When I visited Venezuela a bit more than four years ago, I thought it was a nation on the brink of change.
The politicians were worthless, crime and murder was rampant and inflation was sky-high. There was also no investment in anything, the economy was broken, nothing worked and popular discontent was visible. Meanwhile, buying a tank of gas cost no more than a few cents.
I was wrong. It turned out, the Venezuela of four years ago was Club Med compared to Venezuela today.
But that might change soon… and there’s one thing I’m looking out for as a trigger that could change everything.
Know how atheists love to say the events in the Bible are fake because there isn’t “evidence” they really happened?
Venezuela should be rich
In 1970, Venezuela was the richest country in Latin America. The country’s wealth came from its large oil reserves – which are twice as large as Iraq’s and almost seven times as much as those in the U.S. Venezuela also has lots of natural gas, iron ore, bauxite and gold.
But then things went horribly wrong…
Part of Venezuela’s decline stemmed from a government decision in 1976 to nationalise the country’s oil industry. Productivity and efficiency fell sharply. Foreign investors learned that Venezuela was a black hole for capital – and stayed away.
In the early 1980s, Venezuela’s politicians – concerned that the country might run out of its greatest resource – decided to limit oil production growth. Around the same time, a global oil glut pushed down oil prices.
The combination of lower oil production and lower oil prices hammered the country’s economy. From 1980 to 1990, Venezuela’s GDP per capita collapsed by 46 percent.
Things got worse in the 1990s. Although oil production picked up again, low oil prices meant that the economy deteriorated further.
Enter Mr. Chavez
In 1998, a charismatic strongman named Hugo Chavez was elected president. Chavez appealed to Venezuela’s poor by promising to rescue them from poverty and to restore the country’s pride.
Chavez had the good fortune – for himself, not for Venezuela – to take office in early 1999, within days of the price of oil hitting a bottom of US$10 per barrel. The 1999-2008 commodities boom helped send oil to US$140 per barrel… and gave Chavez’s socialist government the cash it needed to create one of the world’s most subsidised economies.
Subsidies are a powerful tool for politicians. Few people, especially in poor countries, will vote out someone who gives them free stuff. Subsidies are also economic poison.
Chavez died of cancer in March 2013. His handpicked successor, Nicolas Maduro, carried on his policies.
Subsidies create incredible economic inefficiencies and distortions. When I was there, I saw hundreds of people waiting outside state-run supermarkets that hadn’t opened for the day yet. There wasn’t much food – because nothing (distribution, business, government, the economy, the country) worked. And it’s gotten far, far worse.
Already, more than 10 million of these boxes have been deployed across the globe. They contain something so powerful, it will impact every industry and every technology for the next 100 years. And if you play your cards right, it could hand you a life-changing 1,000% profit.
Today, an incredible 90 percent of the population of Venezuela is now under the poverty line – twice what it was four years ago. So many children are malnourished and adults are going hungry that Venezuelans have coined a term for it… they call it “The Maduro Diet”.
The country’s biggest export is its people… an estimated 3 million Venezuelans have left the country (equivalent to 10 percent of the population) since 2015.
Annualised inflation in Venezuela is now running around 1 million percent. In most of the rest of the world, inflation of 15 percent (in the U.S. in the late 1970s, for example) is considered nosebleed catastrophic. The International Monetary Fund predicts that inflation could reach an impossible-to-understand 10 million percent this year and estimates that the economy will shrink by at least 18 percent.
What will doom Maduro
Through it all, Maduro has held on to power. In May, he won a new six-year term as president, in an election widely seen as a sham.
But after his inauguration in January, opposition leader and head of Congress Juan Guaidó declared himself as the interim president of Venezuela. Guaidó is recognised as the legitimate leader of the country by more than 60 countries – including the U.S.
Maduro refuses to step down. The U.S. has hit Venezuela with sanctions, and darkly hinted at military intervention. Meanwhile, Maduro has been blocking humanitarian aid from coming into Venezuela, saying that it’s veiled attempts at foreign invasion.
This story is far from over.
Investors should be wary, until…
Back in March 2017 I wrote, “even if Venezuela’s pressing political and macroeconomic problems were somehow solved tomorrow, the country still faces more structural challenges than most countries will experience over the course of a few generations.”
But despite the signs, many investors poured into the country’s sovereign bonds. As I told you in June 2017, some investors – most notably, global bank Goldman Sachs – were betting that the Venezuela government would pay bondholders back instead of importing food and medicine for its people.
So far, that’s been wrong. (Whoever bought then, and didn’t follow a reasonable stop loss is sitting on big losses.)
But in recent months, bondholders have been heartened by the potential for change. As of early February, the Bloomberg Barclays Venezuela Sovereign Bond Index, which measures the prices of Venezuela’s sovereign bonds, was up nearly 50 percent over the end of last year. It’s since fallen sharply from those levels, as shown below. And bond prices are well below the heady days of early 2017.
What will make things better?
As any contrarian will tell you the best time to get into a market is when things seem like they can’t get any worse. If things can’t get any worse, they can only get better. Unfortunately for Venezuela, things have – incredibly – only gotten worse.
What will change things? One thing: The support of Venezuela’s military. The moment that the military feels that it will be better served – looked after, cultivated, fed and supplied – with someone other than the current president, Maduro is out.
Will that be time to invest in Venezuela? If you know people and don’t mind a lawless society where the rule of law doesn’t exist, yes. For everyone else, not yet.
P.S. I travel to out-of-favour markets all over the world to figure out if they’re out of favour for good reason… or if they’re undervalued gems. Venezuela isn’t someplace I’d want to invest anytime soon. However, there’s a handful of countries that most people might think are similar to Venezuela… but they’re actually attractive investment destinations. In International Capitalist, I set out to find those countries and markets. And in the next few days, we’ll be opening up International Capitalist to new subscribers. So stay tuned.