Coming soon to the corner of Broad and Wall?


Von Mises' "crack-up boom" is being played out.

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Bulls Brave Inflation
and Zimbabwe's Political Turmoil

By Tony Hawkins
Financial Times, London
Thursday, June 14, 2007

Notwithstanding the world's highest inflation rate -- by far -- and the world's fastest-contracting economy, the Zimbabwe Stock Exchange is booming, with share prices trebling in real terms in just 22 weeks.

Earnings and growth fundamentals cannot begin to explain the 4,500 percent surge in the ZSE Industrials index since December 2006. Instead, analysts cite three main influences -- the market is drowning in liquidity as the central bank prints money at a breakneck pace; the Zimbabwe dollar has collapsed in the parallel (unofficial) market from Z$2,900 to the US dollar at the start of the year to between Z$75,000 and Z$100,000 today; and the ZSE is more casino than market as investors throw increasingly worthless Zimbabwe dollars into penny stocks.

Consumer prices rose 55 percent last month, according to official figures leaked this week, taking the year-on-year inflation rate to 4,350 percent. With the authorities pumping literally thousands of billions of Zimbabwe dollars into the economy in the form of subsidies to gold miners, tobacco, and maize farmers and to service the national debt along with higher wages for public servants and the security forces, money supply is growing at an alarming rate. Meanwhile, output is contracting rapidly leaving consumers and investors little to do with their money other than play the technically illegal parallel foreign exchange market or the ZSE. Brains Muchemwah, economist at Genesis Investment Bank, estimates that in US dollar terms the stock market is now up 38 percent this year.

He says that a small investor can buy 176 shares in medical group Medtech for the same price as a loaf of bread. And with the market poised to "go through the roof," in the words of Tony Fisher, managing director of Tetrad Asset Management, it is hardly surprising that a whole new class of investors has discovered the stock exchange.

Yet ZSE investment remains a high-risk strategy. The key downside risks include the probability that in the forthcoming supplementary budget due next month, the finance minister will impose some form of short-term capital gains tax or stock exchange turnover tax.

Then there is the government's Indigenization and Empowerment Bill -- due to become law by September -- that will force foreign-owned companies, of which there are many on the ZSE, to sell at least 50 percent of their shares to "black" Zimbabwean investors. It is clear that having made this policy decision in the hope of winning votes in next year's elections, the government has no idea just what it is taking on or how it will implement the scheme.

Perhaps the greatest downside risk is that when -- rather than if -- the political bubble bursts, so too will the stock exchange. Those who believe that political change will fire the starter's gun for rapid economic recovery in Zimbabwe are underestimating the huge damage Robert Mugabe, the prime minister, has inflicted over the past 10 years, which will take at least a decade, if not a generation, to redress.

But for the time being, the bulls are in full control.

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at the
World Gold, PGM, and Diamond Investment Conference in Vancouver, British Columbia, Canada
Sunday and Monday, June 17 and 18, 2007

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