Tuesday, August 17, 2010

Where are the green shoots of economy

The markets in tandem were low when Lehman broke in October. Worst than that was the credit crisis that freezed everything in the world. The simple reason of the freeze was the complete lack of trust among parties. No one knew who will be the next Lehman? If Lehman with its size can fail than no one in the town(read world) is sacrosanct.
Market reflected that phenomena with huge crashes around the world. All talks of India and China story including emerging market was swept under the carpet. Looked like that was the end of the world. The erosion in the wealth was massive and still is.
Than suddenly everyone started talking about green shoots in the economy.Some of the indicators started turning up. And in tandem market started moving up. So are we on the inflection point where the economy has started recovering. The data started mellowing in terms of its intensity and a common term often heard is that the economy has bottomed out.
This will always be a difficult question to answer. The economy does not changes on per hour or per day basis, the way stock market reflects it. One bad data and it takes everyone down. One little less bad data and everyone starts moving up. Also the data is good and bad is relative as it is compared with the expectations reached by surveying the so called market experts. The same market experts who never can predict even a day or for that matter an hour ahead. And we expect them to predict the manufacturing activity or inflation numbers. I feel it's better to generate those expectations by running a random number generator program in my computer. This will be much cheaper also.
So let's focus on if the green shoots are really there? I think rather than asking this question that when the economy will start turning up so that you can start investing , I would pose a different question? Will economy ever will turn up? What do you think? Do not worry about time line now. It might be 2 hours (as stock market predicts it) or it might be 2 months,2 years or 2 decades. We all agree that the economy will recover eventually, unless a meteorite hits our planet and we go in never recover mode.(Some optimist can even argue that we will again come to housing boom albeit couple of million years later.)
So once we have decided and etched in our mind that economy will eventually recover than what to do next? Think when the economy will recover what the opportunities will be presented. What preparations you need to do to be better, smarter and stronger in that? If we get with this idea that economy will recover and don't worry about time, it will be much easier to make investing decisions. Yes you still have to be prudent in selecting your eggs but chances are you will be eventually better off because economy will eventually be better off.
Do you still care for green shoots?
There is a corollary also. When the economy is doing good than eventually it's going to turn down as many recession cycles has proven and will prove. Again think that what you need to do so that you survive in a smarter and better way when the economy will turn the other way.

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