This entry was posted on April 22, 2010 at 12:06 pm and is filed under Venezuela.
Obama’s reaction to Monday’s Military Parade in Caracas
April 22, 2010
The Devil's Excrement
Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.
-
Unknown Feed- An error has occurred; the feed is probably down. Try again later.
Blogroll
-
The Devil's Excrement 
April 30, 2010 at 12:11 pm
@m_astera:
Thank you for your reply.
You stated:
“I doubt that the accountants and buyers for these chains are ignorant of inflation.”
The fact that you state” ignorant of INFLATION” proves that neither you nor Venezuelan accountants understand what is going on.
I don´t blame you: if Sir David Tweedie, the Chairman on the International Accounting Standards Board does not understand the effect of accountants´ very destructive STABLE MEASURING UNIT ASSUMPTION during low inflation and hyperinflation, how can we expect you and Venezuelan accountants to understand it?
That is what gives me a unique selling opportunity with the parent company of a very well known Venezuelan group of companies: I understand that it is Venezuela´s and all accountants´ stable measuring unit assumption and not INFLATION nor Hugo Chavez (what you people do not want to hear from me) that is destroying real value in the Venezuelan non-monetary or real economy.
Inflation can ONLY destroy the real value of the Bolivar – nothing else.
So? What is destroying the rest of the Venezuelan economy?
Part of it is Hugo Chavez´s incorrect policies, I agree.
And part of it is simply Venezuelan accountants´ implementation of the stable measuring unit assumption – as they are encouraged by Sir David Tweedie from the IASB.
That is where I come in: I can explain that it is not all Hugo Chavez´s fault: some of the blame is with the stable measuring unit assumption – NOT inflation.
How can I prove that I am corrcect: with what was done in Brazil for 30 years from 1964 to 1994: they were in hyperinflation – not just your 26 to 30 per cent inflation per year, but, 2000 per cent per year: and they grew their economy: during 2000 % inflation per year.
Why?
Because they updated most of their non-monetary items DAILY in terms of what is equivalent to your PARALLEL RATE.
In Brazil´s case, the government supplied the population with a DAILY rate to update ALL non-monetary item: salaries, trade debtors, all non-monetary prices, capital, retained profits, etc.
That is what I understand and that is what your accountants and Sir David Tweedie from the IASB do not understand.
I will let you know when I have a South African publisher for my book on the matter – and you can read about it all in the same book.
Obviously I can not explain the whole concept in a few comments here on Miguel´s excellent blog.
April 30, 2010 at 11:33 am
Hello Nicolaas; I came back to read your comment.
Your statement about no one buying the towels at 2x the price shows that you don’t understand the Venezuelan mindset. More expensive is better, newer is better.
I am not talking about a small store here, but a very large grocery, appliance, and hard goods chain with stores all over the country.
I am reporting what I have observed, and not in just one store or chain of stores: The prices stay the same until the goods are sold. I doubt that the accountants and buyers for these chains are ignorant of inflation, or of the cost of replacing inventory.
I don’t know what the reason is. Arturo’s remark about shutting down the farmacia for raising prices is, I think, a good clue.
April 26, 2010 at 2:20 am
m_astera, I first have to try and stay out of jail if I were to visit Venezuela: I know that you can get arrested for increasing prices or advocating price increases in a country with price controls. So, I am not advocating price increases that are not allowed by law. I hope that statement keeps me out of jail. I will answer your question accepting that the towels are not price controlled as you stated.
Not knowing the store´s cost prices makes it difficult for us to understand what is going on. There are various possible options. We must remember that Consumer Price Inflation is currently about 2% per month in Venezuela while the swap rate has risen from 5 to 7.41 since October 2009: that is an increase of 48.2% in 7 months.
First of all: no-one is going to buy the towel priced 143 BsF. So, one possible answer is that the store wants to sell all the old stock first – and they will. The store´s management and accountants may not understand the real value destroying effect of 2% monthly inflation. The store may have bought the old stock at 36.5 BsF and now believe they are making a 50% gross margin. They may have bought the 143 stock at 71.5 and believe they are going to make 50% gross margin when they start selling that stock. So, they are very happy with the nominal situation: they think they are maintaining their 50% gross margin with all their sales.
They may not realize that the real situation is very different when inflation is 2% per month equalling 26.8% per annual. They are simply applying the 700 year old Historical Cost paradigm that the rest of the world is applying too: they may believe the real value of the BsF is staying the same over time.
I do not presently know what is happening on the ground in Venezuela as far as price increases are concerned: whether stores are increasing prices at the 2% monthly inflation rate or at the much faster rising swap rate.
April 25, 2010 at 6:07 pm
I’m not sure I follow you Nicolaas. Here is a specific example that I checked on today: Bath towels at a large local “general store”. They are selling the same towels side by side, same brand. The new stock coming in is priced at 143 BsF, the old stock at 73 BsF.
The old stock price has not changed and will not change. They will all be sold at the original price; I know, I bought some. This is true for butter and canned goods too. None of these things are price-controlled.
April 24, 2010 at 4:19 pm
@M-Astera
“I have noticed that store inventory is not updated to keep pace with inflation. Old stock stays at the same price until it is sold.”
I assume you mean goods for sale in the store: As long as it is updated when it is sold then everything is fine.
Maybe the store owner is updating in terms of the daily change in the parallel rate and does not want to update all prices every day.
So, prices are only update when there is a sale of a product. That is fine for the store owner.
April 24, 2010 at 3:50 pm
Miguel, I am most probably going to advise the company to value ONLY fixed property (land and buildings) at the parallel rate of currently 7.3 in their balance sheet.
April 24, 2010 at 3:48 pm
Miguel, thank you for your answer, but, I beg to differ: the company will receive USD at the 4.3 rate to pay dividends and royalties.
So, the company´s effective USD rate is 4.3.
April 24, 2010 at 3:40 pm
Nicholas: In your example, it is not correct, if you do not use the swap rate, then you have to use Bs. 2.6 NOT 4.3 for everything except Venezuelan Government and PDVSA bonds, except the inflation adjusted bonds which are adjusted at Bs. 4.3.
April 24, 2010 at 8:22 am
I have noticed that store inventory is not updated to keep pace with inflation. Old stock stays at the same price until it is sold.
As I doubt that this is due to ignorance, I assume it is because there are government regulations preventing it.
A certain troll who bragged about shutting down a farmacia may be an example of why old stock inventory prices are not updated.
April 23, 2010 at 6:15 pm
I had seen it, fantastic, should have my 3G version next week if everything works out, if not, the week after…Thanks
April 23, 2010 at 6:05 pm
This is OT but I’m fairly sure that Miguel will enjoy watching this far more than Obama gawping at our pathetic Chavista hootenanny (oh, cool, I’m back on topic ;-).
http://is.gd/bFsoD
April 23, 2010 at 2:26 pm
Miguel,
Sorry to trouble you again: another question:
Would you agree with the following?
If I had a company with BV 2.15 million in Capital (credit) and Property of BV 2.15 million (debit) on 6th Jan 2010 (that was my complete balance sheet) and my dividend rate was BV 2.15 to the USD and I personally valued the Property at USD 1 million, but, I knowingly did not apply the swap rate of 6 for the valuation in my accounting,
Then
After devaluation I would simply revalue my property at 4.3 as follows:
Property BV 2.15 million Dr Capital BV 2.15 million Cr
Revaluation BV 2.15 million Dr Reval Reserve BV 2.15 million Cr
Total Assets BV 4.30 million Dr Total Liabilities BV 4.30 million Cr
April 23, 2010 at 11:43 am
It is as simple as that. I did that in 1996 in Auto-Sueco or Volvo in Angola.
April 23, 2010 at 11:41 am
If that is true then Venezuela has absolutely no problem:
Just get all your accountants to update all non-monetary items at the daily parallel rate; that is, all constant real value non-monetary items in the balance sheet, namely issued share capital, retained profits, all other items in shareholders´ equity, trade debtors, trade creditors, taxes payable, taxes receivable, etc, plus all variable real value non-monetary items, e.g. property, plant, equipment, inventory, shares, foreign exchange, etc, plus all items in the income statement.
When your accountants update all non-monetary items in all entities, companies, banks, etc, every time the parallel rate changes, you will basically Dollarize your real or non-monetary economy while you will still have hyperinflation in your monetary economy.
Just don´t hold VB´s from one day to the next or over any time period and you will lose no real value.
April 23, 2010 at 11:19 am
“The perfect solution for the country is for everyone to buy and sell at the parallel rate and to update all non-monetary items at the parallel rate.”
Other than items on the controlled price list, which are usually in short supply, that is basically how the country is now running.
April 23, 2010 at 10:25 am
@Antonion: I am trying to show the company I am talking to how to value things properly and do accounting correctly and how to maintain their real value during hyperinflation.
But, you are right: the more corrupt the system, the more difficult everything is.
April 23, 2010 at 10:23 am
@Island Canuck If you can sell at the parallel rate you can operate in Venezuela´s hyperinflationary economy in the same way as in the USA: you must just never keep VB´s over time and you must adjust your trade debtors at the parallel rate – everytime the rate changes.
The key is to legally sell at the parallel and to adjust your prices and trade debtors and all your non-monetary items at the parallel rate evertime it changes.
You will effectively Dollarize your operations in Venezuela´s hyperinflationary economy.
The perfect solution for the country is for everyone to buy and sell at the parallel rate and to update all non-monetary items at the parallel rate.
That is what Brazil did for 30 years from 1964 to 1994 under various governments with various daily indexes. They were lucky that they had honest Central Bankers who actually tried for 10 years till they killed hyperinflation with Gustavo Franco as Governor of the Banco Central do Brazil with their Real Plan in 1994.
A big problem during hyperinflation is that the Big Four Audit firms and the International Accounting Standards Board as well as the US FASB regard trade debtors and trade creditors as monetary items.
They are constant real value non-monetary items that have to be updated at the daily parallel rate. I have an email from Dr Gustavo Franco explaining that they did that in Brazil.
April 23, 2010 at 9:50 am
Smith, the way to play in Venezuelan economy is to adapt yourself to Chaos, “tomultuory”, “stealsiolism”, communist, corruption everywhere economy, by the news, Spanish companies like Telefonica, MRW, BBVA, adapt very well in Venezuelan economy, provably is they are backed up by their government. You should see information from that kind of companies to see the ways to operate in Venezuela
Look to connect with the owner of the country, Chavez, if you have his agreement, you can do whatever you like in Venezuela.
April 23, 2010 at 9:40 am
As a further note only 26% of the Cadivi outflow for travel has been allocated this year as compared with 2009. The reasons are simple – red tape & threats after you get back. My wife is still unexplainedly on the black list from 2007 even after supplying the supporting documents 3 times over 3 years, the final time with a lawyer.
No response has been received.
April 23, 2010 at 9:34 am
“The company I am talking to have not yet received their allocation at 2.15 for the 2007 and 2008 dividends.
Will they eventually get it at that rate when they have applied correctly at the right time?”
Much will depend on what happens as we go down the road. Many feel that with current internal commitments the government has more outflow than inflow. In my opinion the company you refer to will probably not receive their $$ from Cadivi.
As an example of the problems that Cadivi has many businesses that previously relied on preferential dollars now do all of their trading on the swap markets. The red tape is so bad & thye wait so long that it’s just not worth the expenditure & wait for a 30 to 40% difference especially if they have no problem selling their products at the higher price.
April 23, 2010 at 9:17 am
Miguel,
Do you think the government will allow them to repatriate 2010 profits in the form of dividends in 2011 at 4.3?
The company I am talking to have not yet received their allocation at 2.15 for the 2007 and 2008 dividends.
Will they eventually get it at that rate when they have applied correctly at the right time?
April 23, 2010 at 9:08 am
Miguel,
So you can buy USD 1 million in Venezuela on the swap market paying VB 7.3 million to someone in Caracas?
Then your USD 1 million is available to you outside Venezuela?
You can then later bring that USD 1 million back to Venezuela via the swap market again and get paid, say VB 8.5 million here in month or two for the same USD 1 million?
April 23, 2010 at 9:02 am
I can also see that foreign companies made fantastic profits in USD in their Venezuelan subsidiaries since 2005 with the rate for dividend and royalty payments fixed at 2.15 while the VB was in high inflation: foreign companies made 20% plus profits just on the fixed rate – doing nothing: fantastic. I am sure foreign companies love to invest in Venezuela with a fixed dividend and royalty payment rate during hyperinflation.
Even at 4.3 foreign companies are going to make 30% plus profits in USD this year just from the fixed rate – doing nothing. Fantastic – till the next devaluation – the effect of which will be recuperated in about two years of fixed rate again thereafter. Great for foreign companies in Venezuala.
April 23, 2010 at 8:52 am
Miguel,
I was not referring to Venezuelan companies trading on foreign stock exchanges: I am looking for a big foreing bank or company trading on the Caracas Exchange.
April 23, 2010 at 8:50 am
Thanks, Miguel. Not a single foreign multi-national trading in Caracas? Strange.
In Zimbabwe many companies and individuals maintained the real value of their money by buying Old Mutual shares on the Zimbabwe Stock Exchange. The price on the ZSE mirrored the price in London but at the parallel rate on the ZSE. So, when companies and individuals could not physically buy USD in Zimbabwe, they bought Old Mutual Shares. The Old Mutual Implied Rate or OMIR was actually the parallel rate over there.
Miguel, can companies open USDollar bank accounts in Venezuela to keep USD bought in the swap market?
April 23, 2010 at 8:20 am
@Robert: Lol, yes, I can remember when I wrote it I thought something was wrong, but, I am mostly too much in a hurry.
Warehouse where you keep your wares. I speak three languages and sometimes get it all mixed up.
April 23, 2010 at 7:19 am
Did you read El Universal front page? Ramírez talking
about the paquete chino.
It is as bad as we thought
April 23, 2010 at 6:44 am
Smith- I cringe at your spelling of “wharehouse.”
Either replace the a with an o or take out the h please. Or clarify that a wharehouse is a place you keep who**s. Sorry for the low taste. Just too funny.
April 23, 2010 at 6:37 am
Subtlety to the joke – did you notice the caption on the TV? “Democratic National Convention”. Venezuela was a prop, not the punch line. But still funny.
April 22, 2010 at 11:59 pm
GOT ANY OF YOUR MONEY IN EUROs ?
I am reading more and more comments on financial web sites, and in major newspapers, that the Euro is an endangered currency. You may wish to consider that, if you have any, and they take a big fall.
April 22, 2010 at 11:28 pm
Miguel, thank you very much for your help so far.
I am not trying to sell a wharehouse. I am busy advising a foreign company which is the parent company of a business that all of you know very well in Venezuela: the company has been there for a very long time. I think you all know the products very well.
Please excuse my optimism, but, I think I may have all the answers to the problems of foreign companies with subsidiaries in Venezuela. This is not being silly (or arrogant): I have worked in Angola´s hyperinflationary economy in the 1990´s and have been studying these problems for the last 15 years.
My detailed knowledge of the situation in Zimbabwe also helps me a lot.
Miguel, two questions for now:
1. Is it possible to move USD 20 million at a single time through the parallel market?
2. Which is the biggest foreign company trading on Wall Street or in London or another foreign stock exchange also trading on the Caracas stock exchange with strong liquidity; that is, lost of buying and selling of its shares on the Caracas stock exchange?
I promise to share all my knowledge on your blog. I actually think it is possible to run the whole Venezuelan economy with no loss of real value because of hyperinflation or devaluation. I know you will find this hard to believe, but, in the end you will agree with me. I am sure I can help.
To run the whole country with no loss of real value because of hyperinflation and devaluation everybody has to work together on the correct procedures. That is the difficult part. Brazil did it for 30 years. Venezuela can do it too.
April 22, 2010 at 10:06 pm
Laugher has always been an escape, and given our tragedy, there are few other things you can resort too, but laughing, otherwise we would cry all the time.
April 22, 2010 at 7:54 pm
I am not Chavista (on the contrary), but looking at a Venezuelan making fun of its own country through the image of an incompetent “President” from a bankruprt country does not seem funny at all to me. It is rather pathetic. I guess you are also American and Democrat. I wonder why smart people are so arrogant.
April 22, 2010 at 6:48 pm
Would you set your price according to the swap rate or according to what the market tells you? Shouldn’t the price be based on value to the buyer as opposed to “what covers my costs”? Or is the market so distorted that simple rules don’t apply any more?
April 22, 2010 at 6:37 pm
I sell a house like one year ago.
Two years ago, I used parallel or swap rate to not loose money and I begining to ofer to this price, one year later after decresing the value of the house slowly I finishing selling the house to 40% less from the original price.
April 22, 2010 at 6:19 pm
Smith, I am not an expert in accountability but you have to deal with two prices. One price or value in books and others are the price or value to selling. The price in books should be the price in BsF, by the value used to paid taxes in Venezuela, you have to see “the theory value” given by municipal or government entities to values your properties to pay municipal or any government taxes. The theory value should be use 4.6 Bs rate to transfer to dollars, because 2.6 if for special things to import, not to export.
To check the appropriate conversion rate you should look for news in internet to see how transnationals in Venezuela were affected in their accountabilities and in their values in the stock markets in USA and in Europe.
The value of selling should in theory, if you planning to expatriate the BsF, one value to equilibrate the depression of the value of the Bs at the parallel rate, from the time you bought the warehouse to the time you sell, this due to not loose money, because provably you have to use the parallel rate to expatriate the BsF.
Finally, the real value is the market value and it will be final price or value you can achieve to sell. Because actually practically nobody is buying properties in Venezuela, and in warehouses provably this is worse. Chances are you will have to work hard to sell the warehouse, use a friend or somebody near the warehouse to inform you the last selling in the area, at transfer to your property proportionally by size of the property.
Chances are you have to be patience and finally you have to sell by half of the original value in $ to have chances to the sell soon your warehouse and expatriate the BsF. to dollars.
I wish you good selling
April 22, 2010 at 5:57 pm
It’s something in between, importers have to bring lots of things at the parallel rate in order to function if Cadivi does not give you $, so the parallel rate play a strong role in inflation. My gut feeling is the weighted average is above the Bs. 4.3 5 5.2 or so, but properties people talk in $ per square meter and use the swap rate.
April 22, 2010 at 5:23 pm
Or do people apply the movement in the parallel rate to all prices, for example, consumer goods and raw materials?
April 22, 2010 at 5:20 pm
Thank you: I see then: locals have Bs prices for properties and increase the price in terms of the movement in the parallel rate.
So then the movement in the parallel rate is the inflation rate in fixed properties.
I suppose the change in the Consumer Price Index indicates the inflation rate for items bought and sold at the 2.6 and 4.3 rates with the parallel rate inflation for properties? Would that be correct?
April 22, 2010 at 5:14 pm
Are all properties then valued in USD and bougth and sold at the parallel rate?
April 22, 2010 at 5:08 pm
Thank you. Your answer gives me a lot of information.
But, what I mean is the following: If I had that wharehouse actually in the market at a selling price of Bs 2.5 million on 7/1, would I have kept the price the same or would I have upped my selling price to Bs 2.6 million?
Did all local property selling prices stay the same immediately after the devaluation?
Or as you say: if I had the property in my books, could I then revalue it to Bs 2.6 million?
April 22, 2010 at 5:04 pm
Therefore, if you had the building value at Bs. 2.15 million, it is now worth $826,923 dollars (2.15/2.6)…or zero if the big man happens to point his mighty finger at it and say “expropienlo”.
April 22, 2010 at 4:44 pm
Or what did the price go to?
April 22, 2010 at 4:42 pm
Miguel,
Another question:
If on 7th Jan 2010 I had a property (wharehouse) for sale in Caracas at a price of VB 2.15 million or USD 1 million, what would the price have gone to on 9th Jan 2010?
VB 2.6 million or VB 4.3 million to a local buyer?
April 22, 2010 at 3:50 pm
Where do you get those photos? El Chiguire Bipolar doesn’t have it.
If I were Obama, I would have a wry smile and some compassion for Esteban Flim-Flam.
Esteban must be find some relief in that none of these Armed Farces will have to face U.S. military power ever.
The show is directed at Venezuelans and did it fail! to inspire anything but laughs and derision here. Sheesh man, when did we become a Fourth World country complete with an uniformed fatso riding a Cadillac in a parade he was supposed to be presiding? Is this a reality show? Moon over Parador? Candid Camera?
April 22, 2010 at 3:11 pm
I’d be surprised if he spent 2sec/week over Venezuela, really surprised …
April 22, 2010 at 2:45 pm
Impartial – The photo you request provably you will only see Obama’s shoes elevated from the floor, because he is rolling over his body by the laughing.
April 22, 2010 at 1:57 pm
Impartial – Probably the same response.
April 22, 2010 at 1:45 pm
I want to see Obama’s face when he saw the Bolivarian militias. Please post that photo!!!