How The Glorious Socialist Revolution Generated A 681% Return For Goldman Sachs
Back in 2011, BlackRock's Larry Fink revealed one of the great unspoken truths of capital markets, namely that "markets like totalitarian governments." They also like authoritarian socialism, sprinkled in with a healthy dose of nationalization, because as Bloomberg reports, one of the biggest beneficiaries of over ten years of the "glorious socialist revolution" in Venezuela, coupled with over 1000 nationalizations by the bed-ridden and roughly 15 times deceased Hugo Chavez (if one believes all the rumors), is none other than Goldman Sachs, which generated some 681% in returns due to "aligning its interests" with those of the unshakable Venezuelan ruler.
Since taking office in 1999, Hugo Chavez has spread his socialist revolution in Venezuela by seizing more than 1,000 companies. For bondholders that stuck by him, he’s also delivered returns that are double the emerging- market average.
The 681 percent advance, equal to 14.7 percent annually, has enriched investors from OppenheimerFunds Inc. to Goldman Sachs Asset Management LP that counted on Chavez’s willingness to siphon the country’s oil wealth to pay its creditors in the face of start-stop growth and falling reserves. While his policies drove away enough investors to keep Venezuela’s borrowing costs over 12 percent on average during his tenure, or 4 percentage points higher than those of developing nations, he’s never missed a bond payment.
Venezuelan bonds accounted for about 6.7 percent of the holdings of Goldman Sachs’s $2.9 billion Growth & Emerging Markets Debt Fund, the third-biggest investment, according to data compiled by Bloomberg. The fund returned 12.8 percent over the past three years, outperforming 90 percent of its peers.
“This is a really great high-income and high-total-return investment for your portfolio,” said Sara Zervos, an emerging- market debt manager at New York-based OppenheimerFunds, which oversees $176 billion in assets and has invested in Venezuelan notes for more than a decade. “Chavez hasn’t done a lot of good for his country, but he has the objective to service the bonds. Our interests are aligned.”
Indeed they are. Just as they are aligned in the US, albeit inversely - because for every bond the US government issues, the Fed monetizes anywhere between 50% and 75% (and sometimes over 100% on a gross basis), with the result being excess reserves created flowing through into the coffers of firms like Goldman Sachs, which can then add domestic to already solid socialist returns abroad, by ramping stocks with the indirect proceeds of the Fed monetization.
But everything comes to an end, and while the Fed will not end its market intervention before it has no other choice (i.e., when the rate it pays on overnight reserves is greater than interest income on its "assets under management"), Goldman's Venezuelan faucet is about to run dry:
Now, as the 58-year-old leader battles cancer, the nation’s outsized returns may be nearing an end. While Venezuela’s benchmark bonds have climbed to a five-year high since Chavez said on Dec. 8 that he needed more surgery, they’re unlikely to replicate the gains they’ve posted in the past decade once the rally drives yields down closer in line with regional peers, according to Russell Dallen, the head trader at Caracas Capital Markets.
What happens after the inevitable passage is unclear, but will likely not be good news:
“While the story has been deteriorating, Venezuela will continue to pay their debt,” Sam Finkelstein, an emerging- market bond manager at Goldman Sachs Asset Management in New York, said in a telephone interview on Jan. 25. “The situation will have to be much tighter, more fragile for a default to be likely.”
A worst case scenario for Venezuela will have broad implications elsewhere, such as the oil market:
Chavez paid off the debt because non-payment would lead creditors to seize Venezuelan oil shipments, which supply half of the government’s revenue, according to Simon Nocera, a former economist at the International Monetary Fund. Bond investors can also freeze Venezuelan assets overseas, including refineries and gas stations of Citgo Petroleum Corp., a subsidiary of PDVSA, he said.
“Chavez makes noise, but he will never come out and say: ‘We are going to restructure our bonds,’” Nocera, now chief investment officer at Lumen Advisors LLC, said in a telephone interview from San Francisco on Jan. 23. “He knows if he does, he won’t sell the only product that allows him to survive. There’s no reason to be scared.”
True -there is never any reason to be scared, until the panic sets in. Just ask the Fed.
As for Goldman, don't feel bad about them: with the entire world turning socialist, the bank may simply focus on France next, or maybe even the US. Worst case, their aggressive ramping of operations in Africa will soon bear fruit, once the whole world grasps that the last race for commodity colonies, to be held between the US and China, together with the occasional drone, extended semiautomatic clip and mortar, will need lots and lots of debt - debt Goldman will be happy to fund for a price.