April 9, 2017


Economist – Free exchange: How Chavez and Maduro have impoverished Venezuela 4/6

“It is hard to convey the severity of Venezuela’s unfolding crisis. Its extent is astounding: the economy shrank by 10% last year, and will be 23% smaller than in 2013 by the end of this year, according to IMF forecasts. Inflation may exceed 1,600% this year. The human details are more poignant: over the past year around three-quarters of Venezuelans have lost weight, averaging 8.7kg (19.18lbs) per person, because of a scarcity of food. No war, foreign or civil, is to blame for this catastrophe. Venezuela did this to itself.”

“Fifty years ago, Venezuela was an example to the rest of Latin America, a relatively stable democracy and not much poorer than Britain.”

“Venezuela’s economy is built on oil – its leaders boast it has the world’s largest proven reserves – and it is tempting blame fickle crude prices for its woes. Oil accounts for more than 90% of Venezuelan exports. It helps to fund the government budget and provides the foreign exchange that the country needs to import consumer goods. Nearly everything of consequence in the economy, from toilet paper to trousers, is imported from abroad.”

“As oil prices soared in the 2000s, Venezuela found itself awash in cash. In 2014 the boom ended.” So the new president, Nicolas Maduro, could either let the bolivar float and depreciate in a meaningful way causing imports to jump in price – likely a very unpopular move – or fix the exchange rate, cross his fingers and try to keep market distortions from becoming overwhelming. 

“Economic dependence on oil is always fraught. Soaring oil prices place upward pressure on the exchange rate, leaving other, non-oil industries at a competitive disadvantage. That deepens an oil-exporting economy’s dependence on crude, worsening the pain when prices eventually fall.”

So what to do?

“When times are good, some use inflows of hard currency to build up foreign-exchange reserves, which can be drawn down later to cover foreign-currency obligations and import bills; Saudi Arabia holds reserves worth more than $500bn, for example. Others use oil profits to fill sovereign-wealth funds, which invest in a diversified portfolio in order to reduce the economy’s long-run exposure to petroleum. Norway’s fund, which is intended to help pay for state pensions, is worth nearly $900bn.”

“Chavez had the good fortune to take office at the tail end of a two-decade swoon in oil prices, and to preside over a price surge. The money that came to Chavez, he spent. From 2000 to 2013, spending as a share of GDP rose from 28% to 40%: a much bigger rise than in Latin America’s other large economies. Spending crowded out growth in foreign-exchange reserves. In 2000 Venezuela had enough reserves to cover more than seven months of imports; that dropped to under three months by 2013 (over the same period Russia’s reserves grew from five months of import cover to ten, and Saudi Arabia’s from four months to 37).”

“Why did Chavez not leave Venezuela better prepared for the inevitable crash?… During his rule, Chavez increased public spending on social programs and expanded subsidies for food and energy. Venezuelans felt the results, in higher incomes and improved standards of living. Chavez delivered, for a time.”

“Yet this narrative was false… In his careless economic management, he undercut the oil wealth that funded Venezuelan socialism. His assaults on private firms left the country short of the expertise and capital needed to develop its resources. In recent years it has produced less oil than China and a quarter of the output of Saudi Arabia. Venezuela ate its seed corn despite record harvests.”

“Venezuela was once the envy of Latin America, until a long stagnation in living standards brought a populist strongman to power. But popularity is hard to maintain. The greater the desperation of the populist, the greater the willingness to accept long-run risks in exchange for short-run pay-offs. Whether or not the populists survives to see it, the day of reckoning eventually arrives. And it is always the people that suffer most.”

Markets / Economy

Bloomberg Businessweek – Lies, Damn Lies, and Financial Statistics – Peter Coy 4/6

  • “Most of us have a vague sense that we’re being ripped off by investment firms that charge hefty fees while producing results that are no better than you’d get throwing darts at a page of stock listings. It’s troubling nonetheless to find out we’re correct. And it’s important to understand the mechanics of what has gone wrong.”
  • “Harvey’s term for torturing the data until it confesses is ‘p-hacking,’ a reference to the p-value, a measure of statistical significance.”

Economist – Eyes bigger than their wallets: Consumers and firms see a Trump boom. Most forecasters do not 4/6

  • “Economic indicators have rarely sent such mixed signals.”

NYT – Boom or Bust: Stark Partisan Divide on How Consumers View Economy – Nelson Schwartz 4/8

  • “We’ve never recorded this before, the partisan divide has never had as large an impact on consumers’ economic expectations.” – Richard Curtin, director of the University of Michigan’s monthly survey of consumer sentiment.

Real Estate

Bloomberg Businessweek – Toronto Bidding Wars So Fierce Homebuyers Skip Inspections – Kim Chipman 4/3

  • “Toronto’s housing boom is eclipsing those in San Francisco and Vancouver. Buyers are feeling the pressure.”

Economist – Aparkalypse now: The perilous politics of parking 4/6

  • “The average car moves just 5% of the time. To improve cities, focus on the other 95%.”
  • “One study of Washington, DC, found that the availability of free parking is associated with a 97% chance somebody will drive to work alone. Generous parking requirements create asphalt deserts, sapping cities of vigor and beauty. The money and land wasted on car parks make life costlier for everyone, even those who do not drive.”


Economist – Consumer loans: Payday lending is declining 4/8

  • “Roughly 2.5m American households, about one in 50, use payday loans each year, according to government statistics. The typical loan is $350, lasts two weeks, and costs $15 for each $100 borrowed.”
  • Yet due to government regulation “payday-loan volumes have fallen by 18% since 2014; revenues have dropped by 30%. During the first nine months of 2016, lenders shut more than 500 stores and total employment in the industry fell by 3,600, or 3.5%.”


WSJ – Rainy Days Are Here Again: California Governor Declares Drought Over – Jim Carlton 4/7

NYT – Rising Waters Threaten China’s Rising Cities – Michael Kimmelman 4/7

Health / Medicine

Bloomberg Businessweek – Just How Much Is a Medical Miracle Worth? – Caroline Chen 4/6

  • “Years of costly treatments could give way to pricier one-shot cures like Spark Therapeutics’ blindness drug. But insurers aren’t ready.”


Value Walk – China Debt Problem Is Massive At $35 Trillion, On Par With Greece – Mark Melin 4/8

  • “China is the key to the world economy, a Macquarie Research report points out.”
  • “China is like the Greek god of Atlas, Macquarie analysts Victor Shvets and Chetan Seth write, saying the Asian nation is ‘what stands between relative normality and [the] sky falling and crushing global economy.”
  • “China is responsible for 27% of global investment and nearly 66% of global credit creation, and the world is ‘addicted’ to Chinese money. Shvets and Seth think the ‘key’ to the reflation trade is found in China’s stimulus, which drove real estate and industrial development. This, in turn, drove commodity prices significantly higher.”
  • “‘Unlike Western economies that are ‘twisting themselves into pretzels’ trying to present various QE policies as something other than monetization while attempting to portray their fiscal policies as being responsible, China does not need to pretend,’ Shvets and Seth point out. In other words, they can be ‘credibly irresponsible,’ to use a Paul Krugman term, while maintaining a 300% debt to GDP level.”

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