YOU'RE ON YOUR OWN

With the DJIA breaking above 14,000 today for the first time since 2007, here's an update on our Zimbabwe article, "It Can Happen."

May be even a little food for cogitation, maybe not.

What many retail investors and retail voters alike apparently only vaguely comprehend is purchasing power. And the loss of it. Sometimes it's insidious, like the old boiling the frog trick. See Federal Reserve Bank here.

Two of America's finest institutions celebrate their 100th anniversary in 2013, The Federal Reserve Bank and the IRS.  A detailed research project of any meaningful magnitude will have a hard time finding two institutions that have destroyed more purchasing power than these two since their birth. But for now that's part of the rest of the story. Back to Zimbabwe.

A former British colony known as the Republic of Rhodesia for many years, Zimbabwe gained its independence in 1980 with Robert Mugabe Prime Minister and the Zimbabwe dollar replaced the old Rhodesian currency. At the time the Zimbabwe dollar held more value than the U.S. dollar (See U.S. inflation rate 1980-81).

In the early part the last decade we had the of pleasure visiting Zimbabwe and traveling around the country. Back then they wanted fresh U.S. $20 bills at the airport when you entered the country and another one when you flew out. A couple of elderly people sitting on weathered wooden folding chairs at tattered metal folding tables with cigar boxes stuffed full of the bills greeted visitors with a friendly smile. It all seemed rustic enough .

Another face, this one unsmiling, that greeted visitors everywhere was pictures of then president Robert Mugabe. One day at a checkpoint crossing into Botswana right in front of the guard shack there was a motorcycle accident.  A couple of us stopped to see how bad one of the riders was hurt. We helped him up and into the guard shack. When we turned to leave there it was, an over-sized picture of Mugabe on the wall staring down at us, taking it all in. A friend looked at the picture, then at me and rolled his eyes. As Hemingway might say: "It wasn't a good feeling."

A short time after Mugabe became president he instituted a destructive redistribution plan, seizing farmland owned by white farmers and began redistributing it. An avowed socialist, Mugabe sought to right the wrongs of what he saw as British colonialism. Over time his plans proved disastrous as food scarcities soared, manufacturing tanked and unemployment hit 80%. Violence erupted and foreign aid dried up adding to Zimbabwe's woes. It quickly became a monstrous mess. To pay its debts and to try to restore some stability the government ran the monetary printing presses until the smoke coming out of them was visible miles away. But things only got worse.

Zimbabwe inflation rates rocketed in 1998 from 32% a year to an estimated high of 11,200,000 in 2008, according to Zimbabwe's own government statistics when officials issued a new 100 billion dollar note. At that point the government stopped trying to keep tabs. In 2008 Zimbabwe's rate of inflation was so bad prices were doubling every 1.3 days, the second highest in history only to what Hungary experienced in 1946 where prices doubled every 15.6 hours.

Around the same time, talk about pouring H2O on the head of a drowning man, Transparency International, an organization that tracts public sector corruption in 176 countries around the world and publishes an annual Corrupt Perception Index,(www.transparency.org/2012), from the least to the most corrupt, listed Zimbabwe among the worst. Capital fled the country faster than one can say Usain Bolt.

Kyle Bass is the founder of Dallas-based hedge fund Hayman Capital Management. He is also a guy who knows a thing or three about inflation. Bass reportedly made roughly $500 million shorting the sub-prime mortgage miasma. Anyone now think subprime paper wasn't inflated?  Give or take a couple tens of millions here and there he's had other successes.

Bass appeared on CNBC today (2-1-13) discussing monetary policy, inflation and rising stock prices. "You lose sight of what's important if you're focused on nominal prices in equities," he said.

"One of the best performing equity markets of the last decade has been Zimbabwe. But now your entire equity portfolio only buys you three eggs."

That's the big whammy in your lunch pail most people don't get. That's the be careful what-you-get-use-to factor because it can and most likely will change.

"You have to really focus on the insidious nature of what inflation is," he concluded, "and how real returns might be negative on both equities and bonds. You're losing purchasing power."

And that's the point, Mr. Krugman. You lose purchasing power. And nobody--not Bernanke or Krugman or anyone else, not a police, fire or Indian chief, will sound the tocsin before hand.

You're on your own.