This Is What Stocks Do During Hyperinflation

Tyler Durden's picture

One of the classical refrains for buying stocks is that they preserve purchasing power and add value, even under such extreme monetary conditions as hyperinflation, or in other words, on a relative basis, local equities when denominated in a stable currency, will increase in value even as the local currency disintegrates.

As one example of this phenomenon, historians and equity bulls provide the widely referenced example showing that during the Weimar period, even as the mark lost all of its value, the stock market in USD terms actually rose during the parabolic phase.

 

But is that widely documented example really true, and even if it is, is it the case that stocks preserve value during hyperinflation in modern days? Luckily, we have an actual, ongoing case of currency destruction and hyperinflation in a country that was supposed to be a "socialist paradise", but ended up just a little short: Venezuela, whose annual inflation is estimated at just shy of 400% annually according to the Troubled Currencies Project.

The same Venezuela which as we showed yesterday, Germany's Handelsblatt, found was the "best investment" in the world in 2015.

 

Indeed, looking at the performance of the Caracas stock exchange, when denominated in the "official" currency rate, the one which is completely meaningless for virtually everyone, an equity investment in the could not be better: the index clearly soared fourfold in the past year.

 

There is a problem with this chart, however: as noted above, it uses the official Venezuela exchange rate, one which is completely meaningless to the local population if they actually want to buy USD either locally or in the US.

To get the real picture, one has to use the actual "black market" rate as calculated daily by DolarToday, which at 833 bid is quite a bit "different" from the 200 official rate.

Here is a chart of how Venezuela's real currency has performed in 2015:

 

What happens when one shows the Caracas exchange in official "currency terms" on one hand, versus "real currency" terms on the other? The answers are shown by the green and blue lines in the chart below, respesctively.

So to answer the original question: how did Venezuela stocks perform in the past year under the country's hyperinflation? The answer: using a meaningless exchange rate, they rose 4x and, as Handelsblatt incorrectly concluded, "were the best investment of the year"; on the other hand using an exchange rates that actually reflects the country's economic implosion, they lost just over 20% of their value in the past year. 

Which, considering oil plunged by 30% in USD terms in the past year, was not the worst possible return.

Of course, one asset which Venezuelans could have bought on December 31, 2014 and not lost any purchasing power despite the greater than fourfold plunge in the currency, is a simple one: gold.