BALTIMORE – On Monday, Caracas rolled out the red carpet – literally.
In one of the funniest shows in modern capitalism, bondholders were invited to a special meeting in the Venezuelan capital.
A few turned up. They wanted to know what to expect.
The country is going broke – fast. Oil output is at a 28-year low… cash is disappearing… chaos is spreading. When would Venezuela default on its bonds?
The meeting lasted 30 minutes. No questions were allowed. And then, less than 24 hours later, investors got their answer: today!
We’re back in good ol’ Baltimore. There’s nothing quite like it.
Every place has its own character, its own style, and its own life cycle. Baltimore peaked out in the 19th century, when it was the richest city in the United States.
It has been downhill ever since.
An hour to the south of the city is Washington, D.C., with a different culture… a different economy… and a different rendezvous with glory.
Baltimore depended on trade and manufacturing for its wealth. It lost market share when shipping began using New York’s harbor and manufacturing decamped for what is today the old industrial heartland – Ohio, Indiana, and Illinois.
Washington was always a parasitic town. It was small and relatively modest when government was restrained. But as the feds grow bolder, Washington grows richer.
Corporations move their headquarters to nearby Maryland or Virginia, where they will be close to their lobbyists.
The “defense” industry has practically taken over northern Virginia, where it is in position to suborn lawmakers and bribe generals. And law firms perch in downtown towers, like buzzards in a dead tree.
Peak Baltimore may be long past; Peak Washington is still ahead.
No matter what kind of political system you have, as Italian sociologist and economist Vilfredo Pareto noted in the early 1900s, the insiders always figure out how to game it.
In Washington, Deep State insiders now control the White House, both houses of Congress, the Pentagon, and the bureaucracy.
President Trump brought in a new team a year ago. Some thought he would run the Old Establishment out of Washington.
Like Jesus chasing the moneylenders out of the temple, they expected him to turn the tables on the insiders… and Make America Great Again.
It didn’t happen.
Instead, Mr. Trump joined the Deep State so fast, it looked like the fix was in from the get-go.
And now, the insiders have the perfect combination – a White House that claims to be their enemy while enabling and abetting everything they want to do. For example:
Trump, Pelosi, and Schumer crashed through the debt ceiling.
The president installed a new Fed chief who is a swamp rat, just like the old Fed chief.
No cuts to the Pentagon budget… no reduction in America’s goofy “wars” in the Middle East… no change to the cozy relationships with Israel and Saudi Arabia.
No cuts to the welfare state budget… Obamacare is eternal… bankruptcy is guaranteed.
In short, it’s business as usual… but with a big-personality “leaderismo” who has bluffed and bullied the conservative opposition.
Former Venezuelan president Hugo Chávez achieved much the same thing.
But rather than pretending to be a conservative like Trump, he pretended to put “the people” in charge. And rather than turn the country into a socialist paradise, the Chavistas did what insiders always do: They looted the place.
As Maggie Thatcher put it back in the 1970s, “The trouble with socialism is that eventually you run out of other people’s money.”
Venezuela is running out of other people’s money – fast. And with the economy badly mismanaged… and the end coming, the insiders are getting while the gettin’s good.
In the U.S. and Europe, the corruption was widespread, systemic, and subtle.
Big financial players knew (did European Central Bank president and former Goldman boy Mario Draghi tell them?) that the fix was in.
They could buy speculative bonds without risk. Central banks made sure they didn’t go down. (Lower bond prices would mean higher yields, and higher borrowing costs, which central banks were determined to avoid.)
Instead, bond prices went up. Yields went down. And sharp traders made as much as 1,000% profit.
In Venezuela, government bond prices plunged – and yields, along with borrowing costs, spiked – as it became obvious that the country was going broke.
The economy is down 30%. The rate of annual inflation is running at 2,300%, according to the International Monetary Fund. Stores are out of food. Pharmacies have no more medicines. Hospitals can’t put clean sheets on the beds.
But somehow… the “socialist” government kept paying the interest on its bonds.
The people may suffer and even die… but the capitalists still made money.
Why would a “socialist” government favor rich lenders over poor citizens?
Do you have to ask?
Here’s the Miami Herald:
…an open secret among U.S. traders, is that most buyers of Venezuelan bonds have been the so-called “enchufados,” or “plugged in” members of Maduro’s ruling elite and their business cronies.
Whenever Venezuelan bonds plunged amid international expectations that Maduro would default on the country’s debts rather than cancel all food imports, Venezuelan officials and their cronies in the business world would buy PDVSA [Venezuela’s state-run oil company] bonds for 20 or 30 cents to the dollar, with inside information that Maduro would not declare a default.
The fix was in. It always is.
And the gettin’ is always good until it isn’t.
This morning, credit ratings agency Standard & Poor’s declared Venezuela in default.
By Jeff Clark, Editor, Delta Report
By itself, the daily chart of the S&P 500 looks just fine. It shows a steady uptrend. There are no big moves in either direction. It’s just a slow, grinding move higher – week after week, month after month.
The bulls are firmly in control. And even when the stock market’s “crystal ball” warns of an impending decline, the selling pressure is limited to just a few hours. Then the index gets back to marching higher.
Take a look…
There’s absolutely nothing wrong here. This chart is a picture of higher highs and higher lows. That’s bullish. And, since we’re in a seasonally strong period for stock prices, the bulls should have nothing to worry about.
EXCEPT… (oh, come on, you knew that was coming)…
There’s a whole bunch of other charts that don’t look quite so bullish. For example, here’s a chart of the Russell 2000 Index (RUT)…
While the S&P 500 has been marching higher, the Russell 2000 has been declining.
So has the Value Line Geometric Index (VLG)…
And it’s not just the broader-based indexes that are diverging from the S&P. Key sectors are trading lower, too.
Look at the Dow Jones Transportation Average (DJT)…
…the Financial Select Sector SPDR Fund (XLF)…
…and the iShares Nasdaq Biotechnology ETF (IBB)…
Of course, we also have the recent breakdown in the iShares iBoxx High Yield Corporate Bond Fund (HYG), too…
It’s rare for the action in so many sectors of the stock market to diverge so drastically with the action in the S&P 500.
At some point, either the strength in the S&P is going to help turn all of these other sectors around and lead to a remarkable year-end rally… or, the weakness in all the other sectors is going to pull the S&P lower and stocks will suffer a significant correction.
It seems to me the odds favor a correction. But it’s hard to bet that way until the price action on the S&P 500 turns lower.
Keep an eye on the 2566 level on the S&P 500. That was last week’s low. If the index breaks below that level without moving to new highs first, then we’ll have a lower high and a lower low in place.
That’s a downtrend, and it will likely signal the elusive correction is underway.
– Jeff Clark
P.S. My Delta Report subscribers take advantage of divergences like these every week… and it all comes back to a “secret key” I developed 17 years ago.
After almost losing my entire life savings in a single day, I used this technique to turn the trade around… and it completely changed my life.
To read about how this “secret key” can work for you, click here…
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