Last week, a bank in Venezuela briefly overtook Apple and Alphabet to become the world’s “most valuable company by market cap”. Although you should read the fine print, because Mercantil Servicios Financieros CA was valued using Venezuela’s official exchange rate. Nevertheless, it’s worth noticing. Because without something drastic happening in Venezuela, you should expect Mercantil to re-take its position, and stay there until the Venezuelan economy dollarizes.
But even though I’m calling the valuation ‘fine print’, I want to emphasize that the above graph is not fictional. As in: for some Venezuelans (mostly, the politically-connected), this graph is not simply a hypothetical footnote in the saga of the Venezuelan hyperinflation. Instead, the graph represents their real world investment horizon.
So in this post, I want to talk about stock markets, and why they do so well during hyperinflation.
Then tomorrow, I’m going to explain why these ‘official rate’ comparisons are real world investing for some.
Why Stock Markets do so well under hyperinflation (or: “stock markets that trade like bitcoin”)
Here are some graphs that I prepared for you this morning, comparing the Venezuelan Bursatil index* against Bitcoin. The stock market is represented by the table in blue. Bitcoin is all the green and red bars (it’s known as a candlestick chart).
*the Bursatil index measures the 11 largest companies by capitalisation and liquidity on the Venezuelan stock market.
Things to note:
- The Venezuelan stock market is on a roll; and
- The Venezuelan stock market is basically matching the massive price surges in Bitcoin, basis point for basis point.
So let me explain why the stock market is booming:
- Hyperinflation is basically a tax on your bank account and the cash in your wallet. A government prints money, spends it, and drives up inflation. Because everything is now more expensive, you can’t buy as much with your money as before.
- As a result, people living in a hyperinflation will try to get rid of their cash as soon as they receive it. Their options:
- Spend it (which drives up inflation even faster); or
- Convert it into something which won’t lose its value, but is still liquid (ie. turn it into real assets).
- Another way of describing those two options:
- Spending = “Consumer Price Inflation”
- Real Asset conversion = “Financial Asset Price Inflation”
- In terms of ‘real’ assets, there are only really two ways to do that:
- Buy foreign currency; or
- Buy shares.
- All of that means there are generally three expressions of hyperinflation happening all at once:
- Consumer Price Hyperinflation (from people spending their money as quickly as possible);
- Rapid black market devaluations of the currency (from people converting their bolivars into US dollars as quickly as possible); and
- Dramatic stock market bull rallies (from people buying up shares in order to avoid holding any cash balances).
Of course, you also get ‘pricing bubbles’ in property markets and commodities, etc. But because those assets are less easy to turn back into cash, the real focus is on stock markets and foreign currency.
Hence, in Venezuela…
The stock market bull rally:
And the rapid black market devaluation of the bolivar:
But the more troubling part is: there are people who really get to benefit from this.
A Bitcoin Post Script
On a separate note, should we be concerned that the bitcoin price trajectory looks a lot like a stock market bull run under conditions of hyperinflation?
And does this indicate that bitcoin investors are fleeing the US dollar and other currencies in the same way that Venezuelans are fleeing the bolivar?
I’m afraid that I don’t have any answers.
I only have the questions.
Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha. Also, check out the RA podcast on iTunes: The Story of Money.