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Why Mumbaikars bought gold all night long on a weekday

goldGold is money.

It has always been money.

Nobody knows this better than us Indians. Our love for the yellow metal comes out in the way we hoard it. And this faith in gold was at display all night long yesterday in Mumbai.

The question is what brought out Mumbaikars to buy gold on a non-festive day? The answer is Narendra Modi.

In a late evening TV address to the nation prime minister Narendra Modi banned the use of Rs 500 and Rs 1,000 as legal tender. This essentially made a little more than 86 per cent of notes practically useless overnight.

Anyone who has Rs 500 and Rs 1,000 notes can deposit them in his or her bank account or post office account, up until December 30, 2016. This money will be
credited into the bank or post office account.

Nevertheless, these notes can be exchanged only up to a total of Rs 4,000 as cash. This limit has been set for a period of 15 days and it will be reviewed after that. People who have always declared their income and paid taxes on time, have nothing to worry about. All they need to do is just go to a bank or post office and deposit the Rs 500 and Rs 1000 notes they have. The money will be credited into their accounts, which they can later withdraw through ATMs/cheques.

Nevertheless, this move of the Modi government, has created trouble for those who have black money in the form of cash or notes. Black money is essentially unaccounted money which has been earned but on which tax has not been paid. If the holders of black money were to deposit it in their bank account, it would probably lead to questions from the income tax department regarding the origin of the money.

If they were to continue to keep it under their mattresses, the money would become useless overnight. Hence, the next best thing to do was to convert that money into a physical asset, which would continue to hold value. Of course, physical assets like land or flats or paintings cannot be bought overnight.

But there are no such problems in buying gold. It is practically available everywhere in the city. All one needs to do is to step out and buy it. And this precisely what Mumbaikars who had black money in the form of cash did late last night.

They exchanged their Rs 500 and Rs 1,000 notes for gold and ensured that their black money continued to hold value. Also, no identification documents need to be shown for gold purchases of up to Rs 2 lakh. This makes converting black money into gold an easy proposition. Further, those with black money always have the option of buying gold from multiple jewellers in order to avoid showing identification documents. Hence, people were essentially busy converting their black money into gold.

As per the government notification Rs 500 and Rs 1,000 were not supposed to be a legal tender post-midnight. But the city jewellers seemed to have overlooked this technicality and carried on with brisk business late into the night. This was a good opportunity for them to earn some money, in what has been an otherwise slow year for them.

Of course, the money that they earned during the night and all the Rs 500 and Rs 1,000 notes that they managed to accumulate, must be deposited into their bank accounts, to make sure that it continues to hold value. If they don’t do that they will essentially end up holding worthless pieces of paper.

And once the money is deposited into a bank account, it will essentially mean that the black money of Mumbaikars will be converted into white money of the jewellers on which an income tax will have to be paid. This in a rather circuitous way will be a good thing to happen.

The column originally appeared in the Midday on November 9, 2016

Sensex 4,20,000: Coming in 15 years at a stock market near you

rakesh jhunjhunwalaVivek Kaul

It is that time of the year when stock brokerages forecast their Sensex/Nifty targets for the next year. A few such reports have landed up in my mailbox and the highest forecast that I have come across until now is that of the Sensex touching 37,000 points by December 2015.
I was thinking of writing a piece around these forecasts, until I happened to read an interview in which big bull Rakesh Jhunjhunwala said that he would disappointed if the Nifty doesn’t hit 1,25,000 by 2030.
Nifty currently quotes at a level of around 8,500 points. The logic offered by Jhunjhunwla is very straightforward. He said that the earnings of stocks that constitute the Nifty index will grow by fifteen times over the next fifteen years. And that would take the Nifty to a level which is fifteen times its current level ( actually 15 times 8500 is 1,27,500, but given that Jhunjhunwala was talking in very broad terms let’s not nitpick). Hence, Nifty will be at 1,25,000 by 2030.
How reliable is this forecast? Not very, is a straightforward answer. A period of 15 years is too long a time to make such a specific forecast on the stock market or anything else for that matter. There are many things that can go wrong during the period (or go right for that matter). Hence, such forecasts need to be taken with a pinch of salt and seen as something that has an entertainment value more than anything else.
In matters of forecasts like these it is important to remember the first few lines of Ruchir Sharma’s Breakout Nations – In Pursuit of the Next Economic Miracles: “The old rule of forecasting was to make as many forecasts as possible and publicise the ones you got right. The new rule is to forecast so far into the future that no one will know you got it wrong.” Jhunjhunwala has done precisely that.
If earnings have to grow by 15 times in 15 years, the Indian economy also needs to grow at a breakneck speed. Over a very long period of time, the companies cannot keep growing their profits unless the economy grows as well. For 15% earnings growth to happen, the economy needs to grow at a real rate of 8-10% per year (the remaining earnings growth will come from inflation).
The trouble is that this kind of rapid long term economic growth in countries is an extremely rare phenomenon.
As Sharma points out in Breakout Nations:“Very few nations achieve long-term rapid growth. My own research shows that over the course of any given decade since 1950, only one-third of emerging markets have been able to grow at an annual rate of 5% or more. Less than one-fourth have kept that pace up for two decades, and one tenth for three decades. Just six countries (Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong) have maintained the rate of growth for four decades, and two (South Korea and Taiwan) have done so for five decades.”
In fact, India and China which have been among the fastest growing countries over the last ten years, were laggards when it come to economic growth. “During the 1950s and the 1960s the biggest emerging markets – China and India – were struggling to grow at all. Nations like Iran, Iraq, and Yemen put together long strings of strong growth, but those strings came to a halt with the outbreak of war…In the 1960s, the Philippines, Sri Lanka, and Burma were billed as the next East Asian tigers, only to see their growth falter badly,” writes Sharma.
Long story short: Rapid economic growth cannot be taken for granted and given this forecasts like Nifty touching 1,25,000 at best need to be taken with a pinch of salt. Indeed, Jhunjhunwala had predicted in October 2007 that the Sensex will touch 50,000 points in the next six or seven years.
Its been more than seven years since then and the Sensex is nowhere near the 50,000 level.
In October 2007, India was growing at a rapid rate. At that point of time it was almost a given that the country would continue to grow at a very fast rate. In fact, this feeling lasted almost until 2011, when the high inflation finally caught up with economic growth and the first set of low economic growth numbers started to come.
Also, Jhunjhunwala and most other stock market experts did not know in October 2007 that more or less a year later, the investment bank Lehman Brothers would go bust, and the world would see a financial crisis of the kind it had never seen since the Great Depression.
The stock market fell rapidly in the aftermath of the crisis. Once this happened the central banks of the world led by the Federal Reserve of the United States, printed and pumped money into their respective financial systems.
The idea was to flood the financial system with money so as to maintain low interest rates and hope that people borrow and spend, and in the process get economic growth going again. That happened to a limited extent. What happened instead was that big financial institutions borrowed money at low interest rates and invested it in financial markets all over the world.
In the Indian case the foreign institutional investors have made a net purchase of Rs 3,19,366.35 crore in the Indian stock market between January 2009 and November 2014. During the same period the domestic institutional investors sold stocks worth Rs 1,27,280.1 crore. The massive financial flows from abroad have ensured that the BSE Sensex has jumped from around a level of 10,000 points to around 28,450 points, during the same period, giving an absolute return of around 185%.
The point being that despite this massive inflow of money from abroad, the BSE Sensex is nowhere near the 50,000 level that Jhunjhunwala had predicted in October 2007. Over the long term a lot of things can go wrong and which is what happened after 2007.
To conclude, let me ride on Jhunjhunwala’s forecast and make my own forecast. Jhunjhunwala has predicted that the Nifty index will touch 1,25,000 points in 2030. This means the Sensex will cross 4,16, 420 points in 2030.
How do I say that? The Sensex currently quotes at around 28,450 points. In comparison, the Nifty is at around 8,500 points. This means a Sensex to Nifty ratio of around 3.33.
Hence, when Nifty touches 1,25,000 points, the Sensex will touch 4,16,420 points (1,25,000 x 3.33). For the sake of convenience let’s just round this off to 4,20,000 points. I know, the world is not so linear. If forecasts were just about dragging a few MS Excel cells, everybody would be getting them right.
But then it is the forecast season and everyone seems to be making one, and given that even I should be making one. And if in 2030 I am proven right, I will search this column and tell the world at large that I said it first way back in late 2014 on The Daily Reckoning.
To conclude, dear reader, remember you read it here first. That’s the trick and I know how it works.

The article originally appeared on www.equitymaster.com as a part of The Daily Reckoning, on Dec 4, 2014