Scrapping Currency & Election Result at USA

By November 18, 2016 Blog

Investor’s Query: Two main big stories right now.

  1. Prime Minister scrapped Rs. 500/- and Rs. 1,000/- currency notes. Now all are saying Bye Bye Black Money, Buy Buy equities…:)
  1. Donald Trump elected as President of America. All the predictions goes wrong.

Your kind thoughts on these?

Mr. Gerard Colaco: Where the scrapping of the existing Rs. 500/- and Rs. 1,000/- currency notes in India is concerned, it is an excellent move on the part of the Government to show seriousness about tackling black money on a variety of fronts.  The moment the recent Income Disclosure Scheme ended, the cancellation of the high value currency notes has been undertaken.  That leaves individuals dealing in black money nervous and wondering what’s coming next.

But we may be wrong, as usual, if we think this will end the black money menace.  Most black money is held in real estate and gold, not just currency. In fact, the people who habitually deal in black money realize that holding currency is a loser’s game, as it produces no return and is seriously damaged by inflation. So they generally hold currency for only short periods, until it can be either converted into accounted money or deployed in some assets like gold or real estate that have components of both accounted and unaccounted money.

Having said that, the move of the Government will certainly affect a good deal of black money that has been generated and stored on a short term basis, pending deployment in some form of investment or the other.  It will also affect people in India and abroad who manufacture fake currency. Bribe-takers, gold merchants, other business people who evade taxes, smugglers, criminals dealing in cash, large sections of the film industry and persons in real estate who are holding currency at this time will certainly be affected.

That does not mean that henceforth money will suddenly and magically flow into stocks.  If certain investors are not familiar with equity investments, they will certainly not rush into stocks. A good deal, of individuals who hold black money know nothing about equity investment and think that it is mere gambling.

Where the election of Donald Trump is concerned, I have always held that opinion polls are like short to medium term stock market predictions.  Some go right.  Others go wrong. Three major predictions have gone wrong in the last few months.  The first was Brexit.  The second was the rejection by the Colombian voters of a government-sponsored referendum for a peace deal with a guerilla group called FARC. The third was the US election.

The results only shows how much those who vote detest the existing political establishments in various countries.  If you believe in democracy, you have to accept the results democracy produces.  Whether, as individuals, we agree with the results or not, is utterly irrelevant.

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