Most readers are familiar with the hyperinflation that plagued the German Weimar Republic in 1922–23. The hyperinflation actually began as early as 1919 in the aftermath of the First World War (1914–18) and the Treaty of Versailles (1919), which established reparations by Germany based on its responsibility for starting the war. 1922 and 1923 were the most extreme years of the hyperinflation, when the amount of paper German marks needed to buy 1 gold mark skyrocketed from 100 marks to 1 trillion marks.
Most investors have seen grainy black-and-white photos of bankers carrying huge piles of paper marks in wheelbarrows just to buy a loaf of bread or a pound of ham. Ever since, people have asked how this could happen. Why did citizens let events spin so out of control that the money was worthless and their savings were gone?
One of the answers is that in the early stages of the hyperinflation, the stock market did quite well. German stocks rose strongly in 1920 and 1921 just before the hyperinflation kicked into high gear. German citizens were vaguely aware that their currency was devaluing, but they were cheered by the fact that their stock portfolios were going up.
The problem with this view is that the stocks themselves were denominated in the soon-to-be-worthless paper marks. So rising stock prices were not rising in real terms once you adjusted for the devaluation of the currency. This pattern is now repeating itself in Venezuela.
This article explains that while the currency in Venezuela is collapsing, stock market gains are so huge that the exchange computers can’t handle the number of zeros on the stock price quotes. The computers are being fixed but markets are not. Stock investors may enjoy the ride, but when the currency becomes totally worthless, the stocks won’t be worth anything either except as private equity.
There’s a lesson here for all investors around the world. If inflation gets a grip in a country such as the U.S. or Japan, don’t rely on your stock gains to bail you out.
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