New Financial Risk

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rickets's picture
rickets
Status: Silver Member (Offline)
Joined: Jun 8 2009
Posts: 238
New Financial Risk

Today Venezuela devalued their currency by 50% and told all businesses that if they raise prices the government will seize them.  In other words, they are going to seize everything.  While perhaps not a total shock, Venezuela is the 30th (or it was in 2008) biggest GDP in the world, above Greece, Switzerland, Austria....and many other first world countries.  The fact this is not front page news is a big surprise (or, maybe it isnt anymore).

Also, I wanted to alert others here that volatility has exploded so far in 2010.  While the broader equity markets have been quite stable, there have been massive movements in commodity stocks and prices.  Further, interest have been spiking up.

Just after the markets closed today, the first major earnings report for Q4 2009 came out with AA (alcoa).  It was not good.

In any event, on top of the huge Euro issues and Greece imploding, I think we are setting up for some extreme volatility soon.  I dont want to make any predictions as always - just wanted to post this stuff to make sure all were aware.

pinecarr's picture
pinecarr
Status: Diamond Member (Offline)
Joined: Apr 13 2008
Posts: 2237
Re: New Financial Risk

rickets, thanks for the great hat tip.  That's the first I'd heard of Venezuela's currency devaluation.  Thanks for sharing your other observations, as well.   

After reading your h/t, I searched for some more on the Venezuelan devalutation in case others are interested too.

1. http://www.reuters.com/article/idUSN096521320100109, "UPDATE 1 - Devaluation ups staked in Venezuela election year", dated 1/9/10, at  Clip:

"In a bid to jump-start the recession-hit economy of South America's top oil exporter, Chavez on Friday announced a dual system for the fixed rate bolivar.

It devalues the currency to 4.3 and 2.6 against the dollar, from a rate of 2.15 per dollar in place since 2005, giving the better rate for basic goods in an attempt to limit the impact of the measure on consumer prices.

The opposition seized on fears that prices for imported goods will double as shoppers formed lines of more than a hundred people outside some stores in the capital Caracas."

 

2. http://www.reuters.com/article/idUSTRE60A5IN20100111, "Venezuela's Devaluation Will Cost Some US Companies"., dated 1/11/10.   Clip

"CHICAGO (Reuters) - U.S. companies doing substantial business in Venezuela, such as Avon Products Inc and Colgate-Palmolive Co, are bracing for the impact from the country's currency devaluation."

 

3. http://www.brisbanetimes.com.au/business/devaluation-sparks-shopping-frenzy-in-venezuela-20100111-m1kx.html, "Devaluation sparks shopping frenzy in Venezuela", dated 1/11/10. 

1st Clip:

"Venezuelans went on a shopping spree this weekend after President Hugo Chavez announced a massive currency devaluation that is expected to increase prices.

Families packed shopping malls across the country to stock up on electronic goods and other items in anticipation of many prices doubling.

In an attempt to fight the inflation fears, President Hugo Chavez ordered soldiers to seek out businesses that raise prices, saying he will expropriate firms that engage in price gouging."

clip #2:

"Foreign debt-holders will also be pleased, since the devaluation improves Venezuela's finances."

 

-pinecarr

On Our Own's picture
On Our Own
Status: Bronze Member (Offline)
Joined: Dec 28 2009
Posts: 72
Re: New Financial Risk

They actually set up a two tiered system and I admit to be somewhat confused about what that means for those trading with them.

Finance Minister Ali Rodriguez said the devaluation will add 3 percent to 5 percent to inflation, already the highest in the Americas at 25 percent last year.

"The popularity of the government is obviously going to be sharply and negatively affected," said economist Pedro Palma. "The inflationary impact of the measure diminishes the real income of people. People can consume less."

The new two-tiered exchange system offers the 2.6/dollar rate for goods deemed essential including food, medicine and industrial machinery. Other products, including cars and telephones, will be imported at the higher 4.3 rate.  Last month, BMO Capital Markets cut ratings on Colgate-Palmolive Co (CL.N), Avon Products Inc (AVP.N) and Kimberly-Clark Corp (KMB.N) to "market perform" saying a possible devaluation in Venezuela could hurt the U.S. consumer goods makers' profits.

Can anyone explain this in laymen's terms?  What does it mean for trade partners?

 

 

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