The Crash You Can See Coming

It happens around this time of year. All of the ‘official’ predictions for the markets start to come out.

While most people are still struggling to remember their passwords as they return from holiday, the ‘who will crash’ data starts to roll in.

To kick the year off, Bloomberg surveyed a bunch of economists to find out where you should avoid putting your money.

In the article ‘Meet 2016’s Worst Economic Performers Flirting with Disaster’, the five countries set for doom are Venezuela, Brazil, Greece, Russia and Ecuador.

After investigating 93 economies, Bloomberg reckon that these five nations will see their economies contract over 2016.

Have a look at the chart below.

Basically, these five are the ones to avoid putting your money in.

Unless you’re keen on shorting emerging markets — something Jim Rickards is looking into in Currency Wars Trader — steer clear.

Bloomberg then points out the probability of a recession in each of the nations sampled.

Bolivia and Kazakhstan have 20% and 33% respective probability of recession.

Interestingly, Australia is up there with the United States, with a 15% chance of recession this year.

And Venezuela? Even though the number crunchers reckon the economy will contract — through shrinking gross domestic product — by as much as 3.3% this year, they haven’t provided a number on the likelihood of recession for the South American country.

Is that because the statisticians decided that a Venezuelan recession is a given, so there’s no point calculating it?

The thing is, Venezuela is in very serious trouble. Just five days ago, President Nicolas Mudro said the country is in a state of emergency as oil prices slipped to US$33 per barrel.

The oil rich nation derives 95% of its export income from oil.

Last year is was estimated that Venezuela needs oil to be around US$90 to break even. As high as that figures sounds, it’s nothing compared to other oil rich countries.

Break even oil price per barrel for major producing countries

Source: Business Insider, IMF, Deutsche Bank

While other countries may need a higher per barrel oil price, the low crude price is showing up in Venezuela more than others.

In fact, economists reckon that every US$1 drop in oil prices equates to a US$700M hit to revenue for the Venezuelan government.

Barclays Capital has even come out saying that Venezuela can manage its cash flow for the year if oil returns to US$50 per barrel. That’s manage cash flow people. Not rescue the country from the dumps.

You see, Venezuela has around US$128 billion in debt servicing commitments over the next 24 years.

But the long term debt isn’t the problem at the moment.

The falling price of crude has the markets questioning Venezuela’s ability to service its immediate debts.

In August last year, Markit fixed income analyst Neil Mehta said the high spreads on credit default swaps — a derivative companies use to hedge their loans in case of default — suggested a 96% chance of default in the next five years.

If you like a punt on the gg’s, that’s like backing the favourite to win.

So dire is the situation in Venezuela that the state owned oil companies are offering a discount to other nations to settle debts early.

Take Venezuelan Petrocaribe Energy for example. The Dominican Republic paid back only US$1.93 billion to settle a $4 billion debt in January last year.

State owned Petroleos de Venezuela SA (PDVSA) allowed Uruguay to pay off only US$262M of the total US$400M, for doing so 12 months early.

That’s not going to help PDVSA much. The oiler has US$1 billion due shortly, and is in negotiating to delay payment until 2016/2017.

In addition, PDVSA have around US$3 billion in interest payments alone in the first quarter of this year. Which is half of the total expected revenue from oil for the whole of 2016.

That’s on top of the total debt of US$13 billion they need to meet this year.

The point is, crude oil prices — not seen this low since 2002 — are slowly crippling oil producing nations.

I wrote to subscribers of Strategic Intelligence last week, telling them that 2016 was the year of the crisis.

It might be a gloomy way to start the year. But Jim Rickards and I are trying to show subscribers where the trouble is coming from, and how they can prepare their portfolio to withstand it.

The possibility of a Venezuelan default is high. While oil prices remain low, it’s only the beginning of bad news.

If you’re sitting somewhere in Australia, in air conditioned comfort, sipping on a latte and eating almonds, the oil problem in Venezuela doesn’t seem like it will affect you.

Let me assure you, it will.

Low crude prices are starting to cripple economies that thought the price of oil would be high forever. The amount of oil related debt is starting to show. The real problem however, is where the debt ends up.

I’ll explain more on that next time.


Shae Russell,

Editor, Strategic Intelligence

From the Port Phillip Publishing Library

Special Report: You probably already sense that stocks might be in for another bumpy ride in 2016. But that doesn’t have to mean that you have to miss out on making great money. Because, according to small-cap analyst Sam Volkering, certain stocks could rise hundreds of percent no matter what happens in the next 12 months. In this special report, Sam reveals the simple principle behind that success. And you’ll also discover his top three small-cap picks for 2016, which could bring you gains as high as 338% over the next 12 months. (more)

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Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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