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.

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buzzsaw99's picture

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.

bullshit. gold was a loser last year.

usa dollars did better

or usa treasurys

or usa equities

City_Of_Champyinz's picture

Something tells me that Gold had some kick ass purchasing power over the last year in Caracas...

buzzsaw99's picture

Something tells me that usd had some kick ass purchasing power over the last year in Caracas...

Stuck on Zero's picture

With currency controls any money you may have earned in Venezuela for for not.  You couldn't even buy toilet paper.

God's picture

Fuck stocks! All I want to know about is energy in 2016! Bring it.

Chuck Walla's picture

Tampons, hoard Tampons. Better than gold. What girl wouldn't give everything(or almost) not to have to resort to a hank of grass?

FORWARD SOVIET SHOVES!

 

Oh, Happy New Year, Trotsky!

asteroids's picture

Not yet for gold. Soon, but not yet.

herkomilchen's picture

Not soon, unfortunately.  Will almost certainly take the collapse of government first.  So long as productive people insist on obeying government, and most of them do, government fiat currency and associated exploitations will reign.

Government can outlaw conducting business in gold with the stroke of its pen.  Disobey and violent thugs are dispatched to seize your stuff and lock you up.  If gold threatened to come back into popular use as money, government would do just that.

buzzsaw99's picture

gold, wop wop wah...

Golden years, gold, whop, whop, whop

Golden years, gold, whop, whop, whop

Golden years, gold, whop, whop, whop

Don't let me hear you say gold's taking you nowhere, angel...

Yen Cross's picture

 I've known buzz for many years, and there's some,  rhyme to his reason.

 I opened this trade last week, and thought about covering today. I'm up about $1800.00.

 You can see my trailing stop in RED, and the decending channel forming an possible double bottom off the december 3rd-4th highs.

 I feel the risk, is worth the reward...

buzzsaw99's picture

thanks yen. when a stock makes 52 week lows year after year everyone agrees it's a dog but some of the people on here are just rabid goldbugz and don't wanna hear it.

glenlloyd's picture

No disrespect intended, I'd rather have my pet rock than your piece of paper...

Yen Cross's picture

 You missed the point... You can buy the real stuff with paper profits. ;-)

scintillator9's picture

Provided:

One is allowed to sell (Ref China, "gating", CYNK, KBIO,)

Everything works great, until the one day it does not.

 

 

 

Yen Cross's picture

 Apples & Oranges.

 I see your point. If you want to play with paper dividends and EBITDA.

herkomilchen's picture

Whether we like it or not, gold is not currently accepted for food, shelter, clothing, travel, ammo, utility bills, medical care, etc. and may not be for many decades.  Not until the dollar implodes.  And not even then if the state retains enough men, guns, and credibility to just force productive people to use its replacement fiat ("New Dollar" / SDR / whatever).

Meanwhile the quality of life we have is here and now, the next few years.  We could get cancer tomorrow.  We could have a child tomorrow.  Bills payable only in fiat will ensue.  We have to be able to pay them to enjoy ourselves, our family, our lives in the short time we are here.  That's why we live.

So despite seeing the truth that the whole government thing is a scam, "dancing" with the manipulators, their fiat, their ponzi schemes is essential to be able to enjoy life.  I wouldn't pooh-pooh that.

TRM's picture

Only if you live in the US. If you live in Canada then that is another story.

buzzsaw99's picture

yeah sure. he should stick to that story.

Yen Cross's picture

lol.

Is it called hyperinflation when in 2012  the BOJ intervened in the currency markets, and the PenNikkei went parabolic? (nominally)

 Is it hyperinflation when Draghi jawbones us to death, then actually does something, and the frontrun DAX sells off?

 Happy New Year~ Bitchez

buzzsaw99's picture

i'm just snarking at ackman saying he is taking a loss for tax purposes.

lordbyroniv's picture

or dollars !!!!  they coulda bpought dollarz !!!!!!!!!!!11

BigRedRider's picture

 

 

Ist das nicht ein Wienerschnitzel?

Ja! das ist ein Wienerschnitzel!

KesselRunin12Parsecs's picture

So when my 'penny stock' goes to a hundo billion, what's the redemption value in joobux? Or otherwise, will it buy me a loaf of bread?

Anopheles's picture

I know that a lot of posters will say they should have bought gold, bitcoin, etc.  

Well, they CAN'T easily do that.    Venezuela has currency controls.   Meaning they can only withdraw $180 a year in hard currency, and that includes gold.  

Sure they can get gold and bitcoin on the black market, but it's not much different than buying drugs, and for any substantial sum of gold or bitcoin, you need to pay for them in hard currency, US dollars, not the worthless bolivar. 

Which again remains the problem, how do you get those dollars in the first place?

 

Implicit simplicit's picture

This begs the age old question. How long will the deflation last before hyerinflation begins? The way the debt ceiling was raised without discussion makes qe forever seem the likely immediate response to a crash. QE or not QE, this is the congestion. Be it nobler in mind... blah, blah , blah happy New Year! 

Bunga Bunga's picture

The chart above is not correct. Also, long term investors lost, only short term investors with very good timing could make money. For long term investors it would have been better to hoard gold instead of stocks:

http://i.imgur.com/QEOp4xb.jpg

Anopheles's picture

It's difficult to buy gold in any quantity in Venezuela.  All the gold mining is nationalized, and most of the gold is sold abroad for hard currency. 

You have to remember it's a closed economy with a closed currency

Yen Cross's picture

I look forward to MOAR charts from you in '16 Bunga.

 I like what I'm seeing.

kaboomnomic's picture

Well... I surprised Tyler fall for that article.

Look Dudes. You WILL NOT SEEING HYPER INFLATIONS. NOT YET!!

WHY??

IF, Fed's use A REAL NUMBERS GDP. INSTEAD OF MAKING NUMBERS UP?? Your GDP should ALREADY SHRINKING MUCH this year (do you think only China mades fakes data? Yours also Dude).

My country shrinks GDP this year. From 896B$ economy, to a 888B$ forcasted for 2015 (real numbers not yet available. Cause usually my CB gives real previous year GDP after Q1). Tax incomes predicted NOT reaching 85% of target. Actually right up to october's 2015? It only reach 73% collections rate. So, nobody here believe it could reached to 85%
Less tax means less jobs, means less incomes, hence lower GDP per capita. And it shows.

So, what happens into your US country? Let's see..
1. Your work participation rate lowest ever this year? (ZH own article said this).

2. PMI number lowest.

3. Tax collections lowered (if calculated on per capita based).

4. That's why you got trillions dollar deficit budget for 2016.

5. House income lowered but for 0.1% of your wealthiest.

6. Shipping/Trains/Trucks freight index lowered beyon records.

7. Credit cards debt, and other debt are increasing dangerously.

8. And your govt DOESN'T SEE ANY INFLATION in your country.

Well.. that could only means one thing. You are in JAPAN DEFLATIONS, DEPRESSIONS, AND STAGNATIONS ALL TOGETHER.

Your govt doesn't see inflations cause all price are deflated, caused by REAL NUMBER NEGATIVE GDP!!

Even IF you look at the above signs? You should already knows your GDP should be negatives already. But, your Feds choose to "manipulates" the numbers.

That is WHY the numbers doesn't seems to correspondent.

If you still wants to believes your govt data? Hey... be my guest. I myself? Don't want to live in a dreams world...

Schroedingers Cat's picture

All the inflation has gone into assets.  Apart from college tuition, housing and health care there has been very little inflation on Main St.  We're in for a wave of deflation the likes of which were never believed possible.  It's only a matter of time.

Bobbyrib's picture

Yeah, but here in the US, we have white folks running things. /sarcasm.

 

Seriously there are people who bash South Ametican socialist countries who ignore our national debt and ignore the fact that our rights (afforeded to us by the Constitution) are being stolen out from under us. What's the difference from the direction of the country we are being led in.

That's why I am voting Republican in 2016. I like the way they piss away what is left of our country's wealth better. Iraq has helped us tremendously..almost as much as the Affordable Care Act. /sarcasm.

Kagemusho's picture

Investing in a socialist country for the most part historically has been to throw money down a black hole...and sociopolitically have yourself be drawn to its event horizon, to follow soon after.

That is, unless you're an agent of said country. Recall Armand Hammer and his strangely cozy relationship with the former Soviet Union.

Perhaps the best foreign 'investments' in such countries are in land for burial plots; socialism usually kills those it was supposed to serve, with frightening regularlity. Just ask any now elderly surviving escapees from the former Iron Curtain.