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Source link: http://archive.mises.org/6491/zimbabwe-best-performing-stock-market-in-2007/

Zimbabwe: Best Performing Stock Market in 2007?

April 10, 2007 by

The Zimbabwe Stock Exchange (the ZSE) is the best performing stock exchange in the world, the key Zimbabwe Industrials Index up some 595% since the beginning of the year and 12,000% over twelve months. And yet, the country is crumbling, writes John Paul Koning. Zimbabwe is in the middle of an economic disintegration, with GDP declining for the seventh consecutive year, half what it was in 2000. Ever since President Mugabe’s disastrous land-reform campaign (an entire article in itself), the country’s farming, tourism, and gold sectors have collapsed. Unemployment is said to be near 80%. What gives? FULL ARTICLE

{ 24 comments }

Person April 10, 2007 at 8:41 am

Quick question: “Because entrepreneurs react to this observed but unjustified change in the structure of prices by investing their capital, misallocation occurs.” –> Why can’t entrepreneurs see that interest rates are too low? I mean, they know what’s going on, don’t they? And then, wouldn’t they shy away from investments not justified by the true interest rate?

Bill Ott April 10, 2007 at 10:22 am

Maybe the stock prices outpaced other prices because of the increase in money supply? There ain’t no maybe about it.

The increasing money supply (devaluing of currency) helps corporations in two ways:
1. Banks and other lenders use this money to buy stocks.
2. Corporations find it easy to increase earnings and revenue as they are earning larger amounts of less valuable money.

Francisco Torres April 10, 2007 at 10:59 am

Why can’t entrepreneurs see that interest rates are too low?

How would they know, without the knowledge of a market-driven (non-fiat money) interest rate. There is simply no benchmark on which to rely.

I mean, they know what’s going on, don’t they?

The same question was applied to those investors that lost everything in 1929. They should have known, wouldn’t they?


And then, wouldn’t they shy away from investments not justified by the true interest rate?

Again, no. The problem is that, even if investor A knew what was going on, he would still have little options in the face of the bubble: stay put, and see your money dissapear into oblivion. Or try to ride the bubble and get as much as possible before the downfall, seeing that investor B, C, D, et cetera, are doing the same. That is the tragedy that fiat money generates.

Person April 10, 2007 at 11:09 am

How would they know, without the knowledge of a market-driven (non-fiat money) interest rate. There is simply no benchmark on which to rely.

Sure there is: yield curve, interest rate futures, etc.

The same question was applied to those investors that lost everything in 1929. They should have known, wouldn’t they?

If their portfolios were that vulnerable to interest rate fluctuations, yes.

Again, no. The problem is that, even if investor A knew what was going on, he would still have little options in the face of the bubble: stay put, and see your money dissapear into oblivion. Or try to ride the bubble and get as much as possible before the downfall, seeing that investor B, C, D, et cetera, are doing the same. That is the tragedy that fiat money generates.

Surely those aren’t the only options.

billwald April 10, 2007 at 11:23 am

In the old days people bought stocks in companies that produced a good product and turned a profit. These days the markets are controlled by the big funds. May the best computer program win.

Francisco Torres April 10, 2007 at 11:47 am

Sure there is: yield curve, interest rate futures, etc.

Person, yield curves and other metrics can only measure in terms of money, and that would only be the one available: the fiat currency. They would be just as susceptible to being mislead by the money supply as the entrepreneurs and investors that have to use that currency.

Surely those aren’t the only options [to stay put or invest].

Please enlighten me.

Digs April 10, 2007 at 12:21 pm

Posted this story and had someone respond with the following that I’d like to get some feedback on.

Thanks, Digs

Response was:

“Nonsense.

Convert the returns into dollars, or some other more stable currency, or adjust them for local inflation, and you’d still be a loser.

Those kinds of ‘returns’ are common in countries experiencing hyperinflation … your just down less than if holding cash. Might be an important lesson going forward.”

Person April 10, 2007 at 12:24 pm

Francisco: Person, yield curves and other metrics can only measure in terms of money, and that would only be the one available: the fiat currency.

You do know there’s more than one currency, right? And besides, I thought entrepreneurs were guided by nominal, not real interest rates? If it’s the latter, then they have a way of gauging inflation in the first place, and could convert available data into useful information.

me:Surely those aren’t the only options [to stay put or invest].

you:Please enlighten me.

Oh, don’t equivocate on me. You said their only options are to continue what they’re doing, or stop. They could instead, not expand, and buy high-grade bonds. Or a stabler currency. Etc.

jp April 10, 2007 at 12:40 pm

digs:
You’re wrong and right. Adjusted for local inflation, the stock market has had terrific returns. Adjusted for the collapse of the Zimbabwe dollar, it is probably down.

From the perspective of the Zimbabwean who needs to buy food and survive, the stock market is rising far faster than goods prices and therefore offers protection from money supply expansion. That was the point of the article.

From the foreign investor’s perspective, any investment in Zimbabwean shares would have probably resulted in a loss due to the collapse in the currency eclipsing share gains.

Yancey Ward April 10, 2007 at 2:08 pm

Inspired by this article, I just bought the entire market in Zimbabwe for $12.97 cents.

Michael A. Clem April 10, 2007 at 2:12 pm

The article states, Converting wealth into foreign currency is difficult; hard currency is scarce, and strict rules limit exchangeability.
It doesn’t say why, nor does it say it’s impossible–however, it seems that they have limited options.

Karolina Kowalski April 10, 2007 at 2:45 pm

The media in the West has also heavely critisized Zimbabwe due to the fact of Mugabe and his foreign policy. Especially the the UK has a lot of investments in the country that it does now want to let go! They constantly report that it is a terrible economy, but it’s interesting to know that the stock market is doing such a tremendous job. The agricultural development is increasing as well by 9% (maize by 14%) after a tremendous decline. But can all of this really overpower the high inflation rate? It seems like Mugabe has to go and the “Milosevic Treatment” seems like a reasonable solution.

And not to mention Mugabe did imply a law that wanted all whites out of his country because of what had occured during the white regime, the Rhodesian Front. Of course it takes the demise of a white man for other countries to step in, while look what is occuring all over Africa between the black tribes.

Björn Lundahl April 10, 2007 at 4:50 pm

Thank you for a very interesting article!

Any great and sudden change in the economy that is not anticipated such as increased or decreased savings, increased hoarding etc can cause crises and problems. Rothbard has also mentioned this.

But those are rather economic fluctuations, and are they anticipated, the business community can easily cope with them without causing any problems at all.

There is a time lag between increases of the supply of money and changes in the purchasing power of money.

If monetary authorities anticipate that aggregate demand will fall in the future, and therefore increases the supply of money today, there is a time lag between those actions and their impact on aggregate demand.

Changes in aggregate demand can be anticipated by the market. Businessmen are trained specialists in their capability to anticipate changes in the market place and anticipated changes of market prices in the future cause immediate changes of prices today and the necessary adjustments.

If there is a fall in aggregate demand, monetary authorities cannot offset this by increasing the supply of money without causing a business cycle.

Increases of the money supply can not be neutralized even if they are anticipated because there is no way to distinguish them from real savings. They are borrowed funds and as they are, actually borrowed, businessmen are factually deluded to act as if savings have increased.

Consumers can allocate their economic recourses in two ways: consumption versus savings.

The fact is that during recessions and depressions price falls are extremely much more severe in the capital goods markets than in consumer goods markets.

In Sweden during the early 90s we had an economic depression and only in one year we had an increase of the purchasing power of money of 1% while real estate prices decreased around 50%!

Stocks are titles of capital goods and prices of them fell extremely too.

The same story goes in the U.S. during the late 20s and early 30s and Japan during the very early 90s.

It is true that during depressions prices of some capital intensive consumer goods fall a lot too (durable consumer goods) but they are comparable to capital goods as they render services over a longer term of time and can be regarded as part of a economy’s fixed capital.

To put an end to business cycles, fractional reserve banking must be rejected and a 100% commodity money reserve standard adopted (such as gold and silver).

Björn Lundahl
Göteborg, Sweden

Björn Lundahl April 10, 2007 at 5:21 pm

Just now I am speculating in Chinese stocks. I hope that I will make a few Dollars or rather Swedish Kronor before it burst. That is my anticipation!

http://finance.yahoo.com/q/hp?s=000001.SS&a=09&b=4&c=2005&d=03&e=10&f=2007&g=m

Björn Lundahl

Jim April 10, 2007 at 7:34 pm

Is it possible to easily invest in an ETF for the ZSE?

Larry N. Martin April 10, 2007 at 7:58 pm

Okay, who’s going to short-sell Zimbabwe stocks??

banker April 10, 2007 at 8:26 pm

I don’t think the article is saying that it is the actual price itself (the interest rate) that is causing entreprenuers to participate in the bubble, but the events lead to the changing of the interest rate. Since the interest rate is a balance between supply and demand, an ultra low interest rate is the result of new paper money flooding the market. So entreprenuers are really reacting to the printing of new money. The increase in money supply manifests in both increasing prices and low interest rates -> asset bubble.

An entrepenuer’s goal is to maintain his/her current wealth or increase it, which implies the entrepenuer has to spend money now on investments or consumer goods(implied by interest rate) or buy another currency. In many countries it is illegal to move your money overseas leaving only the former option available to entreprenuers. This means to protect the value of their property they have to convert their currency into something of more value, which involves purchasing things as quickly as possible -> drives up price inflation.

Landon McDowell April 10, 2007 at 11:53 pm

If you were to show the same graph but convert the Zimbabwe dollar values into a more stable foreign currency using time indexed exchange rates, you would likely find that the value of the ZSE is declining at roughly the same rate as the Zimbabwe GDP.

The rub is that Zimbabwe dollar exchange is so tightly controlled that the only valid exchange rates would be on the black market, essentially making the exchange data inaccessible.

To the authors last point, if you use time indexed exchange rates and measure the value of common US stock indices for the last 25 years in fixed masses of gold or silver you will find in fact that stock values did rise with or higher than GDP with the exception of the last 3 years or so. One could argue that poor recent performance of US stocks as measured in weights of gold or silver is the actual correction of steep growth between 1995 and 2000.

jp April 11, 2007 at 10:14 am

Landon: Using black market rates from Wikipedia (which were compiled from http://www.zimbabwesituation.com) it is possible to construct such a graph.

Unfortunately my stock data only goes back to March 2005. Nevertheless, here it is:

http://lope.ca/zimbadj.gif

You can see that the Zimbabwe stock exchange in US dollars has stayed pretty well constant since the beginning of 2005, despite the collapsing economy, and has indeed served as a haven.

To get the full picture, you’d need to go back to 2001 at least.

Luke McCulloch April 12, 2007 at 3:23 pm

This part of the article bugs me:

“When, for whatever the reason, money supply finally contracts, the artificial strength in prices that encouraged unprofitable ventures is removed, prices collapse, and large numbers of ventures go bankrupt.”

1.) Money supplies contract? Ha! Government Deflation is unlikely.
2.) The money supply doesn’t have to contract for the bubble to burst. Temporal Misallocation makes a correction happen. The correction occurs because consumers are saving less in the present due to the lower interest rates. Businesses are investing more in longer term projects due to the lower interest rates. Eventually, businesses realize that the demand for these projects isn’t there, because the consumers were not saving. Expected returns on investment do not pan out, and the downturn ensues.

J M Harvey June 2, 2007 at 10:43 pm

After living and working in Zim since I was a kid in the ‘hoods (I am now a 58 year old voluntarily early retired executive and academic), I have come to realise, much to my frustration and terror (who says they don’t kill the messenger?)that noone/very few get it!

Excuse grammar here please, because a new vocabulary in Zimbabwe (not the geographic teritory, but the global entity that it already is) is emerging as we communicate about the world as our issue. This vocabulary is obviously strange, because it is new and not yet in the “mainstream”.

It happens to be similar to our usual erudite chit-chat about the political economy, such as we speak about endlessly without answer re the Middle and Far “East” and the WTO, the WB and the IMF and the (careful now, security can become a greater issue there than in Zim!) USA. Thanks to “Whoever” for acronyms: they help slow down deep thought!

To jump-start the vocabulary, I will point to an economic outcome, “the melt- down” and its link to “successful development” in the context of much resisted globalisaion.

Let me first state my central point(s) of view clearly and than dazzle you with statistics:
1) the Zimbabwe economy has globalised and informalised rapidly through the initiative and enteprenuership of its people which itself was an outcome of initially (and still) sound policies on educa

tion and health.
2) as a result of internal lack of economic progress through geo-politics, it is now not in the control of any government or polity anywhere in the world.

Clear enough? Maybe not. To help with a clue, think of Zimbabwe and the rest of the world as a system, however crudely linked. OK?

Now for the stats:

a) 1980 population 3.5m; 1.3m formally employed in the territory; 0.5m in the diaspora;
2007 population 14.5m; 0.94m formally employed in the territory; 3m(?) in the diaspora.

Need more stats? How many clinics and schools were built since independence, which made this population boom possible, despite HIV/AIDS (an embarassing scourge for many yeas), for instance.
What wss the demand on resources and to what extent was that met by internal economic growth?

Yes, they is the ever-quoted anecdotal unemployment figure of 80% unemployment. Do you seriously think that Zimbabweans are going to sit around waiting to die for formal employment? If they don’t, because they are generally very clever, what are they doing with their time except take care of themselves under the sight of the formal radar inside and outside the sovereign teritory?

But, for their conventionally ungrammatical way of being realistic, which with a little twist can be called, for lack of ready-to-speak-words, “human/individual sovereignty”, they are thriving in the “informal” sector globally.

The simple point in all this is that more than 80% of income generated by Zimambweans is no longer in the control nor scrutiny of the territorial authorities as a result of their own partially successful human development pollicies. No criticism: sh** happens!

Otherwise:
i) Why is the economy not collapsing at the rate it would be expected to? Unless the formal economy is already done for and the informal and extended economy is “the last man standing”?
ii) Why are there no riots in the street? Unless the people no longer believe in the formalities of public organisation and rather prefer the lessons of “taking care of their
own business by themseelves”?

I hope I am not scaring anyonee by suggesting a padigm shift: neither the so-called beneficiaries nor the so-called victims of th present situation are in any hurry to get it fixed into some normality which they both do not understand in their present state of collective gloom.

Nothing said, nothing done.

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Invest in Stock May 25, 2010 at 4:47 am

A very smart and diplomatic thought and needs to be appreciated by everyone.
Invest in Stock

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