“Sell in December and go away” is a popular slogan among global investors. Seasonality in stock markets may defeat all rationality. Yet, there is no denying its existence.The difference is that FII’s are advancing their selling by a month. The reasons are both local and global. The rate hike in USA is imminent and Janet Yellen is constantly cautioning the global markets about it. The demonetization has put the brakes on India’s parallel economy , the size of which is much speculated and unverified. If India’s parallel economy grinds to a halt over the next 7 weeks, it is certain that its ripple impact on the real economy will be greatly felt. The lack of currency for a few weeks is going to create a near- term phobia among people. Remember people waking up in the night even weeks after the Chennai floods with nightmares of rising water! People will keep worrying about the availability of cash and tugging onto cash tightly long after this crisis blows over. Corporate earnings will take a knock. This may surprise those who observe the straight faces that Corporate executives keep while they negate any potential impact from demonetization. They will comeback and simply say ” We read it wrong”. But, the key question before us is ” Did the government read it wrong?”. That looks unlikely. What looks more plausible that the government took the plunge to pull people out of a deep complacency that had set in during the past 15 years. Property speculation, tax evasion and gold accumulation have been three routine features in the average Indian’s lives for the past 15 years. The state has been a passive onlooker even as people refused to invest their savings in the real economy. Money rested comfortably outside the banking system. November,8 was a Ctr-alt-del day for Indian financial behavior. It shook things up. While people are picking up the pieces and trying to patch up things, we may not have seen the last of strong government action to ensure ample tax compliance among our people. To pick a tougher decision and to play it hard is never easy. India’s leadership knows it well enough. Yet, the government made that choice. We will know in the coming weeks if the people respect that decision enough.
Every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer