Hyperinflation: Case Study #1, Weimar Republic


German Marks It Took to Buy 1 Ounce Of Gold:

January,1919………..170

September,1919……. 499

January, 1920……….1,340

September, 1920…….1,201

January, 1921……….1,349

September, 1921…….2,175

January, 1922……….3,976

September, 1922…….30,381

January, 1923……….372,477

September, 1923…….269,439,000

Oct. 2, 1923………….6,631,749,000

Oct. 9, 1923………….24,868,950,000

Oct. 16, 1923…………84,969,072,000

Oct. 23, 1923…………1,160,552,882,000

Oct. 30, 1923…………1,347,070,000,000

Nov. 5, 1923…………..8,700,000,000,000

Nov. 30, 1923…………87,000,000,000,000

Turn your speakers up and watch this (disco ball and pet shop boy dancing optional)

DO  STOCKS REALLY SOAR DURING INFLATION AS SOME CHARTS AND EXPERTS SUGGEST?  I WOULDN’T COUNT ON IT, ESPECIALLY IN REAL INFLATION-ADJUSTED TERMS WHICH IS WHAT YOU’D NEED FOR STOCKS TO PROTECT YOUR PURCHASING POWER/WEALTH/WAY OF LIFE.

Here’s what one of my favorite stock analysts said on this topic today.  Dan Ferris writes the award winning and contrarian Extreme Value newsletter:

“• Last week, you said, “True hyperinflation would crush every stock, bond, and whatever other U.S. paper you’re holding.” Why did stocks do so well in the German, Argentinean, and Israeli hyperinflations, but won’t do well in a U.S. hyperinflation? – D.C.

Ferris Comment: Technically speaking, since we can’t predict the future, I should have said, “It is likely hyperinflation would crush every stock, bond, and whatever other U.S. paper you’re holding.”

However, I disagree that stocks did well during Germany’s and Argentina’s hyperinflations. After the German hyperinflation, stocks were 75% below their pre-hyperinflation high, so they were a horrible investment.

Argentinean stocks lost about two-thirds in 1999-2001. The MERVAL index (the Buenos Aires Stock Exchange) fell from about 600 in 1999 to about 200 in 2001. I don’t know the inflation-adjusted figure, but it’s hard to believe Argentinean stocks did well while the country went off convertibility and the entire economy collapsed.

The Israeli market went up something like 6,000% in nominal terms in the ’80s, but I don’t know the inflation adjusted numbers. Either way, I consider it a huge gamble to count on anything but lousy U.S. stock returns during a U.S. dollar hyperinflation.

The basic problem is stocks get their value from the same place as any other asset: the discounted present value of all future cash flows. So with inflation, the future dollars you’re getting are worth less than today’s dollars, lowering the nominal present value of those dollars.

But the problem becomes more basic during hyperinflation. How do you estimate cash flows if you don’t even know what a bar of soap cost for next month, week, day, or minute?

Hyperinflation decimates economies, and lowers the general standard of living. It creates shortages of basic goods. Sounds like a bad time to be invested in stocks.

I’ll stick with my original statement. True hyperinflation would crush the present value of businesses, because estimating future cash flows would become utterly futile. Many businesses would go belly-up.

However, I doubt we’ll see this level of distress”  (excerpted from Dan Ferris market notes of Feb 11,2011)

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A blog dedicated to exploring new ways of thinking that lead to success in business and in life, & creating the person you really want to be. We apologize in advance for anyone we inadvertently or purposely offend and would like to take this opportunity to emphasize the importance of keeping a good sense-of-humor and an open mind. Enjoy. "You have to be able to risk your identity for a bigger future than the present you are living." ~Fernando Flores "I am actually a paranoid in reverse. I suspect that people are secretly plotting to make me happy." ~J. D. Salinger "You have to create your life. You have to carve it, like a sculpture." -William Shatner "The only reason they come to see me is that I know that life is great- and they know I know it." ~Clark Gable
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4 Responses to Hyperinflation: Case Study #1, Weimar Republic

  1. Pingback: Is the USA is worse of than other countries - Religious Education Forum

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  4. Thanks for reading my blog! I would never have guessed that this would be by far the most popular blog entries I’ve ever done. It gets hundreds of hits per day, second only to “How My Kids Got so Darn Smart About Money”. It would be great if folks could leave more comments. What’s got you thinking about hyperinflation?

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