Saturday, June 20, 2009

Psychology driven markets

After basic fundamentals are taken into account, most markets (housing, stock,loans ) are driven by psychology. People buy things based on what others are buying. The media plays its role in shaping the opinion and perception about goods and services and common sense will tell you how people buy and sell based on news articles in the media. Many times people are stricken by fear and sell too early - For this see the Cramer video on how market makers plant stories and move stocks. 

My theory is that the bad news trend is down. People yawn when yesterday's unemployment figures in the US were announced and the stock market moved higher, inspite of record unemployment.

What my little brain can infer is that the government is going to throw the kitchen sink at the problem and several articles have pointed to inflation to rise in the coming months. The US I-Bonds limit has been lowered to 5,000$ per person from 30000$. The government does not want to pay the CPI inflation for the bond since it thinks that is the what is on the horizon. Some people are forecasting US inflation at 5% in the coming years. 

In India  I see the government pumping money in by lowering rates and drawing out all the fence sitters to buy in the property market. However they will make loans very hard to get so the black component of the market will rise. I still don't see how we can justify 60L apts in remote areas or 1 cr apts in developed areas if only funded by loans.  

There are other issues like timely delivery of apts, poor construction, cheating which are bigger issues in the apt buying process. Those have to  be analyzed more closely and the only thing the buyer can do is to beware and go for ready possession clear titles properties. 

I still see a big demand in people wanting housing, the only thing as we all know is the price is too high even after the 25% drops in most mid-segment housing prices.


Bharat said...

WPI replaced CPI long time back under the congress govt. as a mechanism to hide the real inflation figures. Inflation was one of the main planks for contesting elections sometime back and now no one knows what is the exact extent of inflation. However the consumer knows that prices have already risen sky high...ask anyone in India and they will remark on how high prices of essential commodities have risen in the past 5 years. There has been a massive increase in liquidity and credit growth all of which might lead us to galloping inflation.

For ex: If in the current situation when WPI is -ve and we still have sky high prices..can people understand what would be the situation when WPI touches double digits??!!!

On the other hand job losses are going to increase for some time to come -

Rates may be lowered in the future to get the fence sitters to commit and maybe tax incentives too. But, just understand this fact of life - inflation is going to erode your savings/wealth in the years to come, bank rates can rise in months to touch 13-15% or more to arrest inflation in the years to come and there is a strong probability that taxes may increase + all these tax incentives disappear...

The stock market is going to decline from here and real estate players are going to face a huge crisis like they were experiencing just some months back. In India like China people understand that the coming years are not going to be an easy ride and people are going into a saving the consumer is not in a mood to bail out the fat cats. I still think that the mood/psychology is overwhelmingly -ve and once the US/Europe sees a nose dive will worsen..the world will seem to be ending. We will see massive price falls in RE and yet people will not venture to buy because of erosion of their wealth/security...

So technically speaking, there is a massive amount of -ve sentiment which is going to drive all asset classes sharply southwards.

Venkatesh Babu K R said...

People shouldn't fear about property price increase. The past boom in realestate happened just because people feared that they may not get any more houses at all...

Let's look at the brighter side of the past boom - now that there are so many houses available and vacant, people can definitely think of tradeoff b/w paying rent and paying loan EMI.

Government, realestate companies etc... all want people to buy long term loans because that way, they can make people as their slaves - earning money to repay their debts for 20 long years.

Decide well before committing for long term loans like 20 years - otherwise u'll be made as slaves.

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