A view on government debt, the crisis and opportunities it creates ... (by Doug Casey)

Doug Casey on "Hunger Bonds"

by Doug Casey | June 23, 2017

A few weeks ago, the investment bank bought around $2.8 billion worth of Venezuelan bonds. The bonds were issued by Venezuela’s national oil company in 2014.

And get this… Goldman paid just $865 million (or 31 cents on the dollar) for them.

Goldman got such a sweet deal because Venezuela is in complete disarray right now.

Its economy shrank 18% last year. Inflation is soaring. And the country is suffering from chronic food shortages. So much so that the media’s calling the bonds that Goldman bought "hunger bonds."

It’s a true "blood in the streets" situation. And regular International Man readers know that this kind of situation often leads to the best speculations.

Of course, most people aren’t seeing it that way. They think Goldman threw Venezuela’s oppressive government a financial lifeline.

To make sense of this complex situation, we’re sharing this conversation between Justin Spittler, editor of the Casey Daily Dispatch, and Doug Casey.

Justin Spittler: Doug, what do you make of this? Did Goldman throw Venezuela a lifeline or was this just a savvy speculation on their end?

Doug Casey: Well, several things should be considered here.

First, these bonds were bought in the aftermarket. So, no new money went to the Venezuelan government.

We did some research and they were 6% bonds. So, it seems to me like an excellent speculation on the part of Goldman because they’re going to capture—if the bonds were trading at $0.31 on the dollar—a current return of almost 20%.

Plus, the increase in value in between now and 2022. Which should be a total return of 40% per year. At least if they keep interest payments current.

--

Let’s look at this from a moral point of view. I’d say that people who buy new bonds from any government, including the US government, have a moral problem. They’re directing capital from possibly productive areas of society to one which is almost always unproductive. So they’re making the world poorer.

But speculation rarely includes moral philosophizing. And, since the bonds are trading in the aftermarket, ethics aren’t an issue. The money doesn’t go to the Venezuelan government, they’re not selling the bonds. I think it’s an excellent speculation on Goldman’s part, however. If the Venezuelans default, Goldman will just file a suit to attach the issuer’s assets anywhere in the world. Pretty much what happened with the Argentine government a while ago.

Now, as to the immorality of governments selling bonds, that’s a different question. I know this sounds outrageous, but I’ve said for years that the US government should default on its bonds.

Justin: Why do you think that the US government should default on its debt?

Doug: Why? Number one, because I don’t want to see the next generation, or several generations of Americans, turned into serfs to pay off those bonds, most of the capital for which has been wasted and dissipated by previous generations. So, that’s one reason.

The second reason is that US government debt is going to be defaulted on eventually anyway, directly or indirectly. It’s as if you have a hundred-story skyscraper that’s about to collapse. It’s better to have a controlled demolition to bring it down than just let it fall at random. It’ll do a lot less damage. As a bonus, it would provide a good reason to auction off most of the governments assets to meet some of its liabilities.

A third reason, which perhaps relates more directly to the Venezuelan purchase, is to punish the buyers of government bonds, discouraging their future purchase.

Goldman expects that those bonds will be paid off in the future at par or close to it because if they’re not, the Venezuelan government won’t be able to borrow in the future. Or at least its national oil company won’t. Of course the government essentially stole it from the previous shareholders. And every government with a state oil company uses it like a piggy bank—they’re not run like sustainable businesses.

How will that be a problem? Governments shouldn’t be able to borrow because they don’t do anything productive with the money. Individual Venezuelan companies would still be able to borrow. People conflate all these things together. The government of a country is not the same thing as the people and the companies within the country’s boundaries.

But while there’s a real risk the Venezuelans will default, simply because they can’t pay, there’s about zero risk the US Government will ever do so. They can kick the can down the road for quite a while to come. The US dollar is the world’s de facto currency, but the Venezuelan bolivar is worthless outside of Venezuela. And only accepted reluctantly within it.

--

Justin: Well said, Doug. Governments can only steal, destroy, and squander capital. So, the financial media shouldn’t attack Goldman for buying Venezuelan oil bonds. They should attack anyone who finances wasteful and destructive governments, including US Treasury holders.

Now, aside from government bonds, are there any speculations that you consider immoral? Is there even such a thing?

Doug: That’s a very good question, and I believe I have a very good answer.

I just finished writing, with John Hunt, the second novel in my High Ground series called Drug Lord, where we defend the morality of dealing drugs, and the right of individuals to take any drugs they wish. We explain the legal and illegal drug trades in some detail. There are many things that are perfectly moral—they may be stupid, but they’re perfectly moral—that run counter to most people’s views on these things.

But as far as investing in different countries, let me go back to what I said earlier. I’m happy to see people who buy government bonds punished, because they’re supporting a destructive entity. It’s a mistake to conflate support of one’s country with support of the government.

But this is a personal decision that everybody has to make. A lot of people won’t invest in tobacco producers or arms producers or god-knows-what. There are lots of different things that individuals consider immoral. It’s a personal decision. Speaking as a speculator, however, that doesn’t enter my mind. The only thing that enters my mind is what the risk/reward is, as opposed to the morality. It’s a personal decision that everybody, including myself, has to make. But it’s not a matter of public policy.

Justin: Before I let you go, Doug, I have to ask something…

Have you thought about speculating in Venezuela, personally? It looks like a huge crisis investing opportunity in the making.

Doug: Well, I’ve been to Venezuela at least four or five times over the years. It’s potentially a great country, and I like it. I’ve gotten out of Caracas into the hinterlands several times too. It should not only be one of the world’s richest countries, but one of the most pleasant to live in. It would be great to have a cattle ranch there. But property rights don’t exist under the current government. If it’s big, they’ll likely steal the ranch. If it’s small, they’ll just steal the cattle. I wonder if you can even get a steak in a Caracas restaurant now.

The problem with a country like Venezuela is that they have one big resource: oil. And it’s owned by the government. It becomes a piggy bank that everybody tries to raid and loot. Politics controls everything. The poverty-stricken mobs vote for the criminal that promises them the most freebies. It’s like every other country in the world. But worse.

The country has been so corrupted over the years that nothing that you’d own there is really safe. It’s a really good question: Would I want to buy in Venezuela as a crisis investment. Well, you can’t “invest” in a place this chaotic, with such bad trends. But it might be an excellent speculation soon. Maduro won’t last. The way to play it? Stocks, because they’re liquid. We’ll need to get boots on the ground soon.

Justin: That we will. Thanks for your insight, Doug.

Doug: My pleasure, Justin.

Editor’s Note: Venezuela isn't the only country in complete disarray. Right now in the United States, things are also falling apart.

Most people have no idea what’s about to hit them. Even fewer are prepared. That’s why we put together a presentation that explains how to “flip” this coming crisis into opportunity. To learn how to do this, watch this free video.