More on Iran’s Hyperinflation, Venezuela Next?

Professor Steve Hanke has more on the developing hyperinflation in Iran. 

From Prof. Hanke’s 10 facts on Iran’s hyperinflation (Cato Institute) [bold original] 

1. Iran is experiencing an implied monthly inflation rate of 69.6%. For comparison, in the month before the sanctions took effect (June 2010), the monthly inflation rate was 0.698%. 

2.. Iran is experiencing an implied annual inflation rate of 196%. For comparison, in June 2010, the annual (year-over-year) inflation rate was 8.25%. 

3. The current monthly inflation rate implies a price-doubling time of 39.8 days. For certain goods, such as chicken, prices may be doubling at an even faster rate. 

4. The current inflation rate implies an equivalent daily inflation rate of 1.78%. Compare that to the United States, whose annual inflation rate is 1.69%. 

5. Since hyperinflation broke out, Iran’s estimated Hanke Misery Index score has skyrocketed from 106 (September 10^th) to 231 (October 2^nd).   See the accompanying chart.

6. Iran is the first country in the Middle East to experience hyperinflation.  It is the seventh Muslim country to experience hyperinflation. 

7. Iran’s Hyperinflation is the third hyperinflation episode of the 21^st century.  The first was Zimbabwe, in 2008. The second was North Korea, whose episode lasted from 2009-11. 

8. Since the sanctions first took effect, in July 2010, the rial has depreciated by 71.4%. In July 2010, the black-market IRR/USD rate was very close to the official rate of 10,000 IRR/USD. The last reported black-market exchange rate was 35,000 IRR/USD (October 2^nd). 

9. At the current monthly inflation rate, Iran’s hyperinflation ranks as the 48^th worst case of hyperinflation in history. Iran currently comes in just behind Armenia, which experienced a peak monthly inflation rate of 73.1%, in January 1992. 

10. The Iranian Rial is now the least-valued currency in the world (in nominal terms). In September 2012, the rial passed the Vietnamese dong, which currently has an exchange rate of 20,845 VND/USD.

To add, as I have repeatedly been saying—symptoms of hyperinflation have likewise been manifested or ventilated on the stock market. 

The public’s reaction to the destruction of a currency’s purchasing power has been to seek refuge through securities backed by real assets. 

Traditional financial metrics in a hyperinflation ravaged economy has hardly been a concern because “cash” is under fire. When half of what has been used for transactions or when the conditions of the domestic medium of exchange is being questioned by the markets, then this represents a dysfunctional economy. We don't use conventional measures on an abnormal situation.

Thus, under a hyperinflationary environment, hedges or the stampede for safety or preservation of savings against a run on the domestic currency prompts for what would look like a stock market boom 

The same dynamic seems apparent in Iran. The one year chart of Iran’s bellwether the TEDPIX at the Tehran’s Stock Exchange reveals of a 3-month spike as Iran segues into a hyperinflation mode. 

Over 5 years the TEDPIX has risen nearly twofold even as real GDP growth in constant dollars exhibits a stagnation.

Iran’s GDP at constant prices (Index Mundi). 

So monetary inflation brings about a parallel universe: rising stocks, stagnating economy.

And another important point: Iran’s experience shows that the emergence of hyperinflation has not been gradual but precipitate. Price inflations as manifestations of monetary disorder always appear suddenly and unexpectedly. 

People who vastly underestimate the current dynamics of price inflation, as a result of concerted inflationism by global central banks, may likely be surprised by price inflation’s impetuous appearance.

I believe that similar symptoms are being exhibited in Venezuela.

Yesterday, the Venezuela’s Caracas benchmark, the IBVC, zoomed by an eye popping 7.98%!! This adds to the amazing weekly gain of 30.98%, and for a year to date return of a whopping 244.78!!! (see chart above from Bloomberg)

Some suggests that this week’s Venezuelan presidential elections have been breathing life into the markets. 

Yet a huge 67% jump in the incumbent’s the socialist populist Hugo Chavez spending in August may have been instrumental in driving the frenzied boom in Venezuela’s stock markets.

This September Bloomberg article gives us a clue, 

Chavez’s August spending surge is swelling the budget deficit that will compel him to devalue the currency after the vote to bolster revenue from oil exports and shore up government finances, according to Barclays Plc and Bank of America Corp., which said in a report yesterday that spending grew 41 percent on an inflation-adjusted basis…

“The market is pricing in an imminent currency devaluation in 2013 regardless of who wins,” said Carlos Fuenmayor, the Miami-based chief executive officer of BancTrust & Co., an investment advisory firm

So Mr. Hanke may want to train his eyes on Venezuela, a likely candidate for the next Iran.

The Catastrophe Portfolio

Many of the world’s wealthiest families have reportedly been hedging their portfolios from the risks of financial meltdown via a ‘catastrophe portfolio’.

From the Reuters

The world's wealthiest families have embarked on damage limitation rather than seeking to boost their fortunes as financial turmoil erodes their riches, with some so worried they are putting their money in 'catastrophe' portfolios.

"We have to explain to our clients, it's not about making money these days, it's about keeping wealth," said Ivan Adamovich, head of the Geneva operations of Swiss bank Wegelin.

With inflation eating away at people's nest eggs and rock-bottom interest rates making living off capital increasingly difficult, many rich people are taking new risks just to stand still, private bankers said.

"We have already inflation higher than interest rates in many markets ... Unless you take some risk you will not achieve a level of return just maintaining (wealth)," Pierre de Weck, head of Deutsche Bank's private wealth management business, said at the Reuters Wealth Management Summit in Geneva.

Adamovich said a model portfolio designed to protect people's wealth in the face of global catastrophe has attracted more interest as financial turmoil spread in recent months.

The "catastrophe portfolio" allocates one third of money to gold, one third to defensive and internationally diversified blue chip company shares and a third to the debt of ultra safe developed countries.

In my view, there is NO such thing as a catastrophe portfolio or a portfolio designed to weather the proverbial storm. That’s because whether it be cash, bonds, gold or blue chips, all are subject to market or systematic risks which entirely depends on the character of the coming crisis.

Hyperinflation would be good for gold and bad for cash, but a systemic deflation from a major banking system collapse contagion would likely do the opposite. On the other hand, wars may adversely impact blue chips or transnational companies, while ‘ultra safe government debt’ could be a delusion if their welfare system has soaked up on too much debt from having an economy that consumes more than she produces or earns. Of course there are possible gray areas, such as debt defaults.

Also, since the conventional markets have been greatly influenced by pervasive bubble policies and political interferences, then my conjecture is that the ramifications from the actions of political authorities will remain as major factors in determining the risk environment.

This makes taking action from reading and analyzing the political tea leaves a better and a more flexible approach than a one-size-fit-all portfolio.

Zimbabwe In The Aftermath Of Hyperinflation: Free Markets

We have published so much about the negative aspects of Zimbabwe, such that we even made her as model for government abuses.

The quest for the preservation of political power by President Robert Mugabe eventually led to hyperinflation.

But things do change.

It would be understandable that after enduring the worst, there is no way but up.

But it is Zimbabwe's reform transition that makes it all the while striking-from tyranny to free market.

This article from Alf Field "Zimbabwe's Fresh Start" is a must read... (Thanks to Jeff Tucker of the Mises Blog)

(bold highlights mine)

``In February 2009 Zimbabwe was the only country in the world without debt. Nobody owed anyone anything. Following the abandonment of the Zimbabwe Dollar as the local currency all local debt was wiped out and the country started with a clean slate.

``It is now a country without a functioning Central Bank and without a local currency that can be produced at will at the behest of politicians. Since February 2009 there has been no lender of last resort in Zimbabwe, causing banks to be ultra cautious in their lending policies. The US Dollar is the de facto currency in use although the Euro, GB Pound and South African Rand are accepted in local transactions.

``Price controls and foreign exchange regulations have been abandoned. Zimbabwe literally joined the real world at the stroke of a pen. Money now flows in and out of the country without restriction. Super market shelves, bare in January, are now bursting with products."

Read the rest here.

Some additional important quotes:

Here are the common sins (not only in Zimbabwe but everywhere- the difference is that Zimbabwe went to the extremes) and their consequences...

``There are common denominators in all hyperinflations. Generally government finances reach a point where large budget deficits cannot be financed by taxes or borrowings. The choices come down to austerity (with the government cutting back its spending) or by funding the deficit by creating local currency through the printing press, leading to the inflation tax. This is always a political decision, but the line of least resistance is the printing press. Cutting government expenditures and laying off bureaucratic staff is anathema to most politicians.

``The worst trauma for ordinary people during the hyperinflation was lack of food. This was due mainly to the imposition of price controls. If the cost of production of an item was $10 and the price controllers instructed that the item could only be sold for $5, the business would soon go bankrupt if they sold at the controlled price. The result was that production and imports just dried up, hence the empty shelves in the supermarkets. People survived by shopping in neighboring countries and relied on assistance from South Africa and the aid agencies.

``Companies survived the hyperinflation with great difficulty and often by ignoring laws. Although companies were left without debt post February 2009, they were also left deficient in working capital and had dilapidated plant and equipment. Regular repairs and maintenance could not be afforded. Most companies now require urgent recapitalization.

``The causes were those always present in these events. A weak economy, large government budget deficits, inability to borrow funds combined with the political decision not to cut Government spending. Governments are reluctant to lay off government employees, especially those related to the armed forces. The latter might invite a military coup. The only source of funding left is the creation of new money.

As to how one hedges against hyperinflation from the Zimbabwe nightmare...

``Having seen the impact of hyperinflation at close quarters, my view is that this is the least desirable method for eliminating excessive debt. The population has been traumatized physically (starvation), mentally and financially. Most people did not have foreign assets or local tangible assets, so lost virtually everything. The companies survived using unusual skills, ignoring laws and protecting working capital by holding foreign currency or purchasing equities"

Foreign currencies, equities, unusual "survival" skills and IGNORING LAWS...

Final quote...

``It is fascinating to see how rapidly the economy is recovering. It is a great testament to what can be achieved in a free enterprise environment by the elimination of controls combined with the institution of new money that people trust. It needs to be money that their Government cannot create via the printing (or electronic) press."

Amen