Archive for April 17th, 2007

What the Zimbabwean and the Caracas Stock market may have in common

April 17, 2007

I was struck by this article in Publiuspundit about the best
performing stock market in the world in 2006:

you see the chart above corresponds to the Zimbabwe stock
market, which despite being one of the least friendly countries to investments
in the world had that outstanding performance. up 555% in 2006. According to the Luwig Von Mises
Institute in Austria the explanation is simple:

“This is what we are
seeing in Zimbabwe. With the country suffering from Mugabe’s catastrophic
policies, increasingly the only means for the government to fund itself has
been money-supply growth. This has only exacerbated the economy’s problems. The
flood of new money that authorities have created has caused the existing value
of money in circulation to plummet, i.e., the prices of all sorts of goods to
explode, some rising more than others.”

Why did this strike a chord? Because the second best market
in the world for the same year 2006, happens to have been the
Venezuelan Stock Market, where the same exaggerated money supply growth (up 67% in 2006) has
created inflation and in the face of exchange controls, similar to Zimbabwe,
people sought refuge in one of the few assets that could preserve the value of
your money, the stock market, driving it up 160% for the year 2006:

In fact, dampen some the extremes, add a little oil and the
explanation given below in the same article is quite similar,
change Zimbabwean for Venezuelan, the time frame and give it a little more
footing for Government bonds thanks to oil and the economic framework is similar and so were the
results for the market:

This relative outperformance versus
general prices is a result of stocks being a chief entry point for the flood of
newly created money. Keep Zimbabwean dollars in your pocket, and they’ve
already lost a chunk of their value by the next day. Putting money in the bank,
where rates are pithy, is not much better. Investing in government bonds is the
equivalent of financial suicide. Converting wealth into foreign currency is
difficult; hard currency is scarce, and strict rules limit exchangeability.

Of course, in early January our market came crashing down
thanks to Chavez’ threats to private property, as clearly seen in the graph. Of
course, according to the electoral magician now turned Vice-President Jorge Rodriguez,
that 33% drop did not even occur in another bizarre Chavista explanation of reality.

So, the lesson is when markets go up, it may be a reflection
of excess money supply more than economic health, something that the whole
world maybe be living through at this point. Next time you hear a country
imposing exchange controls and expansive monetary policies, just jump in, you
may be rewarded amply!

How cool is this ?

April 17, 2007

The new conductor of the Los Angeles Philarmonic, Venezuelan Gustavo Dudamel plays for the Pope on his birthday. Is Venezuela a developed country only musically?