Dear Diary,
We are here in Lower Manhattan. It does not seem much like an “urban jungle.” It is too cold and rainy.
After a brief excursion outside, you have to warm yourself by an artificial fire, with a coffee. Or, after 7 p.m., with a glass of Jameson. Then the fog of the outside world clears long enough to think about “the hurtin'” and other philosophical puzzles.
Nobody wants to be a-hurtin’. And nobody wants to own an asset in a sector that has the hurtin’ on it. But that is usually the best thing to buy.
Man is not cut out to be a good investor. It goes against his basic instincts. At the end of a battle he wants to be still standing, like Caravaggio’s David – a bloody sword in one hand and the head of Goliath in the other.
He wants to win. And he wants to own the team that just won the Super Bowl. The alternative, at least in his atavistic race memory, is death.
But going with the winners is a recipe for losing in the perverse world of Wall Street, near where we pen these words.
The winners soon get as fat, stupid and overbought as a senator. The losers, meanwhile, are leaner, wiser and oversold. Error and misfortune are what you look for in a good investment.
Nietzsche’s Logic
“That which doesn’t kill you makes you stronger,” wrote Nietzsche.
(We like to quote the great German thinker from time to time. It gives the Diary the pseudo-intellectual tone we are looking for. But we admit: We don’t know how to spell his name. So we put in all the consonants you should need; reorganize them as you please.)
By Nietzsche’s logic, it may be time to buy Venezuela.
Talk about losers!
For 13 long years, while strongman Hugo Chávez ran the country, investors in Venezuela were kicked and spat on. Their capital was seized. Their profits were taxed away. Capitalists fled to Miami and output declined.
Now Chávez is dead. And the hurtin’ has moved from producers to consumers. The Financial Times reports that “lines of frustrated shoppers have replaced socialist rallies and posters of Hugo Chávez as the most ubiquitous images of the South American nation.”
The Venezuelan government loses about $700 million in revenues every time the price of oil drops a dollar, says the newspaper. Yesterday, oil dropped $2. Since its peak in June, it has dropped $35 – a devastating loss for the country.
Will the hurtin’ make Venezuela leaner?
The FT coverage provided evidence. Elena González, described by the newspaper as a “pensioner,” said she lost 10 kilograms (about 22 pounds) standing in lines to buy food!
Ms. González was looking on the bright side. So was President Nicolás Maduro. As we reported yesterday, he takes the present adversity as “an opportunity to end superfluous luxuries and unnecessary spending.”
Unfortunately, superfluous luxuries and unnecessary spending are just what voters want. That is why poor Nicolás has watched his approval rating get cut in half: from 55% a year ago to just 25% today.
This puts him between President Obama, with a 39% approval rating, and French president François Hollande, with a piddling 12% approval rating.
That one out of four sentient adults in Venezuela still approves of Maduro’s policies suggests they are putting something in the drinking water down there.
Economic Disaster Zone
Venezuela is an economic disaster zone. The typical Venezuelan spends hours lining up to buy basic food items, while 27,000 government apparatchiks inspect prices to make sure they are “fair.”
How would they know?
Consumer prices are rising at 63% a year. And the annual rate of increase is expected to reach 110% next year.
And so great is the threat of default that Venezuela’s dollar bonds yield nearly 20%.
But when the going gets tough, the Venezuelans turn – to crime!
Venezuelans tend not to report crimes to the police. They see the police as a bigger threat than the criminals. So crime rates have to be estimated. Murder rate estimates converge at about 60 per 100,000.
In Baltimore, a great source of civic pride is the vigorous and self-reliant way its residents settle their disputes. But the Venezuelans have bragging rights.
There were “only” 198 murders in Baltimore so far this year. With a population of 600,000, this puts the city’s homicide rate at only about half that of the South American pacesetter.
What kind of hellhole is Venezuela?
“We are beggars of food, beggars of basic products, beggars of medicines, beggars of diapers for our children – right now we are beggars of everything,” a person in a grocery line told the FT.
“Inflation eats us up; we have hit rock bottom. We cannot get any worse.”
As to that last line, we are skeptics. There is probably more hurtin’ where that came from.
But rock bottom is out there somewhere. Today, it may be “too early” to buy Venezuela… or Russia… or Greece… or oil… or gold.
Someday, it will be too late.
Tomorrow… the kind of failure that leads to more failure – Amazon.com… Japan… and more!
Regards,
Bill
Has Russia Reached “Maximum Pessimism”?
Another country that’s hurtin’ is Russia.
Regular readers will know that Bill is bullish on Russian stocks because of their big discount to stocks in most of the rest of the world.
By our favorite valuation metric, the Shiller P/E (or CAPE), Russia is the second most inexpensive stock market in the world after Greece.
(The Shiller P/E is a price-to-earnings ratio based on average inflation-adjusted earnings from the previous 10 years. This helps “smooth” year-to-year earnings volatility.)
At the start of last month, the Russian stock market was on a Shiller P/E of 5.2 versus a Shiller P/E of 27.2 for the US stock market – an 81% discount.
And the Russian market is on a dividend yield of 5.2% – more than double the 2.3% yield of the S&P 500.
But the Russian economy is under severe stress. And the situation there got a lot worse after last Thursday’s decision by the OPEC oil cartel to keep its output steady, despite a supply glut and a roughly one-third fall in crude oil prices since June.
On Monday, the ruble suffered its worst one-day decline against the dollar since 1998. It fell 4% versus the dollar to trade at over 53 rubles to the buck. Today, the ruble is at 55 to the dollar – 38% lower than it was six months ago.
This should come as no surprise. Oil and gas make up 68% of Russia’s exports and half of its federal budget. The plunge in crude oil prices… plus the effects of European Union and US sanctions… have hit the Russian currency hard.
To add to Russia’s pain, consumer price inflation is now running at about 8% a year. And the economy is entering its first recession in five years.
Make no mistake: Russia has “the hurtin’ on it.” But as Bill says, that is usually the best thing to buy.
It’s deeply counterintuitive, but as legendary overseas investor John Templeton put it:
Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.
We might not have hit maximum pessimism in Russia yet. But we’re getting close.
P.S. Are you joining Bill and his family in Nicaragua next year? If you haven’t yet received your invitation, go here now.