Rakesh Jhunjhunwala, Investor and Trader feels that the US housing market is unlikely to bottom in mid-term - there is still a lot of pain left. He also feels that US economic growth is unsustainable. According to Jhunjhunwala the bull market in the US is showing signs of excesses. He believes that the US bull market is coming to an end. Jhunjhunwala forsees a big slowdown for techs if the US slows down.
He also feels that interest rates and commodity prices will also come down.
One, the problem in the housing market problem is going to get worse because there will be a lot of foreclosures. Two, there is a lot of housing under construction which cannot be stopped immediately. Housing is 70% of America’s GDP and that itself would lead to a slowdown in America.
He thinks the world is underestimating the consequences of this subprime or the meltdown of the US housing. There is a vicious cycle in America where you give money on credit to people who cannot not afford USD 50,000 - you give them half million dollars; not based on their ability to pay, but on the value of their capital assets. Such potentially "bad" borrowers primarily drove the buying of houses in the last 24 months. They will keep defaulting.
This slowdown in the housing industry is going to lead to a slowdown in the US economy. This again, would mean lower wages and lower employment, which could result in greater housing loan repayments defaults.
There is a very large subprime market even in Britain. So this will continue to transfer itself even to Europe.
Rakesh Jhunjhunwala believes there have been great excesses in the US bull market. That bull market, in his opinion, is coming to an end and the real excesses will be exposed only after the bull market is over.
The US economy is the engine of economic growth worldwide. It has an unsustainable methodology of growth, where you borrow, borrow, borrow and consume, consume, consume. Also we have had a 25-year bull market in America and all bull markets, regardless of regulators, always produce excesses. Excesses are not products of loose regulations but more products of bull markets because then markets make people lose their sense and they become absolutely greedy.
The US is a very dynamic economy; it has great self-correcting measures. This recession in America depends on factors like whether it is going to be orderly, or create a lot of disequilibrium etc. If it is an orderly one, Jhunjhunwala thinks Indian markets will be not be affected to a very large extent. But if it is a huge disequilibrium, then things are going to be quite unpredictable.
