RECESSION OR CRASH ?
The moment we talk or hear about crashes we normally just tend to fit out with anxiety and create a nervous environment, the meaning of recession is correction, now. the basic question that comes up to your mind is what is the correction? We have only heard about one type of correction in life which is when the teacher used to correct paper, jokes apart that is what this correction is not about, although meaning stands the same but condition remains different.
ANALYSIS OF RECESSION ( CORRECTION )
In India, whenever we move on to the market to buy something let us take for example a plastic bottle and the shopkeeper charges a price for it and we have a tendency of not getting likes with the price or product so we bargain, now the question comes out here why do we bargain.
We are trained from a very young age not to pay more for any product if the price of a bottle is more than what has been given by the shopkeeper we make it towards a reasonable price that we think is correct in today’s day.
The same thing happens when the market ( stock. market, real estate market, or any other economic market) is very overvalued than its intrinsic valuation ( actual valuation ) over a certain period of time then the market tends to correct itself, this process usually occurs after every 8-12 years approximately.
Where CRASH is a fancy word used for a recession having more active noise, if we move on to the history of the last 50 years in India we observe many market recession which has happened in the past starting from 1987, 1992, 2000, 2008,2016, 2020 and probably 2022-2023 and each recession has its own cause. Let’s validate the reasons :
- 1992 market crash – commonly we know it by a scam, which we recently had a web series on ( scam1992)
- 2000 market crash – commonly known as the Dotcom crash( which occurred due to several online companies generating a bump in the market )
- 2008 market crash – commonly known as the real estate crash ( where the price of housing and land went drastically up in the US and in INDIA)
- The 2016 market crash was a minor crash of around 5-8 % since it was around the bull market’s peak it’s considered just a sentimental correction that occurred due to demonetization in India.
- 2020 market crash. – we all know what this crash is known for ( COVID -19 pandemic which is still on )
- Now comes the most exciting part of the future crashing prospects.
2022-2023 UPCOMING CRASH ??
There is a strong possibility or definite plan for the market to move into a crash or correctional analysis, now a question arises how are we confident about it? Well it’s pretty easy to confirm we just need to focus on the GDP our country and the GDP of the nation that holds the reserve currency, yes -the USA
If we move with the GDP (GROSS DOMESTIC PRODUCT ) OF the U.S – we do observe a decrement of an annual rate of 1.5% in the first quarter( the month of January, February, and March ) itself of 2022, which hereby suggests that there is more possibility for the negative return of GDP on the 2nd quarter itself ( approximately around 6.9% ) the exact percentage will be updated on 29th June 2022.
Now this negative return generated by the nation holding reserve currency generates a recession in a global world.
The technical definition of RECESSION OR CRASH IS – “A period of temporary economic decline during which traded industrial activity are reduced, generally identified by a fall in GDP in two successive quarters ”
If anyone will be interested to move and have a look at the upcoming recessional analysis here’s the link for the page.
https://www.bea.gov/data/gdp/gross-domestic-product. here you will get the GDP details of the U.S, and concerning the GDP returns of INDIA, you can move on the link. https://dea.gov.in/monthly-economic-report-table, although there is no chance for any market crash for India since the recession is hitting the reserve currency it will have a great impact on India as well.
well not only in India but the conditional momentum of the crisis started in America as they call it the very famous NIXON NIGHT.
THE NIXON NIGHT
all three major networks had their broadcasting interrupted unexpectedly as the president of the united states suddenly appeared In living rooms across America. in a serious and agitated state, he declared, “I directed secretary [john] Connally to suspend temporarily te convertibility of the dollar to gold”. in one brief sentence, just 14 words, President Nixon announced to the world that the as we knew it would never be the same again.
no longer would the dollar’s value be tied directly to gold. since the government would have the equivalent value of physical gold stocked away safely. and with Nixon’s declaration, the dollar was just now a paper.
imagine you have a treasure chest filled with gold, only to open it one day and find a yellow paper sticky note that simply said “IOU”. nixon was saying that the dollar’s value would now be determined by whatever we deemed its worth. this news also shocked foreign governments that had held huge sums of dollars, believing that they had the option to convert to gold at any time.
overnight Nixon removed that option from the table and also issued a 10% surcharge on all imports to keep the united states competitive. and like a blizzard in late October, Nixon’s address signified a change in seasons of epic proportions.
after the announcement of this statement from Nixon – the global macroeconomic investor ray Dalio states ” it means the definitions of money is different. I would have thought maybe it’s a crisis !” he was certain that when he walked onto the trading floor next morning, the market was sure to plummet.” but eventually he was wrong since the very next day market went 4% high.
THE EFFECT ON CURRENCY
As we know that currency is part of the economic transactional system, every individual country has its own predefined currency which comes on behalf of gold represented by the following country.
Just for the basic transaction, every other country requires a currency and in today’s date, almost all country has a proper devaluing of their currency which generally rises to the formation of inflation.
THE CHANGING VALUE OF MONEY
As evolution occurs and we study how and what has been the most demanding segment of the economy ( which simply means transaction ) there exists a real economy and a financial economy. The two are closely entwined but different. Each has its own supply and demand dynamics.
What we most generally see is that people do get worried about whether their assets are going up or down, and they rarely pay attention to the value of the currency, well if we do move on to the statistics, then we observe a rare percentage of people worried about their currency declining and very much worried about their stocks and other assets are doing.
Generally, across the globe, all currencies devalue or die, if we observe more closely than roughly 750 currencies that have existed since 1700, among them only 20% remain, and the other 80% have been devalued.
WHAT DO THEY DEVALUE AGAINST?
The goal of printing money is to reduce debt burdens, so the most important thing for currencies to devalue against is debt ( i.e., increase the amount of money relative to the amount of debt, to make it easier for debtors to repay ).
Debt is a promise to deliver money, so giving more money to those who need it lessens their debt burden, by doing so the government creates money and credit and flows it into the economic system.
Every country has its own currency but each currency is linked with the currency of reserve currency which is the USD we know in 1971, in America the dramatic night was considered ” A NIXON NIGHT ” when he suddenly appeared in living rooms across America. In a serious and against the state, he declared, ” I DIRECTED SECRETARY CANNILY TO SUSPEND TEMPORARILY THE CONVERTIBILITY OF THE DOLLAR TO GOLD” President Nixon announced to the world that the dollar as we knew it would never be the same again.
It was not only in America, but due to the fluctuation of reserve currency and all other currencies of the world are defragmented when the inflation crisis comes into play.
In case of debt crisis facilities, the flow of this money and credit into productivity and profits for companies, actual and stock prices rise.
When the creation of money sufficiently hurts the actual and prospective returns of cash and debt assets, it drives flows out of those assets and into inflation-holding assets like gold, commodities, inflation-indexed bonds, and other currencies ( including digital). This leads to self-reinforcing the decline in the value of money.
CALCULATION ON INFLATION –
As we have discussed above this proves how the monetary system and unbalanced working of currency have occurred, which had predominantly given rise to stagflation ( which means inflation along with high unemployment ), like in-country INDIA we observe inflation which is just adjusted above 7% and increasing consistently after the end of each quarter.
In AMERICA we observe a constant increase of 8% which devalue the reserve currency and henceforth devalues the monetary policy, all country across the globe is now about to saturate with the financial crisis followed by the debt crisis, the reason being if just observe the ratio of debt to the liquidity of a country it just escapes to high which represents the stagflation of any following country.
DEBT – the uncontrolled amount of money that has been circulated In the system, which has been created by excessive printing of money and that keeps a promise to get repaid.
LIQUIDITY – The amount of cash present in the monetary system which is used to make a payment for debt and loan, if the percentage of liquidity is low, then the debt also becomes high so the entire monetary system gets inflated giving general rise to inflation.
How to stay safe during a Recession?
Whenever we talk about investing and its basic criteria we Generally talk about very few categories of investment segments generally ( stocks, mutual funds, bonds ).
as we proceed further with the categories of investing the basic mindset that clicks us is the risk of investing, Everyone is ready to invest if the risk has been avoided or neglected but once the factor of risk comes into play no Beginner is ready to play the game.
what we do generally forget is, that students do pass high school ( i.e,12th Class) and all the students have a huge decision to take on is which carrier to pursue for further future, but if we observe very clearly that if we choose to pursue any of the fields from ( Science, Commerce & arts) but they do take a huge count down on the risk that which line to propagate with.
then the student proceeds with a huge risk and that is a Tenure of a minimum of 4-5 years with a huge amount of money approximately 8-9 lakhs (INR) still no Guarantee for the future whether the student will pursue a good and secured job.
if we Proceed with the above-Narrated point with the Upcoming situation we will observe similar figures but bounded by societies and conditional upbringing.
in any form of business we observe that the entire form of profit is not made in a single day it takes time to build over it, in India an approximate time required for getting double returns will be Around 4-5 years. (a Stabilised Business generates 26% roughly per annum ) . so considering all The factors into the pay part and observing the future opinions we should consider entering into the world of long-term investing.
FACTORS ON WHICH THE STOCK MARKET DEPENDS.
When a large volume of trades( buy & sell) happens in the stock exchange it makes the market very liquid, efficient, and low cost. however, the systematic risk also increases.
risk Management systems in stock exchanges are used to mitigate the risk of members of exchange defaulting on payment or delivery obligations. Strategies such as Maintenance of adequate capital assets by members and regular Imposition of margin payments on trades ensure that damages through defaults are Minimised .exchanges thus enable two Distinct functions: high liquidity in the execution of trades and Guaranteed settlement of Executed trades.
SETTLEMENT OF GUARANTEED MECHANISM
THE CLEARING IS THE COUNTER-PARTY TO ALL TRADES IN THE STOCK EXCHANGES. THIS IMPLIES THAT IT ASSUMES COUNTER-PARTY RISK COMPLETELY.
any residual risk is funded by a separate pool of funds known as the trade Guarantee fund (on BSE or NSE ).
Whenever a Company makes a fresh issue of shares, it has an impact on the existing shareholders since their proportionate holding in the share capital of the company gets diluted. for example, Company may have a 10 lakhs share of rs. 10 each, amounting to an issued paid-up capital of rs.1 cr.
it the company issues another 10 lakh shares to increase its capital, the Proportion held by Existing shareholders will come down by half, as the issued and paid up capital, the proportion has doubled. this is called dilution of holdings. to prevent this, section 81 of the Company act requires That a company that wants to raise more capital through an issue must first Offer-them to the existing share Holder. such offers are considered a rights issue.
dividends are the share of profits of the company received by its Shareholders . a company may declare Interim dividends during the financial year and final dividend at the end of the year. a company is allowed to declare dividends out of the profits and loss account and the profits of the year in which the dividends are to be paid.
well, there are some conditions for paying Dividends as well,
- that is a loss-making company cannot pay dividends to its shareholder.
- a company that has failed to redeem its preferred shares is prohibited from declaring dividends.
- dividends cannot be declared out of the shared premium accounts, be it revaluation reserve or capital Redemption.
- SEBI has Mandated that listed companies shall declare dividends on a per share Basis Against the practice in the past of declaring dividends as a percentage of its face value.
a stock Split is a corporate action where the face value of the existing shares is reduced in a defined ratio. ( for example, if a stock splits for 1:5 that means for every share there will be 5 shares) , but the face value Will be 1/5th of the original face value ( suppose it was 10 before the split and after Slept it will hold on Up 2 ).
the value of investor holding does not changes, for example, if the share price were rs.1000 per share prior to the split, post the split the price is likely to come down rs.200 per share. the value of the investor holding was rs.100000 ( 100shares * rs.1000) after the split it will remain rs.100000 ( 500share * rs.200).
if further details on Investing are required then please visit www.bridgnile.com. and further details on inflation and how it affects our relative currency and our respective lives please watch. And to watch more of our blogs please visit www.bridgenile.in