Pakistan: Proof that Financial Markets are Run by Self Serving Geniuses

According to a report published in the Pakistani newspaper, Dawn, on October 1, 2012, the Pakistani stock market closed on a four-year high as investors expressed optimism about declining inflation and the consequent expected interest rate reduction. Now, this sounds like good news and it is if you are someone who just plays the market. However, if you are someone who looks for long-term returns, this news provides further proof that the financial market is full of people who know only one thing: how to fleece people.

Now, let’s examine some facts. First, let’s take a look at the country’s foreign exchange reserves: they have declined 14 percent in the past twelve months. Coupled with higher global commodity prices and a burgeoning trade deficit, this decline hurts Pakistan’s ability to pay its bills and support future growth. Second, Pakistan’s debt to GDP ratio has stayed at around 70 percent for the past three years – I would assume investors would like to see some positive movement in this ratio but that needle has barely budged. Finally, let’s discuss GDP growth, which is stuck at 2 percent. One could argue that a high deficit and low reserves were positive signals if Pakistan was growing around over 5 percent but since its not, all these numbers are bad omens. On top of all this, I haven’t even discussed the country’s massive infrastructure problems or the security conditions.

If the signals are that bad then why is the country’s stock market going through the roof and why is inflation so low? Well, first of all, government subsidies continue to support prices and that helps keep inflation low … but this also reduces Islamabad’s resources. Also, keep in mind that when the paper reports that the “consumer price index (CPI) rose 8.79 per cent in September from a year earlier,” this is on top of a 12 percent increase in 2011 and a 14 percent increase in 2010! My prediction is that the market is being propped up profit takers and will collapse in a few weeks, which will profit everyone who sells their stocks in the inexplicably high stock market and piss other people off – just another day in the financial markets for the rich and the poor.