While much of the US populace navel gaze over “he said, he said”, rear view mirror stuff with the 2016 US Presidential appointments/elections, real world carnage is taking place, in real time. Venezuela’s communist government slinky has run out of gravity and steps, falling at the feet of mother Russia. Venezuela has defaulted on $60bln of debt, officially termed “selective default” at present by the rating agencies. Russia is not sure what all the noise is about as their bi-lateral payments have been made on a full and timely basis? Ditto for China.
Caracas is 3,317 miles from Washington, versus the 4,861 miles from Moscow to Washington, DC (and much closer to key US energy assets in the Gulf of Mexico). Beijing is 11,158 miles fromWashington, for reference. Russia/China having strategic energy assets so close to the US should be a point of concern both for the current administration and for the bigger US GOM refiners. Billions of US dollars are flowing into Venezuela from Russia and China, along with a brain trust of skilled workers numbering in the thousands to ensure both execution and return bogeys are met. Russian war ships are on the way to Venezuela as we speak, a strong sign of Russia’s support for the struggling communist nation and the “financial aid” Russia has extended. Putin must have a good giggle daily at having a South American domiciled Ukraine-like foothold without an argument, let alone a public conflict with the US (for now). Back in August, Trump stated publicly that he could not rule out a military option with respect to dealing with the struggling South American nation.
Venezuela has a population of 31.6 million, about 15% less than Canada’s. Venezuela boast the largest conventional oil reserves and the second largest natural gas reserves in the Western Hemisphere. Venezuela’s non-conventional deposits are approximately equivalent to the world’s reserves of conventional oil. The majority of Venezuela’s domestic energy needs are met with hydroelectric power.
Bahrain has requested assistance from neighboring Saudi Arabia and UAE. Saudi Arabia has taken a page out of Brazil’s playbook with “Car Wash 2.0” anti-corruption crackdown. Zimbabwe overnight has seen a coup. Fun times to have the VIX in the low teems (12.6, up 9%). Sovereign EM is not the only story here as EM corporates are the ones with the more heady issuance of late, US$8bln a week at the most recently clip. IG EM US$ bonds returns have been stellar thus far in calendar 2017 with 5 nations clocking > 10% returns year to date; Uruguay, Panama, Peru, Mexico and Kazakhstan. So much room to fall from here. Not a sky is falling comment, buy many assets are priced for perfection when we have blemished prospects for continued/further levity.
Back to Venezuela, recovery rates are very hard to handicap in EM credit, especially when the key assets that would result is some recovery have been sold to Russia and China respectively. VENZ, sovereign rating “D” standing for default, (bond ticker, Benz with a V) 7% 1 December 2018 sold off 40% to trade $32/$35, (seems high given scant recovery prospects). Plenty of info in the popular press on the “deals” that have been struck between Petroleos de Venezuela (PDVSA) and Russia’s Rosneft in the run up to Maduro’s most recent restructuring announcement.
The pace of EM bond issuance will be greatly curtailed, if not ceased near term. The US$ EM bond craze we have seen evident since the GFC has seen US$3 trillion of new debt issued. Little wonder high yield ETF’s have taken a knee in recent sessions, the dry heaves are coming. Calpers most recent tactical asset allocation back into bonds from DM equity will not be soon enough or far enough down the ratings spectrum to provide an air bag for the coming head on collision.
Venezuela, for their part, have been very critical of the rating agencies, “”In the last 36 months, Venezuela has canceled, for the concept of Reimbursed Capital and Paid Interest, the amount of $ 73, 359 billion, an immediate consequence of each payment and each compliance has been the increase of country risk by rating agencies risk, which have been deeply inefficient to prevent scandalous financial setbacks in financial power centers in the United States, Europe, and Asia, but which are used as an instrument of devious action against our country: the more we have paid, even though we have always been timely in honoring our payments, risk rating agencies, following the pattern of financial blockade undertaken by the Trump Administration, makes it expensive with reports devoid of any form of rigor and veracity, the cost of our debt and intervene to hinder Venezuela in its condition of good payer and solvent country, access to external financing, common and frequent for almost all countries of the world”
Only 2 non muslims nations are included in Trump’s most recent travel ban. North Korea and Venezuela. Good luck getting plug nickel out of Venezuela near term if you are a US$ bond holder. Dalio’s call on gold, increasing his weighting significantly, seems precinct. A number of geopolitical fuses have been lit, we just don’t know which one goes boom first.
Credit wider, bond steady / curve to stabilize, equity vol to spike, global equities softer, gold firmer.
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Don’t forget, cash is an option from an asset allocation perspective.