The Devil's Excrement

I know, I have not been posting much. Spending a week in Caracas takes a lot of energy. It is not easy to digest, investigate, see friends, party, eat, drink, work, have gastritis and expect me to write at the same time. More so, when you decide that you better listen to a complete Maduro “cadena”, something I did twice this week, which is enough to cause a variety of ailments, both mental and digestive ones.

But I will start with a simple issue, the attack on the press by the Maduro administration and directly by Maduro personally. For those that even dare suggest there is freedom of the press in Venezuela, please shut up!. Every single day there are threats to sue, to bar, to fire, to do anything to intimidate the press. The Government controls the media and the media which is not controlled has been effectively silenced with few exceptions. With the recent sale of the Cadena Capriles to unknown “forces”, everyone was looking at flagship Ultimas Noticias to see if any changes would take place, but the first casualty occurred in sister publication El Mundo, whose director of four years Omar Lugo, was fired for putting this on the cover:

A bit scandalous? yes, for a serious a economic newspaper it may be somewhat over the top, but certainly not as scandalous as Maduro’s accusations, charges and speeches. Yes, everything is on sale in Venezuela as the headline says, including the country’s international reserves that are going down at a rate of one billion dollars a month. Lugo had been asked to “behave” by the new owners, which he didn’t and he was summarily fired.

Then, Minister of the Interior and Justice Torres threatened to sue newspaper El Universal for publishing a picture of the pool of blood left on the ground by the death of an engineer who had been kidnapped and was killed by police when his relatives were trying to pay the ransom. The police happened to be nearby coincidentally, leading to the deaths of both the kidnappers and the victim. The picture was this one:

Gruesome? Of course, but that is daily life in Venezuela, that happens to be the truth, a trith that the Government controlled media simply does not talk about at all, as if the dead were Martians. As if those killed were not Venezuelans, on both sides. As if those killed had no relatives and nobody noticed their deaths.

Similarly, Maduro accused regional newspaper El Tiempo of “inciting violence” for publishing the words of a storekeeper who said that he preferred to be looted than to sell goods to the public at an arbitrary discount, as it was cheaper for him. Given that it was Maduro who promoted the looting in the first place, this statement is simple pressure to not report what is going on with Maduro’s forced sale by merchants in Venezuela. Which by the way, is an absolutely illegal act, not backed by any act of a Judge, nor a process in which people have been allowed to defend themselves.

Then there is Miami Herald reporter Jim Wyss, who was held for 48 hours by the military for trying to report shortages at a city near the border with Colombia. Wyss is in charge of the Herald’s Bogota’s office, but is registered with Venezuela’s information Ministry,  and went to San Cristobal, in Tachira State to learn about the upcoming election, smuggling and shortages. He told his story very clearly in this article, where he tells us how his belongings were removed from his hotels, he was checked out and his computer and phones inspected and copied in what is certainly an illegal procedure in Venezuela. It is unclear if he would have been held longer, had he not been seen by someone when he went to the bathroom.

Maduro has also accused El Nacional of promoting an economic war against the Government, withheld permits to import newsprint for a number of papers and criticizes in a very explicit fashion the editorials of newspapers for being critical of him. To say nothing of the banning of a number of websites that publish the price of the black market rate, but taking advantage of the opportunity to ban any website, blog, page or site that links to any of them at the same time. Who knows how many websites have been banned by now? I do hope they find ways to use Facebook and Twitter, which would have a much higher politically cost if blocked. The Government even banned URL shortener Bitly to stop dollar pages from tweeting the price. Of course, all users of the service are now banned from using it in Venezuela. Yes, there are others, but…

The telecom regulator in Venezuela even asked Twitter to block the accounts of those that publish the black market rate via Twitter, because publishing such a number was illegal in Venezuela. These guys really have little understanding of what freedom of the press means around the world.

What’s next? Facebook? WordPress? Twitter? There is no limit for these little dictators, whose fascist roots seem to be surfacing more and more these days.

So, going back to the question: Freedom of the Press in Venezuela?

Are you kidding me?

So, Minister of Finance and former Vice-President for the Economy Nelson Merentes presented the budget yesterday in front of the National Assembly and made us all feel at ease, projecting inflation for 2014 at “only” (my words) 26-28%.

This is actually quite scary, because a year ago he was projecting 28.8%  for 2013 ( including the decimal) and now it is almost 50% and in 2009 affable Nelson was projecting single digits by 2012, which he also had projected for 2011.

But the whole speech was quite disturbing, if only because Minister Merentes suggested that the Venezuelan economy faced three perturbations: inflation, shortages and the foreign exchange system.

Well, when you think about it, there is only one perturbation: The Chavista-Madurista Government that imposed the exchange controls that have led to shortages and spent and printed money, causing inflation.

That is a single explanation, a single perturbation. But quite disturbing.

But maybe you can add a second one: The fact that the Venezuelan economy has been mismanaged by non-economists like Nelson Merentes for too long.

Because nobody understood what he meant when he said that inflation is “out of range”. Venezuelan inflation has been “out of range” for too long due to irresponsible policies and Government officials. Inflation is what it is, it has no range, ask Mugabe. Venezuela has the second highest inflation in the world. At least five times the rate of any other Latin American country.

Maybe Minister Merentes should coldly think about the numbers he presented. He is a mathematician after all, he knows no economics, but he should be able to at least understand orders of magnitude, no? For example:

-He proposed a budget of Bs. 550.36 billion Bolivars, US$ 87.37 billion dollars at the official rate of exchange, a full 38.8% higher than that presented a year ago by his predecessor the non-economist Jorge Giordani. But wait! Before you think about that 38.8%, it turns out that since it was presented and up to October 2013, the same budget has been increased by 61%. Yeap! With two months to go the Chavez/Maduro Government has spent a full 61% more than was budgeted.

-And if you compare the 2014 budget to the 2010 budget, as presented originally, which is the only fair comparison, the 2010 budget was only 159.40 billion Bs., so that the 2014 budget is “only” 3.45 times the budget of only three years ago.

-And in his budget, Merentes proposed to issue debt in the amount of Bs. 112.7 billion in 2014, which is an amount almost identical to the projected income of the Government from oil, which will be, according to the same presentation Bs. 114.59 billion in 2014. Think about it, the Government will issue debt equal to the amount of money it will receive from oil. Talk about being irresponsible.

-And in 2013, up to today, monetary liquidity has increased by 35.5%, a huge (and inflationary!) number and that if it grows like it did last year in the last two months, it will end growing by at least 50% by December 31st. (This happens every year, a huge jump in M2 due to seasonality)

But despite all of the above, Merentes called for the need to “investigate” why inflation in Venezuela has been in double digits for thirty years in Venezuela.

There is nothing to investigate: Irresponsible Governments is the explanation. Period.

And despite all this, Merentes projects GDP will grow between 4% and 6% in 2014. Funny, last year he projected 6% for 2013 and we are unlikely to go over 2%.

And, yes, there will be no devaluation…

At this point, the fantasy was complete, I changed channels and turned to watch a more realistic movie about a Martian invasion.

Nothing can illustrate better the lawlessness, irresponsibility and lack of equality that currently rules Venezuela that this item from the international news, accompanied by this item today.

First, we hear that the official (funcionario) from the National Institute for Sports (IND) was not involved in money laundering. It was not money laundering, because the guy was authorized. Never mind the law, whether Bulgarian or Venezuelan laws. Because in both countries, you have to declare cash above a certain amount.

According to this website, you have to declare above 8,000 leva in Bulgaria, whether you are importing or exporting them. That is about 4,000 euro if you were wondering. So, if Mr. Funcionario Official was carrying euro 407,000, he was money laundering, violating Bulgarian law, whether the Embassy likes it or not.

But incredibly, these “funcionarios” from the Bulgarian Embassy forget that we live in Venezuela, where you have to declare over US$ 10,000 when you leave the country. If you don’t, you were also money laundering.

A country where anyone, anyone “normal” of course, has to fill out and hand in folders to Cadivi, to obtain approval. We are talking about all sorts of forms, filled out individually, to get no more, that is the regulation, than US$ 3,000 in your credit card for travel abroad. Legally, there are no exceptions to these rules. It’s the law of the land. Except Chavismo seems to believe that the law only applies to everyone else. Particularly for non-Chavistas.

But really, do you trust a “funcionario” to carry that much cash in a country where nobody can carry cash in foreign currency? Who supervises handing out the cash? Spending it? Really, please….

How much cash did Maduro’s delegation carry in China? No wonder they wanted to get out of the airplane in Vancouver and go shopping after their sudden departure in Beijing…

But really. Think about it. In the country of controls, where to get even small nominal amounts, you have to submit folders, prove you are alive, got to the bank two or three times, get a ticket, get receipts, use only your credit card, except for small cash amounts, but some flunky is given over half a million euros to “carry”, like a drug mule, through the Maiquetia airport, the airport where you can get drugs out, only if you are exporting over a Ton a time, but not smaller amounts.

Same as with cash.

But just like you can not export drugs, it is illegal to export large amounts of cash, even if you are a Chavista. Except it seems as if cash is king for Chavistas. Remember Antonini? He was also above the law.

But somehow for Chavismo, it is one thing to be a member of PSUV, a Chavista, or you and me. This Government is all about discrimination. This Government is all about creating two classes of people. It is about having laws that apply to others, but not to you. Because they are the all powerful Government.

Except Bulgaria is not Venezuela, the same way that Argentina was not Venezuela, even if Antonini’s plane was chartered by PDVSA.

And these are the cases in which they get caught, imagine how many there are where nothing happens. Nobody gets caught. A million euros, two million euros? For Chavismo, the sky is the limit.

I mean, the country does not even have a Comptroller, just some flunky who is a member of PSUV and nobody knows her name. (I think it is a she). Becuase Chavismo does not one to appoint anyone who is not loyal to them.

Nobody is watching, Bolichicos y Bolichicas, take advantage of it.

Meanwhile, pendejos y pendejas (Buddies of mine). Fill out your forms. Hand in your folders. Travel. Spend you money wisely and legally. Hand in your receipts. Get ready to be suspended. Remember you are second class, even if you comply, they may still jail you. You are guilty until proven innocent.

You are just not a Chavista, sorry!

A few weeks ago, a good friend was traveling to Europe, when he was stopped right after Maiquetia immigration and interrogated by some officials. When it was determined that he was only going for a few days, the questions got more direct and unnerving, as they were directly suggesting that he may be carrying drugs on him. Unfortunately, in the world of digital communications, he was carrying no papers about his meeting and did not have on him his ID from work.

He was asked if he minded having an X-Ray done, which he clearly didn’t. At that point, he was moved to a room with other “suspects” and taken away from the airport to some form of dispensary run by Cubans near Catia La Mar. By now, the whole process was quite unnerving, as it was already past the departure time of the airplane and he was far from the airport and did not know if he would miss his flight or not. An X-ray was done, obviously showing nothing and he and the others were returned to the airport to catch their flight, which was delayed two hours because of them.

This story comes to mind, because French authorities revealed this week, that 1,3 Tons of cocaine were found in an Air France airplane arriving from Maiquetia. The stash was found in 30 suitcases, which cnn describes a “colorful” and which did not belong to any of the passengers on the plane.

Imagine this, in an airport where individuals are x-rayed to see if they have drugs in their stomachs, 30 suitcases full of cocaine, worth close to a quarter billion dollars are “sneaked in” on to the airplane. This requires the cooperation of the authorities, of Air France employees, of the National Guard and of the same people that basically harassed my friend.

But that is not the problem. The problem is that this find, proves how rotten Venezuela is when, in a facility controlled by the military, anyone can move one Ton of drugs and succeed. To give you scale, this is the largest drug catch in Frances’ history. This factoid alone should raise concerns about how screwed up Venezuela is.

Another Ton Of Coke, Right Under The Bolivarian Revolution’s Eyes

So far, there has been no statement from the Minister of the Interior and Justice. The Prosecutor’s office opened an investigation and faster that you can say “Maduro is in China”, they detained three National Guardsmen: Two Sargents and one Lieutenant. Sure, quite believable that these three lowly Guardsmen put together an operation worth a quarter billion dollars. This in a country that has a few Generals in the DEA’s watch or is it black list?

Meanwhile the French took ten days to reveal the that they caught the drug, before making their own detentions. Interesting, no?

And Maduro says he wants an Enabling Bill to fight corruption, when his own military and his own security is immersed with drug traffickers to the hilt, as shown by this case. The delay in making any announcements in itself suggests that they were scrambling to see how to react publicly. In any other country, the Airport would be intervened and its Head removed, until the investigation was completed. But General Graterol, Director of the airport is high ranking, as well as close to Diosdado, very powerful. In one of those crazy things that only happen in the revolution, he is not only Director of the Airport, but President of airline Conviasa.  They can barely do one job well, and they are given two.

But think about it: A Ton of cocaine not only was loaded in Maiquetia, but how did it get there frm wherever it came from? Too much complicity, at very high levels.

Like Maletagate, Illaramendi, Bandes, Corpoelec, etc, etc, etc, the case will blow over with time, nothing will happen, the case will be shelved, forgotten in the myriad cases of corruption of the revolution, many of them which hit too close to power and too close for comfort.

Funny how most of these cases are always discovered, investigated and announced abroad, no?

For the last two weeks the Government has begun talking about the possibility of reviving the swap (permuta) market, given that Sicad has been a gigantic failure, in that it has done nothing to lower the parallel black exchange rate and the Government has discovered all sorts of scams in it, aided from within.

So, are we to believe this talk about a new foreign exchange swap market, where people will be able to go and buy foreign currency at prices determined by free market forces and without any limitation?

Well, call me skeptical, dubious and  incredulous. I just don’t think so.

Not under the current conditions of limited foreign currency, excess monetary liquidity (and growing!) and artificially low official exchange rate.

Just as a reminder about swaps, when the Government imposed exchange controls in 2003, it banned the use of Brady bonds as a foreign exchange mechanism, which was the parallel mechanism in the Caldera exchange controls in the 90’s.

But then a clever guy, realized that the permuta (swap), whereby you can exchange an object for another, was an instrument which is part of Venezuela’s Codigo de Comercio (Commercial Code) and had nothing to do with securities. Thus, you were forbidden to buy or sell dollars, but you were not forbidden from swapping your house in Caracas for one in Madrid, or a chocolate ice cream for a vanilla ice cream, like the picture above, or more importantly a dollar denominated bond for a Bolivar denominated bond, at a rate determined by you.

And thus the permuta or swap market was born.

Almost three years later, the Government gave its Seal of Approval to the permuta market, when it approved the Foreign Exchange Illicits Bill,in which the Government, recognizing the need for a escape valve, exempted securities explicitly in the Bill. Before this, there was no punishment for the swaps, after this, the Government was acknowledging that it was legal.

The market boomed, until May 2010, when Chávez, upset over how much the swap or parallel rate had gone up, decided to intervene that market, which was mostly supplied by Government dollars, and in the process, jailed a dozen brokers and intervened and shut down some 48 brokerage houses.

So now, the Government wants to revive this relief valve, but it is clear that it does not want the rate to be public or to go up. Furthermore, it wants official rates, those of Cadivi and Sicad to be lower than they should be. When they launched Sicad, there were all sorts of expectations that the Government would make that exchange rate higher and instead, the Government sold the dollars lower.

But suppose the Government overcomes this, decides it does not care at what price dollars go. Well, the problem is that I don’t think they have the foreign currency to supply this new market so that it does not go up.

Let me explain…

When the Government stopped the swap market in 2010, multi-nationals had not been given any foreign currency to repatriate dividends at the official rate of exchange for three years. It has now been six. These companies have lots of Bolivars just sitting there losing value, day after day. The moment the Government creates a legal foreign exchange parallel market, these companies are going to want to go to it and buy dollars. At almost any price.

Add to that the many Venezuelans that have savings. The many companies that would see such a market as a way of reactivating their business. The arbitrage between the official rate and the parallel rate.

And what you have is a lot of pent up demand to buy dollars.

But the Government has given signals that it does not want to give dollars to the private sector. It has given signals that it does not have as much money in parallel funds as it did in 2010. To top it all off, it would be very costly for the Government to issue debt, as it did in 2009 and 2010 to sell bonds to ease off demand in the parallel market.

Thus, I believe that if the Government really created a legal parallel market, the black (now) parallel rate (then) would move up. Strongly.

And thus my skepticism…

But let’s suppose I am wrong. The Government has realized that things are getting worse. It does not mind if the rate goes up. It is willing to sell lots of dollars into the new swap market.

What will happen?

Well, let’s do the following Gedanken experiment:

Let’s assume that the conditions in 2010, prior to the shutdown of the swap market, were “equilibrium” conditions. That is, the swap market, which was roughly a free market, provided a good measure of supply and demand, in the context of the exchange controls, which kept the official rate at Bs. 4.3 per US$. All the Bolivars that did not get US$ at Bs. 4.3, went to the swap market for imports.

What would be the equivalent Gedanken “equilibirum” be today?

Well, let’s use May 1st. 2010 as the reference date for that moment. On that date, international reserves stood at US$ 28.2 billion and M2, monetary liquidity stood at Bs 238 billion, so that the “intrinsic” exchange rate stood at Bs. 8.3 per US$. That is if you compare how many Bolivars there were for each dollars in reserves, there are Bs. 8.3 per US$, fairly close to the swap exchange rate of Bs. 8 at the time the swap market was closed.

If we do the same today, international reserves sit at US$ 22.17 billion, while monetary liquidity sits at Bs. 912.9 billion, so that the same “intrinsic” value is at Bs. 41.18.

Thus, going back to our Gedanken experiment, if we think that the conditions in 2010 were those of an ideal equilibrium, with a fixed official rate of exchange at Bs. 4.3 per US$, what should be that same rate today, to make conditions in terms of M2, international reserves and the official rate of exchange identically the same to those of May 2010?

The answer is that the official rate of exchange should be today at Bs. 22 per US$! ((4.3/8)xBlack Rate)

And therein lies the problem. By holding the official rate so low, the Government has created an artificial system, in which any item that gets officials dollars is so cheap, compared the huge amount of Bolivars that have been created at a rate of 65% increase per year and the inflation rate of over 20% per year for the last three years, that everyone wants to buy it.

Thus, if the Government created this fantastic new swap market, all you can buy, and absolutely legal, it would have to devalue to Bs. 22 or near that, in order for conditions to be similar to those of 2010.

Except that things are worse:

-The Government has fewer dollars.

-Pent up demand is much higher.

-The Government could issue much less to in bonds to supply the new market

-The Government is not ready to devalue to Bs. 22, nor does it want the unmentionable parallel rate to be higher than it is.

This, my friends is why I am such a skeptic of all these announcements about the newfangled swap market.

Thus, I think the Government will set up a controlled, regulated, limited, maximum, minimum, rules, regulated “market” at a rate much lower than the current black rate, which in the end will do nothing to stop the other rate from rising. Maybe, just maybe, after this new market fails, will the Government will be ready to implement something more realistic.

And this would require both a sharp devaluation and a slow down in the growth of monetary liquidity.

Thus, I find nothing in these announcements that makes me excited.