Trillionaire on a Dime

In 1980, the Zimbabwe dollar was actually worth more than the U.S. dollar. Yet under the leadership of an antifree market dictator, its value has plummeted and hyperinflation has soared, now running well in excess of 300,000,000% a year. Treasury Secretary Geithner, please take note: This is what happens when you nationalize industries, seize private property and limit free trade.

To keep up, the Reserve Bank of Zimbabwe last week unveiled its trillion-dollar bank notes, including a $10 trillion, $20 trillion, $50 trillion and $100 trillion banknote. At current prices, the $100 trillion banknote will be worth about $30 U.S.

As we’ve often pointed out, a country’s wealth is not a function of its natural resources, but its commitment to economic freedom and trade. Zimbabwe, for example, is rich in natural resources such as platinum.

Yet its controlled, socialist economy has prompted government doctors to go on indefinite strike, with no medicine, equipment, electricity supplies for them to practice with even if they wanted to. Nearly half the population are dependent on food aid and the government-run schools are closed, with most teachers having left to try to earn a living elsewhere.

And while cholera might be rampant, property rights are, not surprisingly, nowhere to be found. The “Empowerment Bill,” signed into law by President Mugbabe in 2008, requires all white- or foreign-owned firms to hand over the majority of their businesses to black Zimbabweans. Price controls have led to widespread shortages, with 75% of the population living in poverty.

The country scores 178 out of 183 on The Heritage Foundation’s recent index of Economic Freedom. Maybe they simply don’t have enough regulators and government oversight?

The volatility indexes and derivatives we wrote about back in 2006 are finally been turned into product that’s as simple and easy to buy as shares of General Electric (GE).

Expected to launch at the end of the month are Barclay’s iPath S&P 500 VIX ETNs, which track the implied volatility of the S&P 500 at two different points on the volatility curve. Essentially they allow you to take a long or short position in implied volatility of the S&P 500, either one or five months out.

As we wrote back in 2006, volatility is a unique asset because while it can fall, unlike a stock, it can't go to zero. Volatility tends to rise when stocks drop, exactly what powered the VIX to a 350% jump from August to October of last year. On any given day, when the Dow takes a dump, the VIX tends to spike. As you might be aware, that happens a lot lately.

And while the VIX is often referred to as the “fear index,” the most frightening thing about these new products isn’t even the index they track, but the financial condition of their underlying issuer Barclays (BCS).

VIX Index -- 2 years
Source: BigCharts.com

Exchange-trade-notes (ETNs) don’t actually hold assets, but are unsubordinated debt obligations made by a bank or financial institution, meaning you bear a credit risk beyond the prospects for the actual underlying asset. Investors in Lehman Brother’s Opta ETN funds like RAW or EOH are now unsecured creditors to the company and are unlikely to recover any significant value.

So an investment in the new iPath VIX ETNs... or any iPath ETN is also a vote of confidence in the ability of Barclay’s to actually pay those debts when they come due. Its U.S.-traded stock has fallen from a 2007 high of $62.65/share to a recent $3.20 on fears the bank will be nationalized by the U.K. government.

Now that’s truly frightening.

Barclays PLC – 5 year chart

Although plans of the president’s budget and stimulus package have yet to be formalized, the biggest winners might end up being schools. Since the November election, shares of education firms like Apollo Group (APOL), Strayer Education (STRA), DeVry (DV) and ITT Educational Services Inc. (ESI have dramatically outperformed the broad market, with many notching new multimonth highs in just this past week.)

Education Stocks: ESI, STRA, DV, APOL vs. S&P 500

On her first day on the job, Secretary of State Hillary Clinton spoke to departmental employees about the importance of dialogue. “I want you to give me the best advice you can. I want you to understand there is nothing that I welcome more than a good debate and the kind of dialogue that will make us better.”

Yet only a few moments later, Secretary Clinton promised that “We are not any longer going to tolerate the kind of divisiveness that has paralyzed and undermined our ability to get things done for America.”

So the message is that debate is encouraged, as long as it’s not divisive, or as long as you’re willing to compromise your principles and beliefs.

Given our response to the economic crisis in recent months, it seems that — unfortunately — we are.