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Iran Blows A Stock Market Bubble at Trader’s Narrative




Iran Blows A Stock Market Bubble


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Ahmadinejad in in New York once again addressing the United Nations today and giving a round of interviews to the American media this week. I watched his interview with Christiane Amanpour and from that it is obvious that he’s keeping to his well-worn script of obfuscation, denial, deflection and just plain old lying.

Since Ahmadinejad attacked the economic framework of the ‘West’ and predicted the demise of capitalism, I thought it would be interesting to look at Iran’s economy. The major challenge of the current Iranian economy is difficult to pinpoint since there are so many: unemployment (especially for youth which make up the majority of the population), the largest global brain drain according to the IMF, extremely high inflation, graft and corruption, an almost bankrupt banking sector, etc. Many of these are a direct result of Ahmadinejad’s myopic policies.

For example, several central bank governors have been fired when they refused to follow his orders to withdraw money from the Oil Stabilization Fund (OSF) to pay for his own version of a stimulus plan. The OSF has actually decreased at a time of rapidly rising oil prices. And with rampant spending by the government, inflation is out of control.

Ahmadinejad came to power initially by promising to put the wealth of Iran’s oil fields in the hands of everyday citizens. The reality is that wealth is now concentrated much more than before he came to power. Large Charitable trusts (Bonyads) control vast sections of the Iranian economy and they crowd out legitimate private small business owners. As a result every year the role of the private sector shrinks as state-owned enterprises (many of them controlled by the IRGC) take over more and more.

But the most interesting aspect of the Iranian economy is a growing bubble of gargantuan proportions in real estate and now in the stock market. It is difficult to quantify the real estate bubble since reliable information is hard to come by. The stock market bubble is much easier to spot, even though it is still relatively small in terms of total capitalization. So far, the government has welcomed the bubbles forming in these two sectors of the economy because they help to offset the crippling effect of sanctions by providing a wealth effect.

tepix tehran stock index Sep 2010

As you can see from the chart of the TEPIX, prices were in a wide range for a number of years. The Tehran stock market index found a floor on March 29th 2009 - not long after many of the other global equity markets. Since then it has gained 134% in what can only be described as a parabolic rise. In comparison, at its April high, the S&P 500 has only managed a 78% rise from its low in early March 2009. Of course, one unmistakable characteristic of bubbles is a parabolic chart (see: Parabolic Rise in the Price of Crude Oil).

Like almost all things in Iran, the stock market is manipulated by the government. As you’d expect, official government representatives scoff at talk of a bubble but many members of the Majlis (parliament) are concerned. After all, there is absolutely no fundamental rationale for an appreciation in the Tehran stock exchange, never mind such a rapid acceleration as we’ve seen. Rising debt is a major problem, as is lackluster or negligible profitability from state-owned enterprises that are run more like piggy banks than actual profit seeking corporations.

Rather than a crowd induced bubble, like the kind that we saw in the US stock market at the turn of the new millennium, the Iranian stock market bubble is created by state-owned enterprises buying and selling each other’s shares in a web of cross ownership. Individual investors and traders in Iran can’t really participate since there is in effect, a two tier system providing two different prices. One for individuals and one for publicly traded corporations. This is more akin to the Japanese experience in the 1980’s. In the end, values can’t rise indefinitely and it is more than ironic that while Ahmadinejad is across the Atlantic wagging his finger at the West for its apparent failings, his own house is in disarray and in danger of crumbling in on itself.

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5 Responses to “Iran Blows A Stock Market Bubble”  

  1. 1 PEJ

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    Thanks Babak, another great post.
    I tend to agree with most things, except the calling this a bubble: i’m pretty sure that you will find many “emerging economies” with 100-150% rise in their equity markets since the bottom. that said, the whole of global equity might be a giant bubble :-)

  2. 2 Babak

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    Pej, it isn’t just the parabolic chart, it is that combined with the fact that there is no fundamental rationale for those prices (no earnings, no growth, etc.). It is a mirage conjured up in a hall of mirrors. If you noticed, Ahmadinejad, in defiance to the new crippling sanctions, pointed to Iran’s strong stock market as a sign of how impregnable Iran’s economy is. If that isn’t a red flag, I don’t know what is.

  3. 3 PEJ

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    well, then again, no earnings, no growth, are you implying the stock exchange shouldn’t even exist?
    That said, I’m hearing the same about China’s practices and fake stock market :-)

  4. 4 Babak

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    Pej, not that it shouldn’t exist but that when prices get way out of whack from fundamentals, you have the setting for a bubble. We’ve seen this so many times that it should be familiar territory by now.

  5. 5 PEJ

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    Hey Babak. I’m not saying that I disagree with you. But if you have some concrete figures about the earnings, PERs, and so forth, I’m a taker.
    Also, as goes the old quote (buffett??) “invest when there’s blood on the streets” goes, well, remember that as sad and tragic that it was, there was indeed blood on the streets 18 months ago in Tehran…

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