5 October 2017

Zimbabwe: Markets Are Never Wrong


Followers of American investor and securities analyst Jesse Livermore are divided over what he meant with the quote: "Markets are never wrong; opinions are."

Many are persuaded that Livermore did not mean that markets that mythical realm in which people's expectations about the future are reflected as prices are perfect.

This is for the simple reason that people's expectations about the future do not always materialise.

It is a safe bet to take Livermore's quote to mean that an investor is better served by observing the market, than listening to any "expert" opinion.

Or, even worse, as we will take the liberty to extrapolate, to a politician.

One of the main assumptions of modern finance and economic modeling is that economic agents are rational.

Tied to this is the hypothesis of an efficient market.

For market fundamentalists, prices will fully reflect available information and provide the basis for efficient resource allocation.

However, events of the September 22-24 weekend, when panic buying of basic grocery items sent prices sky-rocketing and temporarily emptied some shop shelves, show what upheavals imperfect information can trigger.

In that instance, rational assessments of objective trends and developments inflation-fuelling government spending, a worsening foreign currency crisis and a galloping stock market combined with social-media driven panic to create a perfect storm.

The stock market, up 200 percent since January with no discernible underlying fundamentals to drive the surge, is the clearest marker of pervasive inflation fears in the economy.

It has not been driven by any social media campaign, but cold calculations of where things are and where they could go.

Subsequent events have shown that the September weekend frenzy was largely driven by fear, but government's attempt to reduce the country's current economic convulsions to "fear-mongering" driven by "saboteurs" using social media is not only dishonest but irresponsible.

There are real, fundamental problems in the economy, most of which fall squarely on the government's shoulders.

Government has shown no serious inclination to cut spending, running up a cumulative budget deficit of $3,4 billion over the past four years.

Funding this deficit through domestic borrowing has crowded out the productive sector, limiting the country's capacity to plug its yawning current account deficit.

Government has also done little to promote investment into the country, another key factor in improving the balance of payments position.

The foreign currency shortages that have led to price increases and the very real prospect of shortages across the economy have their genesis in government action or inaction.

No amount of deflecting, scapegoating and dishonest reductionism will change this fact, let alone resolve the crisis and the sooner government comes to terms with this reality, the better.


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