The Devil's Excrement

I had not looked at monetary liquidity M2 in a few months. This number measures the amount of money in the economy, including bank deposits.

I checked it yesterday and it had reached again US$ 100 billion at the official rate of exchange, in fact, to be precise, it is at US$ 102.3 billion after reaching US$ 100 billion on December 2nd, according to the Venezuelan Central Bank.

And yes, and I say it reached that number again, for the second time in the country’s history. You see, a year ago it had reached US$ 100 billion (US$ 113 billion to be precise), but then the Government through the magic of devaluation from Bs. 2.6 to Bs. 4.3, instantly pushed it down to US$ 68 billion on January 1st.

Thus, since the first of the year monetary liquidity has increased by 49%, or 57% since one year ago.

That’s a lot of new money out there. A lot of printing. That’s why inflation is so pesky, if rather than blame speculators and the oligarchs, the Government allowed M2 to rise more slowly, then inflation would ease.

It may sound like a chicken and egg problem, what comes first? The printing of money or the inflation? Well, I can assure you that if the rate of increase of M2 is double that of inflation like it is today (inflation is around 27%), inflation is surely going to go up. More so when the amount of goods available for sale has not increased much, certainly no more than low digits, while the amount of money has gone up dramatically.

It is simply too much new money chasing the same amount of goods.

And the amount of goods can not be increased via imports much. Imports this year are running more or less at the same pace as last year and right now, the ability of the Venezuelan Central Bank (or CADIVI) to give more money is quite limited. You see, a year ago when M2 was also US$ 100 billion, international reserves were about US$ 30.2 billion, of which gold was about US$ 16 billion. That is, “liquid” reserves (reserves-gold), with some caveats, was about US$ 14.2 billion. That is about six months of imports via CADIVI.

Today, reserves are down to US$ 27.7 billion, of which gold is about US$ 21 billion, that is a much smaller cushion of US$ 6.7 billion in liquid reserves and now the gold is harder to sell or pledge, because it is here. It would have to be shipped abroad first. Thus, the liquid part of reserves is slightly more than one quarter. A little more than three months, that’s all.

The worst part, is that the Government is very unlikely to devalue in 2012, because a devaluation would give inflation a push and you know who wants to be President forever. Thus, as the Government spends ahead of the 2012 election, to give people a felling of well being, M2 will increase more and more, making the idea of removing exchange controls more difficult. A year ago, there were Bs. 9.8 for each dollar in international reserves, today there are Bs. 15.9 for each dollar at the Venezuelan Central Bank (including the gold, of course). In a year, any attempt to remove exchange controls would require a bigger devaluation and more foreign currency to be able to defend a floating rate.

Barclays estimates that inflation in 2013 will reach 36%. The Government will pull all of the stops, decrees, bills and threats in order to slow down price increases. Unfortunately, this is a very difficult game as inflation accelerates, as the private sector may decide not to sell or make goods at a large loss. Then scarcity will increase and politically and scarcity seems to carry more weight with voters than inflation.

And no matter who wins the election, there will have to be a very significant adjustment to the rate of exchange in 2013. And thus, more inflation. The mirage of lower inflation moves further into the future, while the Government ignores the fact that it is the main driver behind it.

If Venezuelan and PDVSA bonds are worth some US$ 60 billion, then today a computer virus made them gain about US$ 1.2 billion, just like that, as the virus was embedded in an email with a headline mourning the death of none other than Hugo Chavez.

The whole thing was bizarre. Venezuela and PDVSA bonds were sort of mixed in the morning and all of a sudden, around noon, I noticed they were up strongly, but there was no news explaining it. Then, a friend calls and tells me New York is full of rumors suggesting that Chavez may have died. I got a dozen calls or cahts on the topic within minutes. Given that he supposedly signed some documents mid-morning, it was hard to believe this could be true.

But the rally kept going. It was only later, that another friend sent me this denial by La Prensa:

You can read it better in the original, but basically it says that this email purportedly showing a page from Panama’s La Prensa was circulating, saying “All of Venezuela in Mourning” because of Chavez’ death. But the whole thing turned out to be a virus, as if you clicked in the video of Chavez, it would download a virus which supposedly takes over your PC.

Well, some people did not even click, they believed the news and it spread all the way to debt markets, where it had a not insignificant effect. Even Panama’s Police felt it had to issue a warning.

Go figure!

Some people speculated the virus came out of the Presidential Palace. Others joked it had to be fake, how could it say “All of Venezuela in Mourning”. But in the end, the underlying truth is that debt markets would have an incredible rally if there wa the possibility of political change in Venezuela. And I understand why. What I don’t understand is how not knowing how orderly or disorderly that transition may be, does not make a difference. Just think, if the news had been right, Venezuela’s President would be Elias Jaua, a lightweight politically. Jaua just happens to be in Russia today, I wonder what his enemies would have done about that if the news had been true.

But the effect is there, an orderly political transition in 2012 will lead to the rally of a lifetime in Venezuelan paper. In fact, the possibility of such a transition should n itself provide a rally for the books.