Caracas Chronicles

We break from full-blown political crisis mode for a short update on a whole other reason Venezuela is completely screwed.

The single most important economic indicator in Venezuela is flashing nuclear crisis mode. Traders all around the world are fully aware of the carnage in oil markets since the summer of 2014, but they sure as hell weren’t prepared for a -20% crash-inside-the-crash in the first two weeks of 2016, and now are having seizures over this headline:

14:45:46  *WTI OIL FALLS BELOW $30/BBL FOR FIRST TIME SINCE DEC. 2003.

We don’t need to look too far into the complex reasons behind the biggest slide in oil prices in recorded history to know what the correct reaction is here:

Nominal prices of oil aren’t accurately reflecting the magnitude of the coñazo. When looking at the real (inflation-adjusted) time series, turns out we are dangerously close to all-time lows in oil prices. One barrel of oil is worth about 20% less than its value during the “Caracazo” riots of Feb. 1989, and there are only very brief moments in the last 30 years where WTI oil has settled below current levels after adjusting for inflation.

One of those moments ended up in Hugo Chavez becoming President of Venezuela, so you know stuff is getting serious down here.

Let’s not forget that our slimy, heavy output from the Orinoco Belt is worth less than international crude oil. About 24 dollars per barrel now, according to our Presidente Obrero. And the knockout punch: taking into account demographic growth and the reduction in oil output over the past two decades, our in-house estimates suggest that real oil income per person in Venezuela has gone down more than two-thirds from its 2008 highs, to its lowest level in at least 30 years.

This crash is not only erasing the so-called “Commodities Super-cycle” worldwide, but it’s also one major force pushing Venezuelan society into economic chaos in 2016. (The other major force is named Luis Salas.)

Bond markets are very aware of the apocalypse scenario. Wall Street bookies are pricing in 72% odds that the Republic and/or PDVSA are going to default over the next 12 months, inferring from the prices on Credit Default Swaps. More interesting, perhaps, is the carnage in the bonds themselves: Venezuelan Government bonds maturing on February (only 6 weeks from now) are trading at 86 cents on the dollar, putting the interest rate at an unprecedented, astronomical, unconceivable 142% annualized return.

Yikes.