In the past few months, there have been several theories floating to justify why the Indian stock markets were defying gravity. Among them was a popular notion called 'decoupling'. Armchair analysts and self annointed experts spewed wisdom to say there is decoupling at work. Don't you worry if the Dow or the Nasdaq were crashing, look at the sensex that's where the real story is, they said. If you bought that theory, you'd believe you are living in paradise, where the economy is unstoppable and sensex could continue defy gravity and we'll are all bound to be billionaires. Nothing wrong with this optimism, it is only the dubious basis of the theory that they were peddling that I had a problem with.
For starts, decoupling assumed that the Indian markets were insulated from the mood swings of the US Markets. They argued that Indian markets had matured enough to chart a course of its own. Some sectors, they said, like IT would be affected in the near term, but the broader markets were high and rocking. And then, they threw the cliche, the India growth story is intact, the Indian economic fundamentals are sound and this was stretched to prove that even if the world's largest economy slowed down, it would have negligible impact on India - its economy and its markets. To add credence to this theory, the markets skyrocketed early this year although the US markets made no headway since Jan 1.
And then came Terrible Tuesday!
This theory fell flat on its face on Terrible Tuesday Jan 22,2008. Global markets crashed hand in hand with the US and the facts were there for everyone to see. The moral of the story was the world has started accepting the reality of a US economic slowdown. The Fed chief testified to the Congress that the economy is slowing but he does not see a recession. That was pure semantics. Few days later, President Bush announced a fiscal revival package and Ben followed that up with an unprecendented emergency rate cut, to stem the slide more so in falling sentiment that in stocks. Now, if global markets were reacting, they were not decoupled were they? If the Indian markets tanked 2000 points, it was very much coupled...wasn't it? I am not trying prove a coupling theory which is equally facile.
Now, let's assume the sensex chooses to flirt with higher levels for a week or so when the US markets is tanking. Does that meaning the "coupling" theory is wrong? The point is this day to day corelation does not work and is not a reliable theory to base one's forecast on.
It's the economy stupid
Macroeconomy 101 and Manmohan Singh post-91 have made us understand how interlinked the Indian economy has become. The retail sales figures of Walmart is causing ripples in Tirupur. Poltical instabilty in Mexico is making Mittal postpones his greenfield investment in India. These are hard facts and this is how economies work. Because economies are run by people, who are, even in their dogged pursuits of profits, are swayed by emotion which define their judgements. To believe that economies are impervious to each other, most of all to the biggest, is being naive. To propound it, is foolhardy.
