How Did The Globally Synchronized Boom Happen

The world is witnessing a globally synchronized bust right now where every country is in a sharp slowdown or already into deep recession. But before this period of gloom the whole world and all asset classes (real estate, equities, bonds, commodities, precious metals) across the world were in a period of boom and high growth.

So when everyone go up together everyone much come down together also and that is what is happening now. But in many people wonder how did this global boom happen which is a very unusual feature of this world.

I say this because earlier some countries were in a boom while others were in slow growth or recession. But this global boom was first of its kind and we try to analyze here that what caused this global boom and hence a global bust now.

Phase One of the Boom

After the stock market bust and IT bubble bust in 2000-2001, the US, in order to prevent recession brought down interest rates drastically. The lending standards were eased and everyone got loans. This easy money lead to the housing boom which created more wealth and even greater consumption mainly on credit.

So as housing prices went on going up the people kept on taking loans and buying houses in hope of selling it soon at even higher prices. But the US economy is more then 70% consumption and so the next question is from where did they get their goods?

Phase Two of the Boom

China in 2000-2001 was already having robust growth. But this excessive comsumption in US fuelled the export industry growth in China. Millions of export oriented jobs were created and people in China started to get wealthier. As the economy in China started to grow at a even robust pace they suddenly needed more commodities, oil and agricultural commodities.

So with US consuming and China exporting there was a boom in the world's biggest economy and the world's biggest emerging economy.

Phase Three of the Boom

So the big growth in China and also India to a comparitively lesser extent sent commodity and oil prices soaring. This was pure case of demand supply. Suddenly there was more demand from two countries in Asia which are house to more then 2 billion people.

So whom does soaring commodity price benefit?

It were the commodity and oil rich countries. So resource producers like Middle-East, Russia, Central Asia, Africa and Latin America started to get rich as a result of rising commodity prices. Hence their economies also saw a boom.

When their economis witnessed a boom there was even more demand for commodities within their own country as well keeping prices high and demand situation tight. So already we have so many countries in boom.

Phase Four of the Boom

Now the resource producers also had lot of money and so they needed some luxary as well. These resource producers started to buy luxary goods in huge amounts from Europe and Japan and needless to say that this improved the economic scenario in these places as well. It is also worth mentioning that in many parts of Europe as well there was huge real estate price increses which also contributed to their increased illusionary wealth.

Thus now starting from US the whole world was in a boom.

The Globally Synchronized Bust

So when the boom had started from the USA leading to the formation of this long chain one can easily imagine what a collpase in the US economy could have done and thats exactly what happened.

Led by the US the whole world is now in recession or just experiencing small growth.

Does that mean that the world will recover only when US recovers?

Certainly Not

Asia led by China should be the engine of global growth next. I cant predict the time when we will see Asia once again growing very fast. But whenever the world economy recovers it will be Asia which will lead growth.

So in the 250 years of history of capitalism the first global boom is over and we can expect the USA to be in recession or very low growth for a very long time. The same thing is applicable to the UK.

Its not that Central Bankers and Analyst dont realise this but they are just too afraid to accept the truth.

Lessons From the Current Economic Meltdown:

• Any economy in the world should be a fine blend of production and consumption. USA is still more then 70% consumption based economy. To make matters worst the consumption was on huge amounts of debt. So both excessive consumption and excessive debt is bad.

• Booms and Recession are a part of the economic cycle. Governments dont come and say during booms that housing prices are going up too fast. Similarly, during a bust also they should not try to stop the downfall. Let recession take its natural cycle and this leads to a healthier world.
  

• In a world economy which is so inter connected as shown above it is difficult to have something called decoupling which so many analyst talked about before this economic slump.

For stock market investors the biggest learning is that when people get too greedy and when things around you defy logic then its best to get out of the markets.

What I mean is that before the crash IPO's like Reliance Power were massively subscribed. This was a IPO for just a plan on paper priced above Rs. 400. Did it make any sense?

Stocks were trading at a PE of even in several hundreds and were still going up every day. All this was clearly not based on any fundamentals.

I would also admit that I made investments even around the peak. But this kind of slump is a first time experience for many of us. So if we could take some key learnings from this we would surely ensure a better and safer investment strategy in future.

Certainly its not the end of the world.

Its also not the end of Equity markets. But when you hear from 99 of the 100 people you meet that its the end of equity markets then you should know that it is the time to start investing.

So take your time. Look back and learn from your mistakes. The markets are not going to go up so soon and that too in a hurry. I can assure everyone it will be more then 3-4 years before we see the Sensex again at or above 21,000.

But also remember the best part of economic growth for India is yet to come.