[seahorse]

The pundits on t.v. rave about the new DOW highs, arguing its a sign of a healthy American economy. Is it? Has it helped any of us pay our increasing medical bills? increasing food costs? will it help us pay for $3 gas? $4 gas? Has it helped any of the displaced GM workers find new jobs? Helped anyone pay their mortgage? No, it hasn't and won't, because "trickle down" economics is a myth. As the old saying goes, shit rolls downhill. No one but the pundits on t.v. ever say money rolls down hill.

Now, if I needed any more proof that the DOW highs are no measure of a strong economy, just look to our brothers in Zimbabwe. Most know that our African brothers are suffering from rampant inflation running at over 1,000%, falling GDP year after year, etc., but most may not know what Zimbabwe has in common with the US - its stock market is booming. Its not only the best performing stock market in Africa, its the best performing stock market in the world right now! Now, go tell the citizens of Zimbabwe to stop complaining, they really have a strong economy.
$this->bbcode_second_pass_quote('', 'Z')imbabwe: Best Performing Stock Market in 2007?
By John Paul Koning
Posted on 4/10/2007
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CNBC and other stock market tabloids are notorious for making simplistic linkages between the stock market and gross domestic product (GDP). They tell us that any event that stimulates GDP growth inevitably drives stock prices up, and any event that hurts GDP growth pushes stocks down.

Since the largest share of GDP is consumption, consumer demand becomes the all-important figure driving growth. When the consumer gets too excited, the Fed must step in to cool them down with interest-rate hikes. When the consumer isn't spending, Fed interest-rate cuts stimulate demand.

The tragedy currently occurring in Zimbabwe completely contradicts this sort of logic. Zimbabwe is in the middle of an economic disintegration, with GDP declining for the seventh consecutive year, half what it was in 2000. Ever since President Mugabe's disastrous land-reform campaign (an entire article in itself), the country's farming, tourism, and gold sectors have collapsed. Unemployment is said to be near 80%.

Yet something odd is happening.

The Zimbabwe Stock Exchange (the ZSE) is the best performing stock exchange in the world, the key Zimbabwe Industrials Index up some 595% since the beginning of the year and 12,000% over twelve months. This jump in share prices is far in excess of increases in consumer prices. While the country is crumbling, the Zimbabwean share speculator is keeping up much better than the typical Zimbabwean on the street.


CNBC logic fails to explain the coincidence of a rising ZSE and collapsing GDP because it entirely ignores the monetary side of the economy. At this point Austrian economics makes its contribution to our story. According to Austrian Business Cycle Theory (ABCT), the peak-trough-peak pattern that economies demonstrate is not their natural state, but one created by excess growth in money supply and credit. New money is not simply parachuted to everyone equally and at the same time — it is sluiced into the economy at certain initial "entry points." From these entry points, a number of initial goods are bought by recipients of new money causing a rise in price for these initial goods relative to other goods.

Because entrepreneurs react to this observed but unjustified change in the structure of prices by investing their capital, misallocation occurs. As money-supply growth continues and prices become more contorted, more and more ventures are undertaken that would not be undertaken in a regime without money-supply growth. When, for whatever the reason, money supply finally contracts, the artificial strength in prices that encouraged unprofitable ventures is removed, prices collapse, and large numbers of ventures go bankrupt. Thus we have the recession part of the business cycle, the simultaneous failure of many firms at the same time.

If, as the Austrian theory states, money enters the economy at certain points, it is likely that a nation's stock market will become a prime beneficiary of any monetary expansion. Fresh money enters the economy first through banks and other financial entities who may invest it in shares, or lend it to others who buy shares. Thus stock prices rise relative to prices of things like food and clothes and will outperform as long as this monetary process is allowed to continue.

This is what we are seeing in Zimbabwe. With the country suffering from Mugabe's catastrophic policies, increasingly the only means for the government to fund itself has been money-supply growth. This has only exacerbated the economy's problems. The flood of new money that authorities have created has caused the existing value of money in circulation to plummet, i.e., the prices of all sorts of goods to explode, some rising more than others.


As prices become more misaligned, basic decision-making abilities of normal Zimbabweans are impaired and the day-to-day functioning of the economy deteriorates. Perversely, all of this has forced the government to issue even more currency to make up for budget shortfalls and to buy support. At last measure, the country's consumer price index was rising (i.e., the purchasing power of currency declining), at a rate of 1,729% a year.

The ZSE is growing some three times faster than consumer prices. This relative outperformance versus general prices is a result of stocks being a chief entry point for the flood of newly created money. Keep Zimbabwean dollars in your pocket, and they've already lost a chunk of their value by the next day. Putting money in the bank, where rates are pithy, is not much better. Investing in government bonds is the equivalent of financial suicide. Converting wealth into foreign currency is difficult; hard currency is scarce, and strict rules limit exchangeability.


As for capital improvements, there is little incentive on the part of companies to invest in their already-losing enterprises since economic prospects look so bleak. Very few havens exist for people to hide their wealth from the evils created by Mugabe's policies. Like compressed air looking for an exit, money is pouring into shares of ZSE-listed firms like banker Old Mutual, hotel group Meikles Africa, and mobile phone firm Econet Wireless. It is the only place to go. Thus the 12,000% year over year increase in the Zimbabwe Industrials.

$45
Our Zimbabwe example, though extreme, demonstrates how changes in stock prices can be driven by monetary conditions, and not changes in GDP. New money gets spent or invested. In Zimbabwe's case, because there are no alternatives, it is stocks that are benefiting.

This sort of thinking can be applied to the stock markets in the Western world too. Though western central banks have not been printing nearly as fast as their Zimbabwe counterpart, they do have a long history of increasing the money supply. It forces one to ask how much of the growth in Western stock markets over the preceding twenty-five years has been created by a vastly increasing money supply, and how much is due to actual wealth creation. Perhaps stock prices have increased faster than goods prices for the last twenty-five years because, as in Zimbabwe, Western stock markets have become one of the principal entry points for newly printed currency.
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John Paul Koning is a stock market researcher at Pollitt & Co, a brokerage based in Toronto, Canada. Send him mail. Comment on the blog.

[Plantagenet]

Its good to know that not everything in Zimbabwe is falling apart due to government mismanagement and uncontrolled inflation.

Go Zimbabwe stock market!!!

[Lore]

The DOW highs mean a lot to the wealthiest 1% in the US that control 33% of all the wealth and the top 20% control over 84% of the countries wealth. The gap is continuing to widen.

Watching CNBC the wealthy are always complaining that they are paying too much in taxes. Could it be because they're making more then they ever have?

Where is this trickle down affect that George Bush was talking about?

[Madpaddy]

Lore wrote,

$this->bbcode_second_pass_quote('', 'W')here is this trickle down affect that George Bush was talking about?

[Jack]

$this->bbcode_second_pass_quote('Lore', 'T')he DOW highs mean a lot to the wealthiest 1% in the US that control 33% of all the wealth and the top 20% control over 84% of the countries wealth. The gap is continuing to widen.

[Zentric]

$this->bbcode_second_pass_quote('Jack', '')$this->bbcode_second_pass_quote('Lore', 'T')he DOW highs mean a lot to the wealthiest 1% in the US that control 33% of all the wealth and the top 20% control over 84% of the countries wealth. The gap is continuing to widen.

[seahorse]

Jack,

You're point is well taken, that PO will not affect everyone equally, as evidenced by Zimbabwe. The "Bill Gates" of the world will continue to live lavish lifestyles, fly in planes etc. The divide between "the haves" and "have nots" will continue to widen. PO will be a growing burden on the majority, but quite possibly will only act to consolidate the power of the few. However, as the British threat report states, in the next 35 years, there is a serious threat of social unrest due to growing wealth disparity. Happened in the French Revolution, so, history could repeat itself.

[Lore]

You have a couple of things that are keeping the lower 80% in a state of imbecilic euphoria.

1) Low unemployment, people with income still have money to spend and so far can absorb high energy and food prices.

2) Low inflation, where the opposite acts as a flat tax on everyone.

Watch, when the two above change status for the worse the similarities will be very close to the French Revolution. Except this time it will be the corporate aristocracy that the consumer will rebel against. This is already evident every time Big Oil reports it's earnings.

[Plantagenet]

About half of all Americans now own stocks, either in personal investment accounts or through mutual funds held in their retirement accounts.

[topcat]

Lore wrote:
$this->bbcode_second_pass_quote('', '1')) Low unemployment, people with income still have money to spend and so far can absorb high energy and food prices

[Jack]

$this->bbcode_second_pass_quote('Zentric', '
')1) Why wouldn't the wealthier investors who aren't sure how this will all shake out just buy more precious metals?

[NEOPO]

Where does Cheney, Buffet and Gates have their money hiding?
Thank you!
I hear rural land in Paraguay is another hot tip.

DJIA 1971 to 2006

Gee beav this looks like those other charts you were showin' me...
I would display the 1920's to 2006 chart but it tends to frighten old people and small children.

Hmmm I sometimes think they are saving the privatization of social security as the last push over the edge. When most of the people own some shares wether it be 401k or the investment that supports their SSI check then wham right in the kisser!!!
Then again I am quite convinced that the pin could be pulled at any time from now to then. tick tock, tick tock, tick tock.

[Newsseeker]

$this->bbcode_second_pass_quote('Plantagenet', 'I')ts good to know that not everything in Zimbabwe is falling apart due to government mismanagement and uncontrolled inflation.

Go Zimbabwe stock market!!!

[Lore]

$this->bbcode_second_pass_quote('topcat', 'I')f you believe the govt inflation numbers. True inflation (the amount of money being created) is running double digit IMO and others. I/we are feeling the pinch of pass-on inflation at the grocery store.

Monetary inflation is the largest, most deadly, and hardest to see of all financial ruins subjected onto the middle/lower crust.

The DOW may be making a "nominal" high (in numerical terms) but once you add in ANY inflationary factor, it is still lagging.

Not to mention, that the DOW only represents what 30 or so stocks.

[Chuckmak]

$this->bbcode_second_pass_quote('Newsseeker', 'A') great place to put your life savings. Either there or Nigeria.

[wxman]

GDP 1.3%

Yeah, the economy is rolling

[Lore]

$this->bbcode_second_pass_quote('wxman', 'G')DP 1.3%

Yeah, the economy is rolling

[MaterialExcess]

Another record high for the Dow !!!

In other news…

1st quarter GDP growth well below expectations at 1.3%.
1st quarter inflation higher than expected.
Dollar hits a record low against the Euro.
Foreclosures up 47% in March.
Homes sales: worst drop in 18 years.
Oil back up over $66/barrel.
Gas prices could exceed $4/gal this summer.

Are the people buying stocks not reading the same news as me? I don’t know about you, but I don’t buy into a market at a record high when those are the financial headlines. I know the carry trade has propped up this market, but the dollar is starting to buckle. It seems as though the market is setting its self up for a mega crash. Sell in May and go away?

[Lore]

People still have jobs and are spending, inflation is only running about 2.2%, close to the Fed's guidelines.

$this->bbcode_second_pass_quote('', 'C')onsumer spending, which accounts for about 70 percent of the economy, rose at an annual rate of 3.8 percent last quarter, compared with a 4.2 percent pace in the previous three months. Before today's report, quarterly consumer-spending gains averaged 3.7 percent the past decade.

[topcat]

Well I sure don't like those numbers!

Inflation 2.2% - poopka!

That may be the fed cpi or ppi, but true inflation (monetary inflation) is FIVE times that.

And as far as consumer spending being 3.8 % qoq, that represents almost a TEN percent drop from the previous quarter by the stated figures.

My acrylic ball is giving off a pretty dim glow.