Latest Blog: Fireside Reading - 12/15/2020
Investment Insights are written by Angeles' CIO Michael Rosen
Michael has more than 30 years experience as an institutional portfolio manager, investment strategist, trader and academic.
BEWARE PARABOLAS AND POPULISTSPublished: 06-13-2017
In scouring the world for investment opportunities, the chart above caught my attention. It shows the year-to-date performance of the Caracas stock exchange, more than tripling from around 30,000 to over 100,000 today. Did we miss a chance to make a lot of money?
Well, no. The stock market has tripled because the currency has lost all value. The official USD exchange rate of the bolivar is 10:1; 10 bolivares buys 1 US dollar. But the official exchange rate is a fantasy: the actual exchange rate is 7,500:1 (see graph below from www.venezuelaecon.com). That’s a 75,000 percent depreciation from the official rate. So, in US dollar terms, the +200% rise in the stock market reflects only a re-pricing of the local currency.
The currency has lost its value because inflation is around 800% (to be fair, the latest number shows a decline to 750%—see graph below). The economy is also contracting at around 20% per year, as there may now be more protesters than workers (see photo).
Of course, the real reason for Venezuela’s economic, political and social collapse is the disastrous populists policies of its long-time dictator, Hugo Chavez, who chose to loot the vast oil revenue to enrich himself and help the poor by imposing controls on prices and capital flows and by a massive expansion of government spending and control of the economy. The effect was to debase the currency, gut the economy and spur hyperinflation. His less charismatic successor, Nicolas Maduro, has continued these equally imbecilic policies, but rising opposition to the lack of food and electricity (the temerity!) has led him to suspend the legislature, overthrow the courts, and send the army to attack civilian protesters.
Venezuela is an especially sad case because of how far it has fallen. When I was young, Venezuela was a relatively wealthy, highly cultured and well-educated society. Even now, it has the largest proven oil reserves in the world. But in the 1980s, the price of oil plummeted and Venezuela’s economy was squeezed. It borrowed heavily, but failed to invest wisely, and ended up defaulting in the early 1990s. Chavez attempted a coup in 1992, failed to gain support, but became the voice of opposition, and was eventually elected in 1998 as a left-wing populist. He ruled as a dictator till he died of cancer in 2013.
This pattern is all too familiar: a once-wealthy country faces a severe economic crisis that establishment political parties cannot re-mediate, creating political division and polarization, leading to the ascent, by coup or ballot, of a populist promising to “drain the swamp,” in current political usage. As Chavez said in 2002: “We must confront the privileged elite who have destroyed a large part of the world.”
With populists, the “privileged elite” may or may not be destroyed; at best, they may be replaced by a different group of privileged elite. But what is destroyed is the economy, rule of law, political discourse and, most importantly, civil society. Venezuela is in its death throes of its own making, and we don’t yet know how much more violence and repression will be inflicted on its citizens. With the rise of populists around the world (see my talk on this last year: http://blog.angelesadvisors.com/multipolarity-presentation-by-michael-rosen-at-the-2017-angeles-investment-advisors-foundation-symposium/), Venezuela is a warning to all of the dangers that lurk.PRINT THIS ARTICLE
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