Has the Bubble Burst? No not yet

Readers of my blog know that I had been predicting burst for quite a while now. And to be very frank the current correction in the stock market can’t exactly be called a burst – it’s too soft a landing to be called a burst, it’s just a correction.

What is a “Burst?”

Burst is something that is followed with lot of pain for example:
1. Crash / Substantial fall in prices of all asset class including shares & real estate. (Has fallen a bit but not substantial)
2. Huge cash loss to speculators and erosion in value of portfolio (happened to an extent but still not at a scale as experienced during a burst. Generally lead to liquidation of long term assets to pay off. Even lead to couple of suicides).
3. Realization that many projects taken up in boom time are not actually viable. This generally happens when people bid more aggressively then one should actually bid (good examples may be Reliance Power’s Sashan Project, Reliance Energy’s Sewree – Nava Seva Sea-link, IPL etc.). Many projects get scrapped, delayed or ‘restructured’ after burst.
4. Fall in prices of factors of production – Land, Labour and Capital. (Currently cost of capital and land has corrected a bit but labour cost is still moving north).
5. Inability to pay debts relating to housing loan etc. This is generally accompanied by lack of willingness to pay because of substantial fall in market value of property. (It has happened in USA but not yet in India)
6. Another remarkable feature of all burst is fall of something which was considered in fallible. For example: big companies like Enron, Worldcom etc. (This time it might be one of the big banks like – Citibank.)
7. Growth engines hitting the wall and come down crashing – this bull runs growth engines have been – Financial engineering (banks), Real estate prices and Power sector. Crash should be more evident in these sectors.
Again the Piped Piper of the last two bull runs were Harshad Mehta and Ketan Pariekh – this time it’s Anil Ambani. Anil Ambani’s fall from grace can lead to end of Bull Run. Last two bulls used ‘not so legal methods’ to use Banks cash to manipulate the market. This time it might have been cash from Mutual funds through ‘not so legal methods.’ International banks financial engineering (read sub-prime) is of course there.

So what are the factors which should be looked forward to which can accelerate the pace of correcting into a Burst / Crash.

1. Coming to light of ‘not so legal’ means of using public money (mutual funds / banks) by certain individuals to manipulate the market. Mutual fund is a big risk area. General public is not following the basic ground rule of investing – ‘Never invest in something you don’t yourself understand’
2. Impending elections in two of the biggest democracies of the world and sudden realizations things are not as stable in terms of policy etc as it was assumed to be
3. Realization that many of the declared or bid for project are not actually viable at these prices
4. Sudden change of policy or tax rules (for example currently stock market earning are almost tax free – Short term capital gain (STCG) attracts only 10% tax rate with Long term capital Gain (LTCG) is tax free. Dividend is tax free in hands of shareholders and Mutual fund investments attracts tax benefits under section 80C – It’s almost perfect for investors and as Aamir Khan said in Dil Chahta hai – it’s difficult to improve something which is already perfect. So tax changes most probably would have negative effect. Even decrease in tax on other avenues of savings like for fixed deposits would have negative impact on stock market due to flow of money to other avenues.)
5. More glaring sub-prime related mess in the international economy
6. Fall of a heavy weight (like Citibank etc)
7. Crash in real estate prices and Oil price fluctuation
8. Currency adjustments – ( change of parity in important currencies like Chinese Yuan & American Dollar)
9. Decease in capex by China. China the world's growth driver would breathe a bit easy with Capital expenditure after the Olympics. This would slow down demand for Steel, cement, and construction goods around the world.