On 6/15/2017 2:54 AM, jat wrote:
Venezuela's stock market is booming for all the wrong reasons
By Peter A. McKay on Jun 14, 2017
Venezuela is experiencing food shortages, political crisis, riots in the
streets, and… a stock-market boom?
On paper, a massive rally is underway. But a closer look reveals the
move is exactly as incongruous — and suspect as an investment
opportunity — as it appears at first glance.
The hitch is that Venezuela's currency, the bolivar, is collapsing amid
a trend that economists call hyperinflation. In recent history, a
similar problem surfaced in Zimbabwe during the depths of the Great
Recession, eventually causing the African country to scrap its currency
altogether and reboot its economy using the U.S. dollar as a means of
A dramatically weaker currency distorts the price of everything,
including stocks. Thus the apparent boom in Venezuelan stocks is,
perversely, more a reflection of the country's recent woes than a sign
of underlying strength.
The Venezuelan economy has been in free fall for more than two years due
to a mix of political and market-based factors. In the latter category,
we can start with the collapse in 2014 in the price of crude oil, which
is Venezuela's chief export:
The decline in oil revenue in particular has forced a reckoning after
years of socialist policies in which President Nicolas Maduro and his
predecessor, the firebrand Hugo Chavez, tried to nationalize or
centrally manage large swaths of the country's economy. That includes
Venezuela's monetary policy, which of late has been to print more and
more bolivars in an effort to stimulate spending.
The abundant supply of bolivars, however, makes each one worth less
intrinsically. As a result, prices go up as sellers demand more bolivars
for the same goods — the definition of inflation.
This has helped push the price of stocks priced in bolivars much higher
as well. The Caracas Stock Exchange's benchmark IBC Index, which tracks
15 major Venezuelan stocks, is up almost 600 percent over the last 12
months, making it the best-performing in the world in nominal terms.
Since 2015, its chart looks like this, a classic "hockey stick."
Of course, if we were to adjust for the drop in the bolivar, the index's
run wouldn't be nearly so impressive. The problem is that can't be done
precisely because, like Zimbabwe before it, Venezuela's government has
simply stopped publishing regular inflation data this year.
That said, there are several back-of-the-envelope calculations of
Venezuela's inflation available. The country's opposition political
party recently estimated that inflation was 127.8 percent in the first
five months of 2017 — a figure many analysts think is conservative.
The International Monetary Fund projected earlier this year that
Venezuelan inflation would be about 43,000 percent, a staggering figure.
(For comparison sake, keep in mind the inflation rate in the U.S., a
stable, major economy, is currently hovering under 2 percent.)
If the actual rate of inflation is anywhere near the IMF projection, or
even some multiple of the low estimate by politicians, it would render
any recent "gains" in Venezuelan stocks moot. Throw in the socialist
regime's occasionally ambivalent approach to private-property rights in
general, and you have a situation that's hardly inviting for foreign