
Originally posted by Raghavan.aiyangar
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It is so HARD to convince people that even a 15% hit on conspicuous consumption (cars, homes, plasma TVs, Bose systems, wine at 1 lakh per bottle, weekend pub bills of Rs 2000, ...) will have a much greater effect on the overall picture.
One of my avatars is in Direct Marketing. We have an analytical frame called the Pyramid, where we fit the number of customers, revenue and profit of a company into 3 stacked pyramids side-by-side.
Without exception we find that 20% of the top customers account for 60% to 80% of revenues and 90% to 130% of profits. You might wonder 130%??? How's that possible. Well, its possible if the remaining 80% only cost more than they return in revenue, leading to losses.
Point I'm trying to make is, I keep hearing the argument that 65% of India is rural and so we will avoid the effect of the tsunami. Little do we realise the falacy in this argument that, yes, the rural population will definitely miss the effects because anyway they lead a life of shortage and poverty. How much poorer can a poor man become.
But even a 15% drop in consumption of these goods mentioned above will eliminate the margins of all the companies that make and sell them, upon which we are building the entire edifice of economic prosperity! When this core element (Corporate Profit) collapses, it has a severe cascading effect on Corporate stock performance, hitting share prices bringing them to 10% of their peak values or lower, which decimates peoples false wealth, which leads to banks recalling their loans on margins, which will lead to further distressed selling, leading to further depressed prices and so on.
To give you an example, there was a great, cash-rich shipping company called GE Shipping (still there


The (credit-led) boom has been mainly in the urban areas due to a large amount of unaffordable borrowing based on the premise that prices will always go up (and by super-leveraging we can make super profits - remember, buying with cash is like walking on 3 foot wall while buying with high leverage is like walking in 300 foot wall; one slip by both and only one survives!!!). These buyers happen to be mainly software people but recently also others industries which export or which provide ancilliary services to these exporters (food, taxis, etc).
I will add to soviblogs analysis with what I had already said - that the real slide will come when jobs start going downhill in large numbers. This will be the main trigger but not the entire cause!!! His assumption is that demand will fall, thus bringing down prices. Partly correct.
But what soviblog missed is that the builders themselves are heavily in debt (he misses that important point). See front page of EcoTimes today. Sobha is on the hook to return 800 crores some today and all within 2 months itself. They must have run out of cash already (remember I mentioned this around 2 months ago in one of the posts). Unitech is in much worse position (which is why its stock is 28 today and falling much faster than the market). Market is much smarter than we think.
So a combination of demand crashing as well as inability of builders to hold on and not sell, because of large debt obligations will together force the liquidation of a large number of flats, etc. When the market is not able to absorb this large numbers in such quick time, the price decline will be even more pronounced than if there was proper absorption by the market.
So, everything will look normal till 1 week before the crash (like US banks which kept telling till the last day that everything is normal, we are capitalised well, etc). Suddenly, next day the headlines are EXTRA LARGE FONT ABOUT THE COLLAPSE!!!


cheers
PS: Btw, I'm not being overly scary or pessimistic. I have used figures that many people in this forum use daily. 1 Crore price, 10-15 lakh salary, etc. I also use logic that everyone finds reasonable. But when you connect the dots the picture looks scary - as it well should as the example hits home.
So, why are people surprised by the end result? Because we don't anticipate that putting harmless Nitrogen (important fertilizer) and harmless Glycerol in the right mix, we get one of the most volatile and deadly explosive (Nitroglycerine) !!!
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