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Motilal Oswal

By Motilal Oswal 15-Jun-2010 | 10:58

The exact gravity of the European debt crisis is difficult to understand by an ordinary person sitting in India. However, when an expert like Nassim Taleb has to say something in this regard, one should sit up and take notice. This is what he had to say to CNBC Europe yesterday

The economic situation today is drastically worse than a couple years ago, and the Euro is doomed as a concept.

"We had less debt cumulatively (two years ago), and more people employed. Today, we have more risk in the system, and a smaller tax base.

Banks balance sheets are just as bad as they were two years ago when the crisis began and "the quality of the risks hasn`t improved

The root of the crisis over the past couple of years wasn`t recession, but debt, which has spread "like a cancer".

The world needs to prepare itself for austerity. We need to slash debt. Unfortunately, that`s the only solution.

Obama administration`s efforts to pull the US out of recession haven`t succeeded.It`s not that they make mistakes; it`s that they almost get nothing right. Moreover, a second major stimulus package may be futile

Obama promised us 8 percent unemployment through stimulus. It hasn`t worked. There are significantly more liabilities in the US than in other countries around the world.Don`t give a junkie more drugs, don`t give a debt junkie more debt."

The key message from the above is that according to Taleb, who is now signaling that public attention has shifted to debt, instead of growth. This implies that even if growth comes on the back of high debt, capital markets around the world may not respond accordingly and may refuse to go up in a sustained manner. The other implication is that Inflation will hit the world hard if something is not done to slash the amount of money circulating around in the world.

For India, if the world slows sure there would some slowdown here too . How much? Only time will tell. We can predict only the earnings growth. Pre expansion or contraction is a function of the market not under our control and depending on risk , capital flows , perception etc. One lesson, which the Lehman crisis has taught me is that one should not ignore any possibility no matter how low the probability of that event happening might be . Further we all know that Murphy’s Law does hold some truth in “Whatever can go wrong will go wrong”

Inflation is a worry in India, we all know that . Apart from primary inflation even the non food inflation is not coming down. If Kirit Parekh’s recommendations are incorporated , it would only make matters worse on inflation

All these factors warrant some caution in the short term . I would look to lighten trading positions for the least . I remain extremely positive about the long term and one should not panic if he is a long term investor . For, the short term nonetheless, there may be some pain.