A few weeks ago ago, the conventional wisdom was that Venezuela was the proverbial boiled frog: 17 years of mismanagement screwed the country up so gradually, we lost all ability to react. But in the last few weeks, something has shifted. The boiling frog jumped. And that change, which began after the release of the Supreme Tribunal’s rulings 155 and 156, seems to be driving the smart money into a massive regime-change bet on Venezuelan government bonds.

Let’s connect the dots to try to understand what’s going on.

A  political tsunami with zero payoff

The surprise move undertaken by the Supreme Tribunal on March 29th was intended to allow for Maduro & Co. to have the ability to sign key deals in the Oil & Gas sector. Small detail… no oil agreement ever got signed. (At least none that we know of.)

The government’s attempt to source creative financing backfired, as it looks like whoever was on the other side of the negotiating table got scared by the uproar in the international community of the move. It was just too brazen: striking an elected branch of government in such circumstances. In fact, according to opposition MP Rafael Guzmán, that was precisely the reason Japanese investment bank Nomura scrapped its alleged plans for a multi-billion repo operation with the Central Bank.

In this context, it’s easy to see why the BCV was ultimately driven to a last-resort deal with distressed investor Fintech Advisory; it was last-chance saloon for a government that shut itself out of all other options.

‘Real Money’ is once again betting on regime change

As the backlash to rulings 155 and 156 built, and fears over the government’s capacity/willingness to pay its $2.6bn worth of liabilities in April intensified, Venezuela/PDVSA dollar bonds suffered an episode of panic-selling. Soon after, they rallied massively and have held up ever since.

VENZ 2027s are the perfect bond to buy if you think the times are a-changin’.

A curious pattern has emerged amid the buying spree. It’s no longer the same-old bachaquero on Wall Street shoplifting of PDVSA 17s driving the market. No, the trend is being set by an army of European brokers and desperate NY dealers placing higher and higher bids for ‘size’ in any long-term Sovereign bond they can get their hands on.

The appetite is particularly focused on VENZ 2027s, one of the oldest bonds issued by the Republic (the only one born in La Cuarta, together with VENZ 13.625% 2018) and a magnet for long-term investors mindful of a debt restructuring scenario due to its lack of Collective Action Clauses (CAC’s).

VENZ 2027s are the perfect bond to buy if you think the times are a-changin’.

Coincidentally, every trader you talk to has said the same thing: final customers (Institutional investors and mutual funds, for the most part) are pouring money into Venezuela as the political storm is shattering the status quo at a voracious pace.

Price evolution of VENZ 9.25% 2027, April’s best performing Venezuelan bond

Uncertainty over Venezuela’s future has never been more intense, and this has led analysts to a key conclusion: the probability of a sudden regime change is increasing. The thinking seems to be that a hypothetical new government would pursue a more rational debt restructuring path, and that would increase the recovery rate on these far-off-in-the-future type bonds.

These hopes are underpinned by the intuition that anyone would do a better job of running the country than the current bunch. So any restructuring proposal brought forward —as long as it provides the much-needed fix of ending price and currency controls— could be better for long-term investors even if it leads to the short-term pain of a haircut.

The opposition is baring its teeth to the Street

The opposition’s tone has changed. It’s now drawing a clear line in the sand for international creditors. The most daring display of this new stance came a couple of weeks ago, courtesy of Julio Borges himself.

Borges went as far as claiming that the Maduro government is negotiating a gold ‘swap’ deal with Deutsche Bank, a veritable tubazo.

In an interview with Deutsche Welle, the National Assembly Chairman reiterated the opposition’s warning: any financing operation signed without the Assembly’s approval will be null and subject to repudiation by a subsequent administration.

Borges went as far as claiming that the Maduro government is negotiating a gold ‘swap’ deal with Deutsche Bank, a veritable tubazo since there’s no publicly available information about such an operation, either before or since the interview. Lastly, and more importantly, Borges sent a strongly-worded letter to John Cryan, CEO of Deutsche Bank. The money quote from the letter (emphasis added):

“I’m obliged to warn you that, by supporting the aforementioned gold swap, you would be acting in favor of a government deemed as dictatorial by the international community […] This would set a negative precedent for investment banks assisting dictatorial governments in their eagerness to stay in power”.

As you can imagine, and to a good extent thanks to the opposition’s steadfastness, potential lenders of last resort for the ruling party are now thin on the ground. This creates a vicious cycle: with the Republic and PDVSA’s illiquidity crisis going to dangerous extremes, the lenders still willing to do business with Maduro are demanding extreme conditions. Remember the Fintech repo we mentioned earlier? It implicitly priced PDVSA unsecured bonds at a 23 cents on the dollar. Not even Argentina’s haircut of 2005 (the literal textbook example of a screwed-up debt restructuring) was that harsh.

Outside VennyLand, the streets are on fire

It’s no coincidence that April’s debt service of over $2 bn. came against a backdrop of almost-daily mass protests nationwide: social unrest, episodes of looting and raucous political demonstrations. Venezuela is in the terminal phase of the deepest economic crisis since the Federal Wars. The economy, which was already a case study in populist economic collapse at the end of last year, keeps on falling apart. The IMF’s forecasts are as bleak as they’ve ever been: they gauge a 720% inflation rate for this year and 2000% in 2018, and see the unemployment rate spiking to 25% by year-end. The Central Bank’s coffers are almost bare: based on official figures, they’re down to their last 10 billion after a month of heavy PDVSA debt service payments. Imports of essentials have suffered draconian cuts, resulting in a nationwide food crisis.

Rulings 155 and 156 didn’t just trigger the protest movement, they also signaled the government’s complete detachment from Venezuela’s common folk.

Prioritizing external debt over imports of essentials can only go so far. Once they’re cut down to zero or thereabouts, the people have nothing left to lose. Ask the brave fellows of El Valle who booted out an entourage of SUVs carrying government heavyweights who tried to deliver CLAP bags shortly after the tragic incidents that took place in the borough.

Try to sense the anger running through the Valleros’ veins; how, no matter how hungry they are, the only thing they want is to shout ‘FUERAA!’ and blast their pains at the PSUV honchos that are trying (and failing) to pull off a stale patronage trick.

A lot of anecdotes of public officials getting rekt by the pueblo have joined the ranks after the infamous Villa Rosa incident of last year marked the start of the people’s change of heart. They have gotten worse: Maduro was seen seriously compromised on national TV after what was supposed to be a routine military promotion event in San Felix. These events are reminders of what having 80% of the country dead-set against you feels like. It doesn’t look pretty. Or sustainable.

The bottom line

Put it all together and it spells the end of the Bachaquero of Wall Street trade. It’s being supplanted in real time by Regime Change Bets: buying long-end VENZ bonds, a bet on a future that’s better than the past.

The Street is calculating that, as the political crisis escalates, so do the costs of maintaining the status quo and the potential benefits of changing it. The precise timing of a government transition is complicated, but the feeling is that key events shape the course of the political process.

Maduro’s latest attempt to cling on to power via a hard reset of the game is one of those key junctures that will define history. It might be just another salesman pitch to keep shoving Venny bonds into the accounts of overseas pension funds, but it makes sense in the grand scheme of things. As market watchers like to say, sometimes “price leads fundamentals.”

So is the current rally in Venny bonds a sign of the impending resolution of our all-encompassing crisis? Or is it the ultimate ‘bull trap’, luring the credulous into a doomed long-term play? Time alone will tell.

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  1. “no oil agreement ever got signed.”

    Well, I don’t know but I saw a Linkedin ad a few days (shame I didn’t take a screeshot) of a Rosneft HR persona looking for engineers to hire and relocate in the West region (Venezuela).

        • well rosneft has had a presence in western vzla for a long time, I know this for a fact. That linkedin notification does not mean that the oil deal was done

      • You can spend years upon years doing preparatory work but not committing any real money to an announced investment, that way they dont contradict the govt publicity but dont do anything that actually puts their money at risk ….Rosnef is I believe not as bothered by the threatened illegality of their transactions as the Chinese or other oil companies , not indifferent either , they generally see Pdvsa as dragging their feet all the time and not taking the hard decisions where they put in the money they have to put to get things started …….!! Pdvsa decisions take a long long time and are usually inconclusive….!!

        • 4 companies have been looking for talent for at least 6 months to move to Vz to begin drilling anew, but no agreement with pdvsa on production off take to pay for investment, so nothing happening.. just more background noise, more last minute scamming. More talent leaving looking for asylum, no one wants to return. Nothing of importance will happen before a government change.. and even then plan on longterm $50 price.

    • Halliburton was in a hiring spree too 4 months ago and no agreement got signed.

      So, be careful on what you base your claims. Oil companies use hiring sprees remarkably more than average firms.

  2. i am having trouble following your analysis, you say that investors buying very long on venny is a sign that they are hoping a new govt will be more adequate. However, you preoviously said that Borges has threatened to shed all unrecognized debt by the AN (which i think those bonds include?). Additionally, by buying those bonds arent they just decreasing the chance of a govt ouster by providing fresh cash?

    • Diego they’re buying bonds in the secondary market (not from Venezuela, they were issued a long time ago).

      The bonds that are being targeted by these buyers do not have Collective Action Clauses (CACs), a feature in sovereign bonds that emerged post-Argentina’s 2001 default that allows a supermajority of creditors voting in favor of a debt restructuring to cram down a deal on all creditors.

      Because these bonds lack CACs, they could receive more favorable treatment in a debt restructuring as bondholders would not be threatened by a cram down, and could hold out for a better deal.

    • Hey, don’t panic! We are all having the same trouble trying to make sense of what’s going on in the Venny market.

      The threats by Julio Borges regarding external debt are tricky to grasp. They could mean just a repudiation of NEW debts on basis of legality (they don’t have parliamentary approval). But they can as well mean a repudiation of an even bigger amount of debt that was incurred by the government administration, on the basis of ‘odious debt’ (a very interesting concept on which I have a lot to read about).

      However, on the basis of price action alone, I’d say the market is pretty confident the repudiation will only touch the most recent debts, starting on Jan 1st 2017. No certainties here though!

      PS: These are all secondary market transactions with no direct impact on the government’s liquidity position (other than the transactions done by govt entities themselves).

  3. Análisis en general acertado pero probablemente demasiado optimista. En @ReporteYa solo he visto pequeños grupos aislados de personas protestando, cuarenta o cincuenta en el mejor de los casos. Si no hay organización, dirección o mejores ideas que dar trancazos o cacerolear será difícil que esto llegue a alguna parte.

  4. I’m too dumb to understand the games played in Wall Street, but I think we are clearly getting to a different kind of evaluation of the economical proposals of the goverment: namely, people like the ones in El Valle or in San Felix have re-evaluated the “stale patronage trick” deal on offer by the goverment and decided it is not worth it anymore. The sweet spot of how much food security in the midst of hunger could you buy by being a “jalabolas” psycophant (enthusiastically or just resigned if you wanted to eat) has moved, and it is clear now that there is no amount of sucking it up that will give you any hope of not being desperately hungry. Literally, there is nothing to lose, the “bozal de arepa” days are over, so why dont just let your anger and despair show? Is not like you are losing anything anymore. What are they going to do, not give you the miserable CLAP bag that does not cover your needs at all? Do you even think next month that is going not to improve, but just to keep in the same levels?

    If that calculus of hunger vs self-respect ever gets to the same numbers with the Armed Forces, they are done. But so far for them sucking it up to the regime is still a win position in terms on ensuring that in the desperate times ahead, if there is 1 k of harina pan it is going to be yours if you have an uniform. If they are going to have the stomach to ensure the rest of the population doesnt gets any as long as they do, thats another question.

  5. Fact is, Socialisom was always a faux government whose patronage, corruption, ineptitude and disruptive power was only sustained from petro dollars. While at first the whole Chavista shebang was a political and social wake up call long overdue, the hatred was so high that instead of pulling up the bottom via foundations and institutions, they pulled down the top and tossed a few fish, so to speak, to the gente, never bothering to teach them how to fish, while closing down all the fish markets in the process, and pillaging most of the fillets for personal consumption. Such a wonky regime was only possible while the money lasted, since over the long haul, there is nothing but money to sustain it. Now the liquidity is shot and anyone caught cashing out the last gold bricks will be seen as profiteers supporting dictators, basically ruling out Western banks.

    Maduro could keep muddling along for years, since he has or had the fealty of the military and security forces, who were all along for the ride. But once the money is actually gone – and the day seems fast approaching – Maduro is done. His government has always maintained absolute control over the purse, and because he has been so liberal in allocating monies to the military et al, he was allowed to continue as a figurehead. But once that purse is empty, what real purpose will her serve. With no money to buy favors and loyalty, no resources to sustain his patronage, and no sane financial strategy whatsoever, he will have to go.

    The question is, how much money is still left and how soon will the shelves be entirely bare. No way the military is eating out of trans cans.

  6. I have a question.
    Lets do a thought experiment: We suppose, the Government actually cares about constitution, law, due process and counter revolucionary stuff like that.

    Can the Government close a gold swap deal with Deutsche Bank without being backed by a mayority in Asamblea Nacional on that matter?

      • even shadier? Olvidate! Casi me hayan contratado para contribuir a su proyecto de ebanking. De marinero, no de capitán. Aplazamiento y estoy en otro ahora.

        I meant from the perspective of the Government. I think they need parliamentary approval for new debt, but I am not sure.

  7. It seems to me that the longer part of the curve is a win/win scenario. ~20% cash yields can amortize the cost of any of the longer dated bonds relatively quickly (i.e. buying a bond at say 45% and holding for 1 year at a 9% interest rate means that after 1 year the adjusted cost would have gone down to ~35% which is already close to avg. recovery rates of corporates). Opposition going in and restructuring debt with haircuts of say 30-40% would still leave those who bought bonds at current prices at a profit….Win/win….Of course you can always go and buy German debt at negative rates, or el Salvador’s debt (until it blows up like it did).

    Scenarios where win/win may not apply:

    1) Venezuela goes the Libya/Egypt/Ukraine route. A very possible thing given lack of clear road map from both opposition and government

    2) Messy restructuring with recovery rates below ~30-35% – highly unlikely given large amount of oil reserves in the country. Recovery rates below 30-35% would imply that oil reserves in the Faja are worth zero, which we know is not true regardless of fracking, etc. Also important to remember that PDVSA still owns equity stakes in the 50-60% range in numerous faja JV’s (Petropiar, Petrocarabobo, etc…) but it doesn’t have the money to fund that equity. Therefore, in a restructuring scenario, it has a lot of potential to raise fresh capital by selling part of their equity stakes in various JV’s. I believe they still need to retain 51% as per the law so they can’t go below that.

    Of course that some people might not agree with the above reasoning purely as a result of behavioral factors; it’s too difficult for them to assess the situation objectively in the current political landscape. Somehow it feels like it is 2001-2002 all over again (with an obvious increase in repression). Buy on the sound of cannons, sell on the sound of trumpets…

    No end in sight, at least in my view.

    • I think the end is becoming visible, but I also think your win-win scenario is reasonable, if one wants to speculate.

      • NET. I see your point, however, wouldn’t you have thought that the end was also visible in 2001, 2002, 2014 and many other occasions? In hindsight everyone now is going to think: “of course not, the end was not near back then because this and that had not happened”. But I have heard the end is near stories for many years in a row (7+ now). Those who followed them, left significant amount of money on the table (because the returns are were so high, being wrong meant missing very good upside; so far it has been an asymmetrical return profile). Can it continue? We don’t know. Were we ever 100% certain it would continue? No.

        This fits in very well with behavioral finance and how investors behave in crisis times. It’s typically the same in all those occasions. When people need to buy in, their emotions stop them due to behavioral reasons (all of which are explained very well in numerous books about the topic written mostly by non-orthodox economists, academics and analysts, for example James Montier, Robert Shiller).

        • In 2002 the end should have occurred, but the Oppo needlessly blew it. In 2014, the Oppo blew it again by allowing the stolen Presidential election, but did avoid bloodshed. This time around, the Oppo has a unified/correct path/procedure, the general population is hurting too much, the Govt. money is running low/out with no probable oil price bailout, and, almost more importantly, neither South American neighbors nor the U. S. (especially under Trump) want a Cuba II on the continent. You have been right, however, against my/others’ opinions on your Venny bond speculations over the past several years.

          • NET. I concur with you regarding current conditions except for procedure…This I believe is not present. And that is concerning because that is what would mark the difference between a good transition and a failed one (think Egypt, Ukraine…). Picture a group of creditors, or a multilateral entity trying to negotiate with someone in Vennezuela. In practice, who do they pick up the phone and call? Borges? Allup? Guevera? Tintori? Guerra? Capriles? Diosdado? Maduro? It is quite a messy situation and each of the above want some variation of a plan, or multiple things at the same time and therefore the end message to the international community is not very clear and lacks substance, and more importantly, credibility…

          • The how isn’t evident, except the traditional has been a real civico-militar transition, this case to real democracy, where lines of authority are clear, which will take some time. Failure of a transition to real democracy is a low-probability scenario, as discussed. An IMF huge backing loan is a necessity, and will give credibility. The wild card is Chavista/Castroite insurgency/uncertainty plaguing the new democratic government. .

  8. OIl reserves in themselves are worthless , they are worth something only as part of a business which involves the effort time and cost of getting it produced and transported and refined , processed or in any other way made saleable to a market at a price which can vary in time but which will in the ordinary course allow a company to make a profit comparable at least to what it might obtain from exploiting other oil reserves located elsewhere in the world. Where the cost time effort of producing transporting etc the oil in that reserve is high and the likely comparable profit to be obtained by selling it at prevailing prices is low or subject to high risk then the reserves can be worth almost nothing …..to put it sucintly one bl of reserves in Venezuela may be worth much less than a bl of reserves in Alaska or the USGC or in Iraq depending on those costs and risks and the kind of oil which is to be found in each location.

    Most of Venezuelan oil is made up of extra heavy crude which is one of the most costly and difficult to produce upgrade and put in saleable condition, its price is among the lowest, specially in a market in which prices seem either stagnant or subject to fall, where oversupply is the prevalent scenario for a long time to come …..the transactional costs of working in Venezuelas chaotic disorganized very challenging enviroment add costs and difificulty to its extraction and sale …..the fact that the country is facing specially risky circumstances and is governed so badly adds to the cost and risks of any investment , all of which points towards Venezuelan reserves being assesed at a very low value……!!

    If we were governed by a more rational govt and Pdvsa were a better run company that would improve the value of the reserves because that would make the costs more manageable and predictable and the likelyhood of a higher profit from the sale of such oil more reliable…..but thats not the case …..!!

    I too some time ago had the idea that oil reserves could be worth a lot , then I saw an actual exercise where a professional group did the assesment on the value of certain reserves using the most up to date methods , the results were dissapointing ……..if you factor in all the cost market contingent elements the reserves were determined to be worth only a fraction of the total required investment ……

    Knowing now of Vennys high professional credentials I dare suggest he take a good hard look at how reserves are actually assesed to be worth by a true professional team ………I suspect he is in for a surprise …..!!

    • Compounding VZ’s petroleum woes is the fact that OPEC is letting VZ take the hit for production reduction. OPEC wants to reduce supply to raise the price of oil. But no member wants to take the hit on their revenue stream. Thanks for VZ’s incompetence, they are taking the reduction on behalf of OPEC. KSA and the Gulf States get to pump the same volume of oil and sell it at higher prices thanks for the fact that VZ’s can’t get their pumping, refinement, and transport equipment to work any more.

  9. Bill, it’s all relative you see.

    You write about the chaotic and disorganized environment of Venezuela, as if Libya, Iraq and a quite a few of the other oil-producing nations were Switzerland. In fact, Venezuela is much less unstable than various other oil-producing countries and has more productive capacity. Libya is quite a problematic country to operate in just for a mere 700k barrels. Whereas the potential in Venezuela is much larger.

    The key word here is potential. You mention the poor valuation of reserves. I think you are overly pessimistic, even if you value each barrel at say 15 dollars, you would have plenty of upside potential and more than enough money to pay for debt. I don’t need to do a lot of complex calculations and valuations, just simple math. It’s the law of large numbers (i.e. quite a lot of oil barrels, even if you’d slashed estimates by half, multiplied by 10-15 dollars per barrel gives you a significant amount of money). The other key point here is: how much of that oil can you extract before it’s worthless? Well quite a lot of companies seem to be betting on that at the moment, not just Chinese and Russian ones but also Indian and American (Chevron, for instance) so I suspect there is still some potential or else they would have backtracked (like many did in Brazil’s offshore drilling projects, for example). In addition the actual production in some of the faja JV’s has increased, not declined, which actually tells you that those are going well (these are real facts, not speculative figures or forecasts). Perhaps they haven’t achieved the crazy production levels that Ramirez estimated a few years ago, but those forecasts were already revised to more down to earth figures. Of course the overall production has declined, because the fields in Maracaibo etc. are producing less, which means that net net, the production is falling. But it also makes sense that Maracaibo fields produce less in the long run because they are more mature. So, where are you going to focus your efforts to increase your production, in Maracaibo or in the Faja? Yes, the oil there is heavy, expensive, needs to be mixed with lighter oil etc. etc. but it’s what it is. You can’t just sit back and say well let’s not monetise this because it’s heavy and expensive…When life gives you lemons, you make lemonade.

    And again, let’s consider the entire spectrum of quasi-sovereign oil co’s: Petrobras (stuck in corruption scandal, debt at least double the size of PDVSA’s, producing close to 2mm barrels a large portion of which needs to be sold in internally and in local currency), Pemex (a company that not long ago had 16 quarters in a row of losses – not sure if they turned a profit, I stopped counting – significant levels of debt and at some point negative equity (!), etc. All of a suddent PDVSA doesn’t look too bad, with ~$40bn. trading at half the value. So all this bla bla for $25bn.?? Just that?

    Now of course, if 30mm people want to live off of PDVSA, that is a different story and is currently not sustainable. PDVSA on its own, is a profitable company. And before the company pays dividend to the state to finance all their crazy expenditure (which is not fixed nor mandatory), it needs to pay down debt.Those revenues need to be generated somehow. No debt payment, potentially no revenue which leaves the state with potentially zero dividends.

    I don’t have such high professional credentials 🙂 I am just trying to get by!

  10. Some time a go I saw not a back of an envelope calculation but an actual professional calculation of the kind that oil companies do when they want to asses how much to pay for specifically located oil reserves , and the way they go about it (using lots of sophisticated programming and detailed data) is that they figure how much it takes to make those reserves into a reasonably profitable investment , the field in question was no different from an Orinoco field and the results were that once you take away the investments costs and opex and other transactional costs what was left was very meagre indeed. This is never publicized , dont want to embarrass the owner but the reality of the matter is that finance guys ( who live in a world of their own) usually overrate what those reserves are worth because they understimate the costs difficulties and haphzards of monetizing them in the real world…!! Of course if youre talking about the Faja of course there is a lot if variation between the conditions of each field , the best of course are those which are already been exploited ( cerro negro) but once you go to hamaca and even further west the attractiveness of the prospects become worse . Pdvsa is not only bad in what it does but also in preventing other much better run companies from doing their job in a rational way , they for example forget to pay what money is owed their partners from their share in the ventures or assumme the task of buying supplies and equipment but then do such a terrible job that it has to be handed back to their partner……… Someone mentioned to me (from hearing it personally from Chinese operators) how unhappy they are at working in Venezuela and how much easier and profitable it is to work in places like Irak , sound funny doenst it , but this is something they say openly when within their own circle of oil people . You know something about oil companies is that they dont necessarily make a public break with a project , they keep posponing the basic investments for as long as they can meantime whichever competitor might come in if they leave the project is blocked from entering the project (just in case they might find a way of making the project work) , its always in the books but its never developed …..!!

    If you are who I think you are , you should be a very knowledgeable financial expert , but I ve seen those before and unfortunately their grasp of oil business realities is often below standard ……, the fact that some faja fields have increased production is no sign that they have become more profitable , only that some debottlenecking has allowed a somewhat better operation ….higher production may not be a sign of higher profits , but of the desperation of producing as the income needed so as not to go under….!!

    I do wish you well in those other activities you engage in which fall outside the venny bond business …..we need all the help we can get…!!

    • Bill, I really couldn’t care less about complex calculations and forecasting models with detailed data. I follow Nassim Taleb’s philosophy: I run away from complex models. For further reference:


      I don’t consider myself a typical “finance guy”. You are probably not who you think I am. I am not recognised nor I am a famous financial expert. I don’t write articles nor I write papers, etc. I am actually not an economist (I graduated from business in 2007). I just have the benefit that I started investing at a very young age (15?) and I lived through several bubbles and crisis (including dot.com crash, Russian default and sub-prime) whilst being invested. That is the best type of knowledge you can get, acquiring empirical knowledge through skin in the game. That is worth more than the pseudo-science applied by a bunch of economists who write articles and papers forecasting anything; economists, analysts and pseudo-scientists that suffer no financial or career consequences when being caught and proved wrong (again, Taleb philosophy…), and who consequently, do not learn from their mistakes (they don’t need to because they don’t have skin in the game).

      I do take your point about higher production not being a sign of higher profits. You are correct. Only time will tell and we will see if they will be able to stay in business or not.

      And I thank for your wishes even though you are not who you think I am!

  11. This is the same market that betted heavily on sub-prime mortgages in 2008 and got its ass handed back to it in the form of the Great Recession. So I wouldn’t bet on any deep-thought analytics here, just the trap of a very low price on one side and very large headlines on the other. But the real-world fundamentals remain on the government side, regrettably.

    • I completely disagree with this extrapolation, some of the reasons for this are explained in “The Big Short”.

      • Well, a very clear case of over-simplification of the world from our buddy Tomas.

        Not really sure where to start but I can easily point several flaws in his analogy: sub-prime mortgages bets are not akin to Venz/PDVSA for the simple fact that the latter are not popular in the media as investments (in fact we have often heard stories depicting how people lost money, like that of retiree Bill Ross, the guy in Queens), are not popular with economists, no one is constantly pushing the purchase of these securities but they what they are actually pushing is the purchase of CDS to protect against the default of such securities, there isn’t an entire infrastructure set up around it (meaning the mortgage system, the banking system, the housing market and all the incentives attached to it which led people to pile on sub-prime mortgages), there is no securitisation or “risk re-engineering” (for the lack of a better word), there is no low probability of losses (as we know, anal-ists have been talking about 70-90% probabilities of default of the country & co for a few years in a row now), they are not systemically important, etc. etc…

        Tomas, next time you want to make an analogy, try harder.

        • Mea culpa, mea maxima culpa VT and thanks for the schooling. The point that I (badly) tried to make was regarding this particular piece of the post:

          “‘Real Money’ is once again betting on regime change”…

          … as I believe that bets against the current Venezuelan administration are at best premature and at worst misinformed. The “real-world” fundamentals that I was speaking about are the control of the State machinery of repression and, precisely, the skin in the game that Maduro’s posse faces as they are more than likely to end up in jail or worse if push comes to shove. So they are much more likely to remain monolithic and in power as they have worked for decades to secure that control. And governments can make their people suffer a lot more for a lot longer than what our people are suffering now, just look at Cuba, North Korea, Libya, etc…

          • Tomas, understood what you meant to write initially. It was not easy to understand that you were referring to real money betting on a change. In any case, I really think is not the case. Real money are typically very boring and risk averse investors (true real money are pension funds, insurers, foundations and some asset managers). Perhaps the only ones that are more or less active in Venz/PDVSA are asset managers, but not on a large scale. Remember that these bonds have been labelled the most risky in the entire market for years now etc. Real money portfolio managers rather not take too much risk as to not lose their jobs if their bets go wrong (no one is going to get fired by buying S&P 500 index products and the index crashing, but they would certainly get fired by buying Venezuela and it defaulting). Moreover, they don’t get paid too much if they perform well. Now if you look at hedge funds, it is a different story, as they do take the risks because they have incentive mechanisms to benefit if the overperform. But, also, if they don’t do well, then they don’t get paid and many times are fired and/or end up in liquidation with no bailout from the state. Only once was a fund bailed out by the state (Long-Term Capital Management), and of course that was the fund managed by “geniuses” and Nobel prize winners with their fancy models….

  12. I am all for believing in the value of expertise (knowledge gained through long practice and experience) over that purportedly gained thru abstract theorizing. In fact Nassim Taleb is one of my favourite reads because he appreciates the weight that fortuitous factors can have in determining how things turn out , one big thinker we should all learn from . Still companies who have for decades succesfully dedicated themselves to investing large amounts of money in the pursuit of profit in time find ways of distilling their very ample accumulated expertise into analytic tools that help them get a better grasp of things , this is the situation of quite a few international oil companies who have a lot of their skin invested if they pay too much for oil reserves they mean to monetize . improvised back of the seat methods have their value but also a rate of failure which can be forbidingly high for certain type of experienced investors…….!!

    The US is now planning to become a net oil exporter to the tune of 1 million B/D, the impact of that and other similar events taking place in the oil market are bound to have a big dampening effect on how high oil prices will go in the future bringing down the value of any oil reserves of extra heavy crude to be found in Venezuela and other places , the prospect is far from rosy , more so when there is likely a lot of room for using a sharper pencil in calculating the size of those reserves taking account of the over generous recovery factors which the regime has used to tally their volume ….Gustavo Coronel has an interesting opinion on the subject ……!! . Of course you must be as aware as I am of what people who have partnered with Pdvsa in various joint ventures actually think of its capacities and weaknesses…..and the extreme difficulty of working rationally with such managerially vandalized organization. I could fill a whole book with stories of how hey have again and again incurred in the most terrible mistakes and moreover of how they are very unreliable in what they inform the public and even their most trusted advisors….

    There is a veil of ignorance (not Rawls) which is conventionally used to maintain confidential the identity of those that write in these blogs, Im all for respecting such rule , but I have an inkling about who you are which may be wrong but which also may be right ………and which I will not dwell upon out of respect for those conventions…., no need to get flustered about it ….!!

    In any event and in all good faith ( whether it be deserved or not) I would advise you to exercise great caution in puting your trust in the salvific value of venezuelas oil reserves to ensure that venezuelan creditors will not be too ill treated when the time comes to square Venezuelas many obligations and its capacity to pay for them …..!!

    • I wasn’t flustering…Just puzzled really (as in previous occasions you labeled me a troll, called me Francisco Rodriguez, etc.). In any case, I realised I made a mistake in my previous post: I meant to write: I am not who you think I am, as opposed to: you are not who you think I am… Typing too fast…But I believe you realised this mistake.

      I understand all the pressure coming from the supply side. Yet, I believe that oil will still remain in demand for the next 20 years because not everyone will be able to afford changing their entire infrastructure which relies on fossil fuels for renewables, etc…For instance, countries like Russia, China and India can’t afford rolling out country-wide infrastructure to switch to renewables as easy as people think. Hence, they will keep demanding oil, and hence why they act the way they do (entering into deals with Venezuela but also with other Latin American and African countries to secure supply in the long run).

      Good to know that you are also a fellow Taleb reader…

  13. I’m trying to organize venezuelans abroad to boycott corporations/individuals that have/are/may be supporting the regime indirectly (see Deutsche Bank example referred earlier). Could anyone help me collect a list of companies that fit this criteria? Let me know also if you want to help. Thanks!


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