Monday, September 7, 2009

Uh I'd like a V shaped recovery please, extra leverage, hold the Zim ...

Hinde Capital via FT Alphaville:

The Zimbabwe (ZSE) was the best performing stock market in 2008. It rose over 30,000% in the next 12 months, a rise far in excess of the CPI rates, and despite an economic collapse.
How come?

Zimbabwe (Zim) followed the classic tenets of Austrian business cycle theory. Excess growth in money supply and credit sees money transfer initially (unfairly) to a few (connected with government) and their purchases cause certain items or goods to rise relative to others. It is not distributed equally to everyone but later it leaks out everywhere via the Cantillon effect. It should be noted after the Zimbabwe Dollar had been re-based (revalued), i.e. a few zeros were chopped off the bank notes, eventually inflation rates of over 231mm% were recorded, numbers we cannot comprehend.

Often a nation’s stock market will become the main beneficiary of ‘fresh’ money. It enters first by the banks who loan it to other institutions and who “loan it cheaply” to entrepreneurs, who then respond to initial goods price increases by producing more goods. Others observe such production, and the owners purchase stock. Many instead of increasing their own production speculate with this money or other entrepreneurs. Whilst the value of money is plummeting in real terms as goods prices rise, stock prices are outstripping these gains. This leads to yet more misalignment of prices and bad decision-making.

‘Wealth’ is momentarily with a few who own the assets that are rising in value, but for the majority relative income is collapsing. So what does the government do. It meets the shortfall by issuing yet more currency to pay for the budget short fall.

Globally we have every nation issuing bonds to meet budget shortfalls, we have monetisation of credit and government assets globally. If you are Japanese, Swedish, Latvian or American you are not sure which currency is a better alternative and gold is increasingly hard to source (even if you have contemplated it yet - most have not). Those with disposable income buy assets which benefit from the goods price rises you are seeing. You stock up early on winter lumber and food if you have no spare income. You ask for wage increases from your by now government employed car worker or banker because you cannot afford the bus in. Absurd. It all seems rather similar. A global issuance of currency as we are seeing makes it very difficult to find ways to protect your wealth.

The major point to take away from the Zim example is initially inflation is almost universally imperceptible with prices rising invisibly through the stock market mechanism. Later goods price increases explode higher at a greater rate and there is almost no in between. One morning you wake up to a cup of tea costing £1 the next it is £5 and so on and so on..

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