Can You Make Sense Of This? 6000% Inflation, 600% Interest Rate, And A Booming Stock Market?

by golbguru on September 26, 2007

A few days ago, this news on BBC just wouldn’t let me concentrate elsewhere (source):

Zimbabwe’s annual inflation rate slowed in August to 6,592.8% from July’s record of 7,634.8%, according to the Central Statistical Office (CSO).

At the end of August, President Mugabe introduced jail terms of up to six months for anyone caught trying to raise prices or wages.

What? 6592.8% inflation! That’s crazy. I think you can actually feel the money becoming lighter and less valuable with the minute. To keep up with this rate of inflation, a person earning $10,000 now, would have to earn $659,280 a year from now in order to maintain his/her lifestyle!

Everything becomes 65.92 times more expensive within a year. If your salary doesn’t increase for whatever reason, you stand become 65.92 times poorer than the previous year without spending a dime!

Man, that just doesn’t sound quite right.

We are so used to a relatively *stable* economy, that we have come to accept certain ideas by default (sort of, “taken for granted” - although we pretend that we look at the historical data and try to predict the future) - for example, inflation rate around 2~4%, interest rates between 0~6%, stock market returns between 8% and 12%, etc. - it almost gives a feeling of complacency at times.

I wonder how our investing minds would react to a Zimbabwe-like economy. If, by some misfortune, we are ever caught in this type of an economic atmosphere, I wonder if we will have the ability to think outside the box.

Anyways, to see how other characteristics of this 6000% inflation economy look like, I checked up some data on the Reserve Bank of Zimbabwe. Here is what I got:

  • Exchange rate: 30,000 Zimbabwe Dollars (ZWD) = 1 US Dollar (can currencies fall any lower?)
  • Interest rate: Overnight Rate (analogous to Federal Funds Rate in US) = 600% (at this interest rate you will arithmetically “double” your initial investment in about 4 months! - although that doubled amount will only be a fraction of it’s original *value* in the same amount of time.)

It’s obvious that the inflation will override the growth of funds in a savings account by about 10 times (assuming if you get a full 600% on the savings account) - makes a simple savings account an invalid option to park your money, even at that interest rate.

Next, I tried to look for some data on the Zimbabwe stock market. I recently explained how the interest rate cycle and market sentiments go hand-in-hand. With that picture in mind, the 600% interest rate in the background, and with the knowledge that the economy was falling apart, I was expecting terrible scene at the stock market.

However, I was in for a big surprise here. This is what I found about the Zimbabwean stock market (source):

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, the country’s farming, tourism, and gold sectors have collapsed. Unemployment is said to be near 80%.Yet something odd is happening.

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. This jump in share prices is far in excess of increases in consumer prices. While the country is crumbling, the Zimbabwean share speculator is keeping up much better than the typical Zimbabwean on the street.

zimbabwe-stock-market

This is probably going to cause a paradigm shift in my thinking about how stock markets react to economic conditions - I was expecting the graph to be exactly opposite! On the basis of conventional investing knowledge in US, there is no way anyone could have predicted that kind of stock market performance - in an economy that’s just out of control, and with lending rates that should be absolutely out of whack with that kind of inflation.

Perhaps, more than the money equations, it’s the geo-political situations that affect the market sentiments. Perhaps, there is more to stock markets than what my tiny brain can comprehend at the moment. Perhaps, it’s just the randomness that people talk about. Whatever.

Yeah.. whatever … I am just glad not to be in Zimbabwe .. I think I would have resorted to gold smuggling by now.

Stuff like this keeps reminding me of Warren Buffet’s ovarian lottery concept.

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{ 6 comments… read them below or add one }

1 plonkee 09.26.07 at 10:39 am

There are many reasons to be glad not to be in Zimbabwe right now. I wonder if the stock market there is an example of how markets are rational in the long term.

2 moom 09.26.07 at 2:06 pm

You need to deflate the stock index by the price index. If you do that, I’m pretty sure you’ll see a downward trend.

I’ve lived in an almost hyperinflationary economy in Israel in the mid-1980s. I also wrote my undergrad economics dissertation on inflation policy in Turkey which has long hd high inflation rates.

3 Property Marbella 08.06.12 at 2:29 am

Zimbabwe economy relies on contributions from other countries, UN, etc. Infationen is just to press the new notes with several more zeros on.

4 real estate agent 11.27.12 at 5:48 am

It is this speculation in asset prices that brought about the ‘booming’ stock market in Zimbabwe economy.there is no way anyone could have predicted that kind of stock market performance - in an economy that’s just out of control, and with lending rates that should be absolutely out of whack with that kind of inflation.

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