Jamal Mecklai: Limbo Rock

MARKET MANIAC

Confirming the fear described in my special report ["The foul smell of capitulation," Business Standard, Monday, March 10], the dollar has, indeed, collapsed to a new all-time low on a trade-weighted basis, broken through 100 yen and parity on the Swiss franc. Gold has shot through the $1,000 ceiling, and markets everywhere are in a rout.

Everybody believes the dollar has further to fall, and there is increasing talk of coordinated intervention by the good old G-3 "" remember them?

Meanwhile, the credit market collapse continues to hit new crescendos every week, with the purported rescue of Bear Stearns the latest in a string of failed efforts by the US Fed to bring some semblance of order to the market. US equities are in a nervous funk, gaining 300 points one day, losing 250 the next, and barely holding above the 11,500 target so definitively seen by all and sundry as the bottom signalled by the head and shoulders pattern formalised back in November last year.

The Fed, like a blind symphony conductor, is wildly chopping interest rates, coordinating private sector rescues and, in a duet with the US Treasury, putting taxpayer money at risk (by taking on highly impaired assets as collateral), while the orchestra plays on. Rather resembling the last hours of the Titanic.

An apt comparison, in my view.

The truth is that though equities are already dirt cheap "" Citibank under $20, for God's sake "" nobody is buying. Banks are staying as liquid as they possibly can to ensure that when another large domino "" following Carlyle, Bear, and so on "" bites the dust, they will have enough capital to stay afloat.

Indeed, nobody is going to buy anything till it is CLEAR that the collapse is over and a market-clearing price has been established.

And till that happens, the market will continue to resemble that 60s dance craze, the Limbo Rock, where you have to fold yourself backwards and edge under the limbo bar, which keeps getting set lower each time, as the crowd screams, How low can you go?

My sense is we will continue in limbo till the Dow drops sharply, ending up below 10,000. Note, it needs to be a sudden drop "" if the market just grinds lower over six months, with 10,000 in clear view before it breaks, it may not work. But, if it falls 2,000 points in three or four sessions, it would definitively signal the bottom.

There would be, as they say, collateral damage, of course. One of more major financial institutions may go belly up "" or, more likely, change control. Perhaps the rumour I started a couple of months ago "" about Citibank changing its name to Bismillah Bank "" will come true.

But that "" or something similar "" is the price for the good life of the past several years.

Let's remember that there's no shortage of capital "" sovereign wealth funds, private equity players and millions of investors over the world are sitting on piles of cash "" and, once the bottom is determined, this cash would pour in taking advantage of the cheap, cheap, cheap prices. And the sooner this happens, the sooner world growth would get back on track.

Of course, regulators "" pi**ing in the wind, as is their wont "" will continue to try to save the markets, not recognising that all their efforts are simply delaying the day of reckoning and making the final cost worse. Fortunately, the market is more enraged than it has EVER been, which suggests that the denouement is imminent.

And what happens to the Indian market in all this?

Well, obviously the Sensex, which has been dancing with the same wide-eyed staccato uncertainty, will respond in suit, falling sharply "" perhaps, 12xxx would be the bottom.

But, once this bottom was hit, it would be one of the best buying opportunities ever anywhere.

The rupee "" a similar story. Its strength over the past couple of years has been very clearly driven by international investment interest in India. Now, despite the slight slowdown in growth "" driven to some extent by the RBI's tight monetary approach, which, incidentally, for once, I agree with "" this interest remains utterly unshaken. Indeed, with each passing day, fundamental interest in India only increases.

However, as I have explained and is rather obvious, the issue is that there is no investment happening anywhere. As a result, the rupee has been wobbling towards 41 to the dollar, which it may well break in the short term.

But once the global hangover is settled "" which may take two months, six months, maybe, even a year "" look out! Money will come pouring into India and the rupee will shoot straight up. And, if God is kind, it may even cross 38.50 (which rounds off to 38) before the end of 2008, which will enable me to buy a billboard on Marine Drive to advertise my forecast in 2003 (when the rupee was 46) that the rupee would reach 38 in 5 years.

Keeping my fingers crossed.

Caveat: Since writing this piece (March 15), the market has reacted very favourably to the takeover of Bear Stearns "" since the demise of a major Wall Street player has often signalled the end of a crisis, we may, indeed, have already seen the bottom. Still not a time to jump in, though.