Venezuela: On The Brink of Collapse

By Jim Rickards

Dear Reader,

It’s not news that Venezuela is a mess with social unrest, bare supermarket shelves, hyperinflation, and riots in the streets.

What readers may not know is just how bad things are, why it will get worse, and why the situation has enormous implications for the rest of the world, investors in particular.

This alert first appeared as an urgent “Flash Newsletter” in Jim Rickard’s Project Prophesy. (A brand new service which uses third-wave AI to predict political and economic "earthquakes" before they happen.)

To see how Project Prophesy can help you build or protect your retirement, you can simply watch this video demonstration. Or continue to read this full alert, for free.

As Venezuela collapses further, oil production will be threatened, oil prices will skyrocket, billions of dollars of debt will go into default, and the ripple effects will be felt from Beijing to Berlin. In the end, the U.S. will intervene militarily to restore order.

What is now mainly a national crisis will become a global crisis on a par with North Korea, Iran and Syria.

Investors should prepare soon with increased allocations to cash and gold.

Jim recommends a handful of plays in both cash and gold. He reveals exactly how he came to those plays in this free video demonstration of his Project Prophesy software.

Let’s start the analysis with some basic facts. Venezuela is not a small so-called Latin American “banana republic.”

It’s a large country, 32nd in the world by size, covering over 275,000 square miles. Venezuela is strategically located with ports on the Atlantic Ocean and Caribbean Sea, and long borders with its important neighbors, Brazil and Colombia.

Of course, size is not the most significant component of Venezuela’s importance in the world. Venezuela’s importance derives from its oil production, 11th highest in the world at about 2.3 million barrels per day, just under 3% of world output.

Prices of any global commodity are not determined on average. They’re determined by the marginal supplier or buyer.

And so, any threat to take Venezuelan oil offline because of political dysfunction or civil war would send shockwaves through global markets and set oil prices soaring.

Even swing producers such as Saudi Arabia (about 10.5 million barrels per day) could not ramp up production fast enough to cover a Venezuelan shortfall on short notice.

Before digging deeper into how turmoil in Venezuela could affect its neighbors and the world, it’s important to understand just how bad conditions really are.

Venezuela is not simply a case of a developing economy with widespread poverty. That has been true for a century.

The problem is that Venezuela is going backwards. It’s not just poor, it’s getting poorer. The middle-class is losing its grip on middle-class status and is slipping back to poverty en masse.

Anatoly Kurmanaev of The Wall Street Journal, who has lived in Venezuela for five years, reported the following on May 24, 2018:

“When I arrived in Venezuela in 2013, the party was still going on. Oil was fetching $100 a barrel, and Mr. Maduro’s populist government was showering petrodollars on everyone.
… But there were worrisome signs of what was to come. Inflation and debt were rising fast. And despite the spending splurge, the economy was only growing at a rate of 1.3%.
… The party ended in the worst economic hangover the world has seen in a half-century: One of the world’s great oil producers obliterated by the sheer greed and incompetence of a ruling party hiding beneath a veneer of Socialist ideology.
… From 2014 to 2017, the poverty rate rose from 48% to 87%…  
Some nine out of 10 Venezuelans don’t earn enough to meet basic needs. Children die from malnutrition and medicine shortages.
… The speed of the collapse has transformed the lives of millions of Venezuelans almost overnight.
When I met social worker Jacqueline Zuñiga … she had recently bought an apartment … and taken a cruise ship to visit her parents’ native Colombia. … Her new lifestyle had been made possible by subsidized loans and preferential exchange rates.
Today, Ms. Zuñiga is struggling to feed her family three meals a day. Her car is rusting away because of a lack of spare parts.”

Kurmanaev also reported that Venezuela’s top veterinary school killed their horses and ate them for food, leaving the carcasses scattered around the campus.

With inflation over 14,000%, it can take over an hour to buy a cup of coffee because payment networks are jammed and cash is scarce. 

Kurmanaev’s stories are a small sample of millions of similar stories. The Venezuelan middle class has slipped back into poverty while the elite continue to loot the petrodollar income.

While this is obviously a tragedy, perhaps it wouldn’t matter to the world, except on humanitarian grounds, if the damage were confined to Venezuela. It’s not. 

Venezuela might have collapsed already but for loans and other economic support from China.

This violation of the Monroe Doctrine was overlooked by the Obama administration, but the Trump administration is likely to take notice and curtail Chinese influence there.

This not only cuts off a lifeline to Venezuela, it puts Chinese loans at risk at a time when China has its own credit crisis brewing.

The world should expect that Venezuela will collapse in stages to the status of a failed state.

A civil war or armed rebellion will ensue, only to be met with armed force. Violence will spread.

Oil production will cease because of an unstable social environment and lack of infrastructure maintenance. Millions of refugees will flood into Brazil and Colombia, causing added stress on those unstable economies.

In the end, the U.S. and its Latin American allies will have to intervene militarily both on humanitarian and economic grounds to restore order, and start the oil flowing again.

China’s interests there will not be protected by the United States, which may have knock-on effects in terms of China’s financial stability.

What is now a national crisis will soon become a global crisis, which the world both doesn’t expect, and is currently unprepared for. Investors should take steps now to avoid being caught by surprise.

All the best,

Jim Rickards
Editor, Rickards’ Project Prophesy