The Devil's Excrement

So Chavez gave his State of Disarray of the Union speech on Friday and it was as nutty and disastrous as the country:

–He named Jorge Giordani Minister of Planning AND Finance. The man responsible for the bad state of the Venezuelan economy  as well as the electric grid is now given more power than ever. I guess Chavez had to join the two ministries now that Jesse is not around. At least Jesse knows that he doesn’t know.

–Since crime has become the number one problem for Venezuelans, he had to say something about it, but it did not come out too credible. Said the Dictator:”Crime and violence is a political problem and one of the greatest enemies of the Bolivarian revolution. I have no doubt that the crime and many of those criminals bands are trained, financed and backed by the counterrevolutionary bourgeois, the Yankee empire and its lackeys.” Unfortunately for Hugo this will not fly in the barrios where they have not seen a cop, a bourgeois or a Yankee in the last eleven years as crime by their own has soared.

–He once again spewed out the BS about Coltan, which I wrote about earlier. The charlatan now thinks it is worth US$ 100 billion. Well, if it is a money losing proposition, then it is really worthless and if it is in Venezuela manged by Chavez and his incompetent robolutionaries, it is worth even less. Oil use to be the sure thng, but in eleven years Chavez and his brilliant cronies have been unable to come up with a single new project that has generated a single new barrel of oil.

–Chavez said that the Venezuelan economy is fine, not like the US, because the US’s economy generated unemployment. Well, you have to be ignorant to believe that an economy can shrink 2.9% like the Venezuelan one and not lose jobs. Oh! by the way Hugo, the Venezuelan economy shrank more than the US’s in 2009. (Which shrank by 1.9% a full point above Venezuela’s). And inflation is going to top 60%, but has anyone told Hugo?

–Chavez says he is a Marxist but never read Das Kapital. That’s like me saying I love West Indies cricket and don’t understand the game.

–Chavez called for the Vatican’s representative’s building to be exorcized because it held a rapist in its walls. Once again Chavez assumes someone is guilty until proven innocent and he personally becomes Judge and Jury. What else is new?

–And once again, Hugo said he would revalue, because the swap rate is going to Bs. 4.3 per dollar. He was probably assured this by the same bullshitters that told him in September they would drive it down to 65% above the Bs. 2.15 per dollars. Maybe they think that if they keep increasing the official rate, they will find convergence. the problem is they keep running the Government and don’t realize that it is not a problem of magnitudes but of policies. They drove the swap rate down below Bs. 5 briefly, because they spent US$ 11 billion in bond sales. But four months after the rate is near Bs. 6 per dollar and it would be hard for them to issue  11 billion dollars more. Meanwhile, Chavez is taking US$ 7 billion from international reserves. Given OPEC’s high current capacity, if oil prices drop, this could be catastrophic.

A few people have asked me about the zero coupon bonds that the Central bank is selling asking why it is I don’t think it will drive down the swap rate down. While Chavez claims he is revaluing the currency because the swap rate will go to Bs. 4.3 per dollar and some respected analysts think this mechanism will work, I disagree. I actually think that the way it is currently designed, this will get nowhere and I think we have already seen the first signs of this. Unless the Central Bank changes the design, it is wasting its time (and our money). Here is why:

First of all, the process is not an auction. It is a sale of dollars at Bs. 5 per dollar, far from the swap rate that closed on Friday at Bs. 5.85 per US$. Thus, there is no way to lose, you sell dollars at close to Bs. 6 and get some sort of democratic allocation at Bs. 5. Whatever you get, if you do, is a gift. Zero risk gift at that. If it was an auction there would be guessing and there would be risk, those needing more dollars would pay higher for it and would get them. There would be no sure thing.

Second, the big drivers of the swap market are corporations. They need millions of dollars not thousands, but if one is to believe what people are being allocated and that nobody has been given preferential treatment, on the first day, orders above $ 60,000 were allocated $60,000, orders below were allocated the full amount. On Thursday, the same thing happened but the number went down, orders above $53,000 were given $53,000, those below the full amount. (I have heard someone was sold millions in the CD’s, either they got preferential treatment or they placed many small orders)

And we come to the crux of the problem: As time goes by, more institutions, individuals and companies will put in more and more small orders, much like in the bonds sold by the Government to drive the swap rate down, but which failed to do so except psychologically. Each day smaller amounts would be allocated and the swap rate will not go down, unless the Government sells a huge amount and wipes out the bids. But I understand the first day there were US$ 500 million in orders. Thus, by the end of next week we may see allocations of $20,000 per orders and thousands of orders.

Whether the CD’s are registered abroad or not to me is almost irrelevant at this point. If they are, those that get them will sell the CD’s and then go back to the “auction” to ask for more. So, it may actually go against the Government to register them. Note that the first day, local banks were buying the CD’s back from the buyers. On the second day they did not, because the Government changed the wording and removed what the Prospectus said on the first day: That the zero coupon bonds would be sold in the international markets. The BCV says it will now register them abroad.

Thus, I expect the Central Bank to change the mechanism soon. In the meantime a few hundred million dollars would have been wasted by the Central Bank. What else is new in a wasteful and incompetent Government? I obviously have ideas as to how I would do it, but I will not tell the BCV how, in their self sufficiency and arrogance they haven’t even asked.

And to make sure I answer all the questions, these bonds will not trade in local currency, it is explicitly prohibited by law.