Venezuela: Coming to you live from the world of toldyaso...

.....here's today's story about how Chávez "tones down rhetoric" and the parallel forex and bonds "jump". Of course, this rebound has nothing to do with the way the whole financial community tried its hardest to instill panic in all things Venezuelan, scare the crap out of people and rob them of their money, is it?

Compare what IKN said yesterday.....

Chávez isn't good at economics...we've been here before and seen how he's made these noises and backed off and made the noises and backed off again. This time won't be much different, as at some point in the next couple of days his financial peeps will quietly explain things to him and then the subject gets dropped...again.

...to the message today:

Dec. 4 (Bloomberg) -- Venezuela’s bolivar rose, rebounding from a 9 percent plunge yesterday, and the country’s dollar bonds gained after President Hugo Chavez toned down threats to nationalize the banking sector.

The bolivar gained 1.7 percent in the unregulated market to 6 per dollar at 11:14 a.m. in New York, from 6.1 yesterday, traders said. The yield on Venezuela’s 9.25 percent bonds due in 2027 dropped 39 basis points, or 0.39 percentage point, to 14.29 percent, according to JPMorgan Chase & Co. The bond’s price rose 1.75 cents on the dollar to 67.75 cents after yada yada continues here

Seriously, these Venezuelan wolves in sheep's clothing con artists need to......

Meanwhile in Venezuela....

...Chávez proves he's a dumbass about economics and plays straight into the hands of the bankers. Once again, the variation on "I'm going to nationalize the banks" comes from Chávez, and once again all the financial community jumps on it hard to stoke up as much panic as possible. I mean, why should it be that the only time people take a Goldman Sachs analyst at face value is when he's saying something like....

“We should take his (Chavez's) statements at face value,” Goldman Sachs Group Inc.’s Alberto Ramos said. “It’s one of the key sectors of the economy that the government hasn’t yet taken substantial control of.”

...even though anyone qualified enough to work at the vampire squid knows that Venezuela can't possibly nationalize its banking system. For one thing, who's going to buy its debt afterwards?

Now for sure he might like to nationalize the banks, but Chávez isn't good at economics...we've been here before and seen how he's made these noises and backed off and made the noises and backed off again. This time won't be much different, as at some point in the next couple of days his financial peeps will quietly explain things to him and then the subject gets dropped...again. But until then, the bankytypes will milk this for all it's worth. We can see that today, as the bid/ask spread for the Bolivar Fuerte parallel rate moves from 0.2 difference to 0.4.

Thus Chávez, seeking to limit the financial speculation and profit margins of the Venezuelan banks (one of the most profitable banking sectors in the world, by the way) only manages to screw his people and add more % margin to the bankers' back pockets. He should stick to talking about the misiones, frankly.

Venezuela parallel exchange rate update

With the last few weeks seeing the Bolivar Fuerte (VEF/USD) parallel, or permuta, rate levelling out and trading in quite a tight band (typically between 5.3 and 5.5 to the dollar), I thought this update could take in the longer view chart. So here it is.

(click to enlarge)

Plenty of room to speculate the currency on the streets of Caracas...that must be why there are so many rich middle class that complain about a system that lets them.......hold on....something wrong there.....

Back to today, and with BCV currency reserves at U$33.644Bn and VEF liquidity (M2) at VEF227.13Bn as per the latest bank figures, this gives an exchange equilibrium theoretical of 6.75VEF for every dollar held by the BCV. Or put simply, the BCV head honchos can jawbone and bullshit all they like, cos if they don't stop printing VEF hand over fist the parallel rate will never drop to the pie-in-the-sky 3.6/1 exchange they're targetting.

Guarapitas served. The end.

Venezuela parallel rate update

Here's the chart:

The latest from Hugolandia's finance scene is the Central Bank's honcho Merentes, who says that the country is committed to a stronger parallel exchange rate and is aiming for that previously announced 60% breach between the official Bolivar Fuerte (VEF) forex of 2.15 against the dollar and the permuta rate (which would mean it exchanges at 3.40 or so against the USD, not the current 5.30 to 5.50).

This is, of course, bullshit pie-in-the-sky and he knows it (if he doesn't WTF is he doing as head of a Central Bank?), so his speechifying can only be put down to either jawboning or LSD tablets. Just check the number of VEFs in circulation right now, compare it against currency reserves, do the math we've done here on many occasions previously and you'll see that a parallel rate under 4.5 is about as likely as Eva Golinger admitting she was wrong about Michael Moore.

The VEF got to 5 recently on the back of a very popular bond emission and then a slightly-less-popular-but-still-worked-fine bond emission. The fate of the VEF parallel rate is tied directly to the number of dollars in the country compared to the number of VEF...it really is that simple in the long run. Jawboning about super secret cunning plans to come is all well and good, but it won't ever move the market permanently. So here's what you have to remember:

Vz Govt issues dollar bonds = people buy dollar bonds with VEF = less VEF in circulation in country = stronger exchange rate.

VZ Govt doesn't issue dollar bonds = more VEF in the country = weaker exchange rate.

The rest is noise.

Quiztime! Which South American currency has strengthened by 29.3% against the dollar since August?

Here's a clue.

Watching dumbasses make fools of themselves over all things LatAm financial is my guilty pleasure, of course, but it comes triplesweet to read the stupidity written about the VEF in the last few weeks.

Stick to your myopic mumblings on inflation next time.

Understanding Venezuela financial experts

So Venezuela is selling U$3Bn in dollar bonds, most probably this week, to its local market.

Here's what local experts are saying:

The bolivar will likely extend its rebound in the parallel market in the run-up to the $3 billion offering, said Russell Dallen, head trader at Caracas Capital Markets at BBO Financial Services Inc. The rally may stall after the sale, he said.

“Once the new issue comes to market -- unless the government has some other ongoing plan up their sleeve to shore up the rate -- all bets are off and we would expect to see the bolivar return to its consistent path of devaluation and continued deterioration,” Dallen said.

And this is what it means.

"It's not fair! Thye're not playing by the rules! The VEF should have been at 10 by now, but don't worry, fee paying clients, we're still right even when we're wrong."

Otto sez: When you own machinery that produces 3.2 million barrels of oil a day, those barrels of oil cost $6 each to produce and you sell 3/4 of them overseas for over $60, you don't follow rules. You make them.

The Venezuelan Currency and this week's coveted award

Here's the chart:

And thusly, this week's coveted award goes to all the prophets of doom that predicted 10:1 for the VEF vs the greenback. All those financial dumbasses that used the word "Zimbabwe" to explain what was about to happen to Venezuela. You are so pwned, dudes, all you have left is, "Yes b-b-b-b-b-but he's not doing it properly, is he?", the financier's equivalent of foot-stomping and pouting. So just do us all a favor and...

You may be wondering why the financial media haven't mentioned Venezuela's parallel currency rate recently.

The reason is that the Bolivar Fuerte (VEF) has appreciated by over 10% versus the dollar since the beginning of August.

As Insipid Bridges said on July 8th "Any further weakening of the Bolivar will mean problems for Chavez", so as the VEF has strengthened since then (from 6.6 to 6.22 vs the greenback), it therefore follows that this must be good news.

Therefore it isn't reported.

Mojitos served, the end.

Venezuela Parallel Exchange Rate Update

Here we go with the latest in this semi-regular series.

First the main chart, that of the VEF/USD parallel (permuta) exchange rate...

...and as things stand, you need VEF6.49 to buy a dollar on the streets of Caracas today. The recent news has been that Chávez&Co is now studying a new multibanded exchange rate system to take pressure off the official 2.15-to-1 fixed rate. Or put into simple English, as this blog predicted Venezuela is in the process of a currency devaluation. We also predicted that the deval wouldn't happen in the first half of the year, but run the risk of getting Argentines shouting "¿Che, no tenés abuela?"* if we start preening too much.

Anyway, back to the subject in hand. The driving force of the weakness in the VEF (as we've explained many a time) isn't inflation. The cause of inflation is the problem, and that's a monetary thing known as M2, which measures the amount of currency in circulation inside the country. Here's how M2 stands right now..

..with the VEF equivalent of U$101.79Bn sloshing round inside Venezuela. This amount of money is up from under U$90Bn (equivalent) at the beginning of April and explains why Venezuela's inflation rate stays stubbornly in the high 20s to 30% range. Put in the most basic terms, if you add 30% more money to a country there are 30% more pieces of folding paper trying to buy the same amount of goods, which means you'll find you're using 30% more of those folding pieces of paper to buy that thing you want to buy. Just good ol' fashioned supply and demand stuff, ask Adam Smith.

However, the Central Bank keeps a store of wealth that backs up the money in circulation. Called International Currency Reserves, it provides backbone to the fiat system. So if we look at the amount of reserves in Venezuela right now....


....we see they've tucked away U$31.45Bn. This means (and the calculation is pretty straightforward), for every single dollar the Central Bank keeps in reserve, there are 6.96VEF circulating in the country. This gives us our theoretical equilibrium point for the VEF/USD exchange rate.

So right now the rate is lower than the theoretical rate by about half a Bolivar Fuerte. This indicates that the financial brains out there in Venezuela expect good things from the government and its plans to tame the permuta. What IKN can say right now is that if the Vz gov't does devalue (or stealth devalue by adding different exchange bands...it's the same thing, really) the parallel rate will drop further as people see arbitrage value in buying dollars at a lower price and selling them higher. However if the Vz Econ team make a SNAFU of plans and the new devaluation system brings no extra flexibility to the exchange rate, the VEF parallel rate will certainly float back up to 7:1 and probably go higher still.

DYODD.

*"Hey, don't you have a grandmother?", an expression that says " grandmothers kiss you and love you, but it seems like you have to love yourself, so presumably you don't have a grandmother to do all that for you"

Venezuela parallel rate update

About time we checked out the progress of the parallel rate. Here's the main chart....

..showing the recent action, April 2009 to date. And what we see is another case of "not much happening". This morning the ask is at VEF6.82 for a dollar, by the way (much to the chagrin of dumbass doom prophets). But as is our wont, let's check out a couple of the main underlying fundamentals that explain why the permuta VEF is where it is. First the evolution of international currency reserves in Venezuela...

...and please note that this chart (for my own screwy XLS reasons) reads right to left. So right now Venezuela has U$30.69Bn tucked away in its reserves pouch. That's a tidy enough sum. However, the good news about reserves is outweighed by the bad news in the next chart:

As a quick reminder (we've done this one before) "M2" refers to the money in circulation in the country, both in the form of physical bills/coins and the money kept in the banking system (your savings amount desposit total, for example). In other words, M2 is basically "how much money there is in the country".

So in the above chart, we see that M2 has risen from the VEF equivalent of U$88Bn in April to VEF eq U$97Bn in July. People, that's a LOT. This means there's 10% more currency floating round Venezuela than there was just three months ago. M2 growth is acelerating since the last time we looked at it, from around 30% per annum to around 43%. This means that Venezuela will come under further inflationary pressure, sad to say.

But back to the parallel rate for a moment: Right now the rate stands at 6.82/1 and this is backed up by monetary theory. If we divide M2 by reserves and then multiply it by the official exchgne rate to get the VEF equivalent, the answer 6.82 pops, out, which is right on the button at the moment. However as the trend is for M2 to grow faster than reserves, the chances are that the parallel rate with continue higher and break 7 in the months to come.