasons that created the beautiful “SUBPRIME” crisis in the real estate markets of USA!
Why should I bother?
Haha! In a single look everyone will feel like that! Why should I bother if some banks fall out in the US?! Lets have an analysis!
Now many banks have fallen & the “SUBPRIME” that exists created a bottleneck in real estate market & so TRADE IS NILL. Suppose the market share of real estate sector is 500billion dollars, that much amount is gonna cut off in one shot! You might have seen in newspapers that US Federal reserve is pumping money (huge amount of dollars) into market to save these banks & to exit from crisis. They are doing this to keep the trade LIVE. Trading will not happen unless MONEY is live. Now this huge pumping of money will create another problem of LIQUIDITY (Liquid cash). There will arise a problem of “CASH AVAILABILTY”
Such a finacial crisis will create fear among people & they will STOP spending too much, they will stop spending on luxury etc. Most people will limit their shopping to “just their needs” This will heavily affect the LUXURY & PRESTIGE businesses & they will wipe out! Similarly this will spread into other areas.
How we Indians are ?
We all know that IT & ITeS sector is the fastest growing of Indian economy & its cent percent sure that this crisis will create a bottleneck to its growth. This crisis will affect the complete outsourcing sector for some time. similarly EXPORT & IMPORT business will be affected. Export trade will diminish because of crisis & Import will be costly as the value of Indian rupee is diminshing (1$ = 49 rupees now). This Export & Import plays a major share in Indian market & so you can guess whats coming?!!
Crisis in the IT sector will force companies to revise their payments. At present IT people are getting a hefty pay & this will be cut down. Many employees might loose jobs too. This cut down in salaries will force the computer geniuses to “limit” their lifestyle.
They will STOP going to Pizzas, Coffe days, PVR MUX, will stope hanging out & spending in malls. So such business will be affected.
Cut down in salaries will force people to limit spending on “not very necessary” needs like CARS,BIKES etc. This will affect the entire automobile Industry!! So the need & demand of TYRES goes down now! Now what if TYRES are demandles?? OBVIOUS…the price of RUBBER will go down drastically! It has started already! 1 month before price of rubber was above Rs.100 per kilo & now its Rs.93
So my generalisation is the “SUBPRIME CRISIS” that exists in UNITED STATES will affect even a SINGLE RUBBER TAPPING employee in this gods own country Kerala (whichs a bottom line of the world)! This will affect every individual You, Me, Our friends, each & every one. NO ONE IS EXEMPTED!
So is this worlds end???!!
Hahaha! Hope not! Just look into the fundamentals of economy. No one will stop trading on necessary goodies…rite? You have to eat, You have to drink, dress etc etc for your survival! So everyone will continue trading on the fundamental goods & products! So theres no doubt that market will reach a steady stable state…but it will take time! I dunno how long? some days…some months…some years! Its purely unpredictable. I only know if FUNDAMENTALS are STRONG you can regain from any fall backs!
So this financial crisis is not the worlds end! Dont worry on that! It will teach the world to SAVE money & it will uproot peoples thirst for LUXURY! Sure this crisis will create a hindrance in worlds progress but it will not KILL! It will find another path on its way to destiny…thats PROGRESS of all HUMANS!
WISH YOU ALL A HAPPY SUBPRIME LIFE!
About me! what to say...
October 12th, 2008 at 10:25 pm
HI .. seems like you studied a lot ….good article….
October 12th, 2008 at 11:05 pm
wow…being honest, i didnt knew what this all chaos was really about….u brought it to me in simple words…
u might want to research on how (specifically) it affects the stock exchanges and how they are going down ?
October 13th, 2008 at 11:53 pm
Nice reading! very informative.. I am adding another two outcomes of these things
The price of the commodities(especially electronic components) will rise soon.For example consider a foreign good of 3$ ,it valued 120 RS before but now it values
147 RS.SO This will reflect as an increase in PRICE for foreign commodities.
Another one news which I heard was that The Country ICELAND is almost trashed due to this crisis.Iceland was a wealthy country till before 1 year and now it has became one of the most poor countries in EUROPE.They’ve started begging for money after other countries!
October 15th, 2008 at 5:34 am
The article that you written was quite informative and the way you wrote the article provoke me to scan through the gamut of it .
The fact that you stated above was apparently obvious, yes Indian IT industry will going to be in recession for at least next four quarters .How this financial crisis around the world will affects Indian economy?. The answer is quite straight forward 30% of Indian IT sector was absolutely depended on U.S banks and other financial firms.
How it will affects our economy , the expected GDP rate of 9% for the next financial year (if am not wrong ) will fallen to 7.2% as per the reports . We all aware about the fact that the inflation was hiking for the past 5-6 months, this indirectly affect the value of indian ruppes to the dollar tremendously .
Since this fact remains i just wonder how u came to the assumption that the price of rubber will fall . Let me show you some calculations.
6 months before
US$ 1 =35.50 RS , The price of rubber was 100
if US want to import 100 kg of rubber they must spend Rs 10000($281.7).
now
US$1= 49 RS the price of rubber is 90~100
same amount of rubber will cost them 9000~10000(183~204)
Dont you think this will attracts more US company’s to import rubber from India . From my perception it will boost the indian rubber industry . More demand for the commodity will make it expensive . However , though the Rubber price increase, US will still afford to buy rubber from india . Just because of the fact that inflation affects the the value of indian rupees against dollar.
Just to share some thing interesting with you . For the next few quarters economy will be in “L” shaped recession (imagine L graph , which drop down dramatically( we saw that already) and maintain in the same level for a while) .
Talking about markets , During the recent financial crisis stock value of many companies dropped down dramatically as well . So this fluctuations in the market will make a share holder to sell their stocks before it end up in a loss . So market will be filled with sellers , you may only find a few people to buy the stock , who are commonly categorized as active investors . This all “X” factors will put market in to recession . Many market will cease their trading and many of them will find themselves in a dilemma to buy or sell or keep.
October 15th, 2008 at 9:48 am
@ NITHIN
Your calculations are TRUE! comparing the Dollar-Rupee conflict! My generalisation on the decrease of Rubber price was based on some facts!
1. There exists a Financial Crisis & it affected the production already in US & its breeze started to shake globally too.
2. Crisis will always lead to “LESS DEMAND” for not very necessary needs like Automobiles
What you have written is the diminished value of Rupee will push the US people to import more rubber…rite? but what if Rubber is in Low demand due to low sales of Cars, Bikes, & other goods….?
I said price of Rubber will go down based on “LOW DEMAND” & “EXCESS SUPPLY” & its a fundamental rule of economy that DEMAND DIRECTLY IMPACTS PRICE (based on Supply)!
Present stats shows that my observation is right! When I wrote the post PRICE of Rubber was Rs.93 & it again decreased to Rs.85 now.
October 15th, 2008 at 10:13 am
@ CYRIAC
What happens in the stock exchanges is actually “Human Created”
The FEAR in people abt the Global Crisis & its impact, its effect, many hypes abt this global crisis, rumours like this crisis will KILL the global economy etc forces ppl to SELL their stocks @ the earliest!
At this point the number of SELLERS (SUPPLY of stock) will be very HIGH compared to BUYERS (DEMAND)
Abundant Supply & Low demand will squeeze down the share prices…& this will affect wholly & the SENSEX point will go down…& down…& down!
What happens in the Stock market is based on assumptions & guesses…its actually a “guessmarket”
If P.Chidambaram (Financial minister of India) makes an announcement today that…”Govt.of India guarantees all deposits in Banks”….am damn sure SENSEX will cross Ten Thousand points in one day….
October 15th, 2008 at 10:16 am
@ LINJO
Your observation is right….The “High” value of dollar will increase price of electronic goods…not such goods alone…it will increase price of all IMPORTED goods!!
October 21st, 2008 at 7:01 am
Good. Nice article.
You said are right. the attitude of the banks to make more and more profit caused the trouble.
The fall in the price of rubber have another reason also: The low crude oil price! This may increased the production of artificial rubber. But we know the why the crude oil price is decreased.
I have a doubt. Let us take the case of Mr. X. If he spend more money to buy luxury goods, will it cause a BOOM in such Industries? and this money may go to some banks…(?)
one more thing, How the a sudden drop in real estate happened?
Any way, Let us hope for an ‘opposite reaction’ to this financial crisis.
January 9th, 2009 at 8:34 pm
@ Jose
“How the sudden drop in real estate happened? ”
Well, How appreciation happens in real estate? Suppose you have 1 acres of land & you study the market rates, deciding to sell your 1 acres of land for 10 laks! Now you call up some brokers & says you are gonna sell this 1 acre, contact me if you have some parties in hand!!
PART 1.
5 or 7 ppl comes to visit your place & suppose if all ppl liked it (i mean ur property) – then DEMAND increases ..rite? When all ppl are ready for a deal, you will increase your price…rite? You will say, everyone liked it so for a deal I will sell it to the one who pays 12 Laks!!…so appreciation of property happens!!
PART 2.
If govt. declares like they are planning a Highway through the roadside of ur ppty, or some kind of big institutions like IIT is gonna happen there, or some public industries are coming near by, normally DEMAND for ur propery will increase…which will increase your properties valuations!
NOW DEPRECIATION WORKS JUST OPPOSITE!!
LESS DEMAND – LESS PRICE ! – FUNDAMENTAL RULE OF ECONOMY