 If you had taken your savings and put it in the sensex on the 23rd of March, when the sensex hit a low and you sold all of it today, do you know how much you would have made? You would have almost doubled your money. Now this is very strange given that most likely all your other sources of income have more or less gone down by 10-20% at least because look at what has happened to the economy. It has shrunk sharply, right? Now what is the reason that across the world, in the middle of the coronavirus pandemic, in the middle of COVID-19, the stock markets went up but the rest of the economy shrunk? Why is there this massive divergence that we see between the markets and the rest of the economy? That's what we're going to tackle and make it easy to understand in today's episode. So if you listen to any of the gurus of the stock market or read books by them, they basically tell you that what drives the price of a share is essentially the income that's taking place behind it. You're not buying a share, you're investing in a part of a business. So if the business done well, if it gets good profits, your share price will increase at the same rate as the value of the company. So if the business is expanding, its profits are increasing, the value of the company will keep going up and your share, which is just one part, let's say a small part of that business will also go up in price more or less at the same rate. Of course, every day you know that prices go up and down in the stock markets but that is not because the profit of that company is changing every day, it's just what the market is betting on at that time. Is this company going to do well or not? So when there's a news flow which comes in that the company's prospects look bad, you'll see that the share price drops. Or sometimes when there's a news flow that comes in which says that the company's got a new order or it's buying another big company, the share market rewards it, the prices tend to go up. So there are many factors which cause this to happen and the share markets mostly are forward looking. They look at what is going to happen in the future. We know for a fact that when COVID-19 came, there was a clear idea in the minds of people, economists that the economies across the world will be badly affected. And we saw what happened in the first quarter of India's GDP. We saw that there was a huge drop and even now this year we're told has ended at about 10% lower in real GDP terms, in real income terms where inflation has been taken out compared to last year. Despite that, you've seen a huge growth in the share market. Now, one has to understand that this tells us that the markets do not really track what is happening to the economy. It doesn't really track economic growth. What it tracks is how much of that economic growth, how much of that income is going to those who own capital, those who own the companies, those who run businesses. So let's say at the starting point there was 100 rupees and it was being divided between those who are workers and they were getting let's say 40 rupees and 60 rupees was going to those who were getting the profit out of that company. Now and the total as I said is 100 rupees. Now let's say next year the economy grows and it goes to 110. But out of that 110 workers take away 60 and those who are making the profits, the capitalists, owners of the companies get 50 rupees then what has happened? The owners share has actually dropped from 60 rupees to 50 rupees and that is bad for the company. So we've seen that the economy as a whole, income as a whole has gone up by 10% but the share of profits has gone down from 60 to 50. So that means that the markets would go down instead of going up. Similarly, if the economy actually shrinks, so let's say it's gone from 100 as I said, 100 where workers share was 40 and the owners share, the capital owner, the business owner share was 60 from that 100 it went down to 90. But now the workers share out of that 90 has gone down to 25 and the owners share has gone up to 65. What do we see then? Then the share of profits has gone up. So that means that the companies are doing better even though the economy has shrunk. So essentially the stock markets, when they go up, when the economy shrinks, it gives us an indication as to the distribution of that income. How much is going to those who own companies, those who own businesses and how much is going to those who they employ? Now in the long run, you will say that those who are employed, if they don't get money, what will happen if the company that's producing goods will not find buyers? But here's the thing, this can actually continue for many, many years. It takes a very, very long time for that demand problem to catch up with companies. Why? Because they sit on cash and they try to tend to buy back their shares because they buy back their shares with the cash they're sitting on, the money that they have. They have nowhere to invest. Let me explain this a little further. Let's say that in the economy, because the inequality has increased, those who make profit are getting more profit, those who get wages, their share is going down. Now there are fewer buyers, there's less demand in the economy. There's less demand in the economy. There's no reason to invest, right? If a rich person is sitting, if an owner of a business is sitting on cash, has money, there's no point in investing if there are going to be no buyers for the product. If there's going to be no buyers for the infrastructure they make, if there's going to be no one to pay for it, then there's no point in expanding. So there's no point in investing. You could say, what about if those who are big shareholders and they have some cash, they could invest in, they could put their money in fixed deposits. Why take this risky route? Look at what is happening to fixed deposits. They give you a return which is actually more or less at par with inflation. So effectively, if you put your money in a fixed deposit, inflation takes care of the gains you're making, because suppose you could buy something with 100 rupees this year, and instead of choosing to buy that thing, you put that into a fixed deposit and 5 years later, instead of that 100 rupees, you ended up with let's say 130 rupees. Now if that thing that you were buying also went to 130 rupees, you actually gained nothing in real terms. Because with that 130 rupees, you're still going to buy that same thing. So therefore, the real growth of your income is going to be flat if interest rates that you get on fixed deposits and on term deposits is more or less close to inflation. Therefore, what can you do? You can only look for riskier investments, riskier in the sense that they can go down but they can also go up. It's an interesting thing in the stock markets, risk is sometimes also attributed to things going way beyond normal returns. So your risk appetite has to increase because you have no option. You can't invest in factories. You can't make anything new because there are no buyers. You can't put it in term deposits and debt because the return is almost as much as inflation. So the only place where you can get good returns is the stock markets and therefore those who are sitting on money, those who have wealth and we know the wealth inequality in this country, right? The top 1% more or less own exactly the same that the remaining 99% own. So that wealth is still there. Where can it go? It can only go into the equity markets. It has no way out. Inequality breeds this. Now you can take advantage of that frankly. You can say that okay, I have a problem with inequality. I have an ethical problem with inequality but I want to make money. So where will you put it? Well, the nature of finance capital is such that all money tends to flow into the equity markets. Whether that's going into production or not, one of the amazing things that have happened in the past few years across the world is that big companies have been rewarding shareholders how by buying back their shares. They don't invest. They take the money they're sitting on. They buy back their shares and increase their shareholding. When they listed, when they first came to the markets, they had to give up a part of their company, right? To you and me or anyone who's got stocks and holdings in those companies. And now what they're doing is they're buying it back because they have got the money to buy it back. Another thing they're doing is giving higher dividends. They're returning the money as which was part of the profit because whatever profit a business retains, some of it goes into investment to expand and some of it is returned to shareholders and owners of that business in terms of dividends. So now because there's nothing to invest, what do you do? You pay back shareholders in terms of dividends. That is what is happening across the world and that also pushes the prices up because when an owner wants to buy stock from the market, everyone tries to buy those shares because they think that the price will go up. This is a strange thing that happens, right? So therefore, when the demand for a stock goes up because the owner is buying it back, right? The price goes up as well. This is another reason why stock markets rise across the world. So this is the strange divergence that you're seeing in the stock markets. Yes, sometimes it can catch up with earnings. And one of the indicators one has to look out for is what the government has projected in terms of corporate tax earnings in the final quarter of this fiscal, which is January to March 2021, which is the fiscal year of 2020-21, which is the last quarter, quarter 4. It has actually projected a huge drop in corporate tax earnings. Usually direct tax is whether it's income tax or corporate tax. They go up between the December quarter, which is the last three months ending in December and the last three months of the fiscal year, which is the first three months of the year, which is January to March end. They go up by almost 30% and that happens because taxes are generally paid right before that period, before the fiscal year ends and advanced taxes are adjusted. A lot of tax is paid in that year. The last few years it has gone up by 30% between this quarter, the third quarter of the fiscal and the fourth quarter. This time it is likely to go down. It is actually likely to go down and that suggests that the government of India thinks that corporate profits will fall and if corporate profits fall, maybe the stock markets will catch up with that but in the markets you never know what is going to happen and if the overall economy continues to be like that where there's no avenue to invest, where their money cannot go anywhere and at the same time the central bank makes it easy to take loans and invest, makes it easier for you to decide whether to put in the markets or in fixed deposits, then markets will keep going up. So that is the key reason why the markets are completely dissociated from the rest of the economy.