Bob Hope and Bing Crosby made a series of movies together entitled “Road to …”. The first, made in 1940, was “The Road to Singapore.” The series was successful and included destinations such as Bali, Zanzibar, Rio, and Morocco. In all, I believe seven different movies were made over about a twelve year period ending in the early 1950s.
Were Hope and Crosby still with us, it is doubtful they would make a “Road to Zimbabwe.” But we don’t need them because we have Hope and Change already working on it. Obama and Bernanke are our modern day clowns making their own version.
The Stock Market
For anyone who believes the stock market is doing just fine, take a look at the following chart and disabuse yourself of that notion:
Elizabeth McDonald explains:
The chart here compares the Dow Jones Industrial Average with the St. Louis Federal Reserve Bank’s adjusted monetary base. It shows the effect of Fed purchases of mortgage-backed and Treasury securities from Fed dealers, whereby the Federal Reserve buys $85 billion total every month from the big banks, hastening the growth in the Fed’s balance sheet to more than $3 trillion.
There are a number of reactions one might have to this chart, including “… so what! Doesn’t everyone know the relationship between liquidity and stocks?” Most investors actually don’t, and are oblivious to what has driven this stock market “recovery.”
Foolishly many believe an economic recovery is underway and is responsible for the good stock market. The Administration and their crony PR machine, the mainstream media, repeat this propaganda virtually every day. The stock market becomes their primary focus because there few claims to be made regarding the real economy that can withstand scrutiny.
Stock market performance is neither necessary nor sufficient to claim an economic recovery. Stocks, at least in the short-term, can go up or down regardless of what is happening in the economy. Richard Fisher. president of the Federal Reserve Bank of Dallas, admitted recently at Columbia University’s School of International and Public Affairs that there was no economic recovery.
Regarding the stock market, Mr. Fisher stated (Fisher quotes are from Ms. McDonald’s article):
Credit is super-abundant and stock market behavior is conditioned not so much by the fundamental performance of its underlying companies but by increasing doses of monetary Ritalin.
Naive investors may be fooled by this monetary game of smoke and mirrors, but sophisticated investors are not. Recent performance in the stock market is a reflection of liquidity not economic strength. The liquidity may feel good in the short term but it has negative effects long term, an example of which is discussed below.
Conditions in the economy are now so bad that the Fed must expand its Ponzi scheme regarding currency and abet the Ponzi scheme of the political grifters who desperately try to con the public into believing their insane economic policies are working. None of this should be surprising once you recognize that fraud is the normal modus operandi of the power class. History is replete with similar schemes. All are used to acquire wealth while currying favor and retaining power. “Bread and circuses” is a correct description.
Every major increase in the stock market has been accompanied or preceded by increases in credit. Increases in liquidity have to go somewhere, and financial markets are good places to seek shelter. The effect is to expand PE ratios. One might reasonably call this effect ”an inflation of earnings,” as each dollar of earnings now costs more to purchase.
Usually liquidity also has an effect on earnings as well. When liquidity goes into the real economy, it stimulates demand and business. The unique aspect of this cycle is that has not happened (yet!). The Fed stimulus, over a $2.3 Trillion expansion in their balance sheet which had the potential for increasing the money supply by around $23 Trillion has done little for economic activity. Fiscal deficits exceeding $1 Trillion per year for the last five years have also failed to stimulate. We still languish in a recession.
Mr. Fisher admitted as much:
… I am not surprised by the reaction of businesses. Operating in a highly uncertain environment, it is eminently sensible for them to defensively use their newly strengthened balance sheets to buy back shares and pay out dividends or employ them offensively in ways—say, in making acquisitions—that often lead to employee rationalization, not payroll expansion for U.S. workers. This is how businesses really think; this is the way people really are.
The Zimbabwe Experience
It should not be surprising that our stock market is going up while our economy languishes. One does not need theory to explain how this happens as there are many examples from history. The most recent, and perhaps the most dramatic, was that of Zimbabwe. As described by John Paul Koning in 2007:
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.
Even in the absence of a functioning economy, stocks can be driven up by liquidity.
All That Goes Up Is Not Real and Some Roads Lead To Nowhere
The Zimbabwe stock market performance was impressive when viewed in Zimbabwe dollars. But Zimbabwe dollars were readily available and the ample supply destroyed their purchasing power. The $100 Trillion Zimbabwe note show above is everywhere and is worthless. Kyle Bass, speaking on CNBC, put matters into perspective with one simple quote:
Zimbabwe’s stock market was the best performer this decade – but your entire portfolio now buys you 3 eggs.
Bass’ short interview follows:
Recent movements in our stock market seem more akin to liquidity effects than a change in underlying economic conditions. That was the same results in the early days of Zimbabwe experiment.
The Zimbabwe Gambit
The US government is using the same policies as Zimbabwe did, as is much of the rest of the world. Currency debauchery is being used as a means to revive broken economies. These policies will not solve the underlying economic issues. But for politicians, appearance rather than reality is important. If these policies can fool enough of the people for a long enough time, then they are considered worthwhile. Putting any crisis off into the future is better than dealing with it today. Besides, some miracle could occur that produces and economic revival. Such is the economic sophistication (and cowardice) of modern day leaders.
As yet, no country has reached the extremes used by Zimbabwe. None are even close and hopefully none get there for reasons explained in Wikipedia:
During the height of inflation from 2008 to 2009, it was difficult to measure Zimbabwe’s hyperinflation because the government of Zimbabwe stopped filing official inflation statistics. However, Zimbabwe’s peak month of inflation is estimated at 6.5 sextillion percent in mid-November 2008.
In 2009, Zimbabwe abandoned its currency. As of 2013, Zimbabwe still has no national currency; currencies from other countries are used.
These numbers are incomprehensible, but the policies which led to them are not. They are exactly what real economists would have predicted. There is nothing but arithmetic that stands between developed economies and a Zimbabwe ending.
Will the US or other developed economies get as desperate as Zimbabwe? Probably not, but Zimbabwe never intended this ending. I am sure that Mr. Obama and Mr. Bernanke do not either. However good intentions pave the Road to Hell, or should I say, Zimbabwe. It is only the integrity of politicians that stands between us and Zimbabwe.
Now doesn’t that make you feel safe and secure?