Here’s why you can’t blame socialism for Venezuela’s crisis

 

Here's why you can't blame socialism for Venezuela's crisis

 

A common misconception, reinforced recently by U.S. President Donald Trump, is that the crisis in Venezuela is the natural result of a socialist system of government. While it may be true that socialism leads to market inefficiency, the causes of the ongoing crisis in Venezuela are not the result of socialism.

Socialism is not communism, it isn’t fascism and it isn’t dictatorship. At its core, socialism means the government disseminates a country’s wealth among people, and that citizens, rather than companies or wealthy individuals, control production and the distribution of goods.

Socialism can result in diverse outcomes that range from the economy of Norway to that of Venezuela, and socialist leaders who vary as widely as Bolivia’s Evo Morales and France’s former President François Hollande.

It started with falling oil prices
Venezuela’s problems stem from corruption and egregious mismanagement, which can happen anywhere. Countries with socialist regimes such as China, Vietnam, Chile and many in Europe have managed to successfully grow their economies as Venezuela’s has tumbled.

The Maduro government oversaw the nationalized oil sector and took over a number of other businesses while redirecting resources from private companies to some of the country’s poorest citizens. The redistribution plan led to major reductions in poverty under former President Hugo Chávez, who remains very popular in the country.

But it buckled under Maduro when oil prices dropped and he began seizing more industries. The declining price of oil from nearly $120 a barrel in 2014 to around $25 a barrel last year meant Maduro was forced to draw upon other sources of revenue to pay the increasing price of ever-growing national guard protection and to keep loyalist politicians in line. Oil sales are 50% of Venezuela’s gross domestic product and 95% of its export revenue.

A massive increase of unsustainable debt
As private companies left the country Venezuela’s growth waned, and rather than cut back on spending, Maduro simply printed more money, resulting in skyrocketing inflation that has risen to an estimated 14,000% this year. To make matters worse, the country issued massive amounts of debt as government bonds and bonds from state-run oil company PDVSA.

That brought Maduro more cash, but payments on the debt have grown so high that the government can no longer afford to import basic supplies including food and medicine. As citizens starve, losing an average of 24 pounds a year on the “Maduro diet,” the country sends billions to overseas investors in coupon and principal payments. The country can’t issue more debt because of sanctions from the United States, and there’s hardly a market for it at the moment as Venezuela has fallen into default on some of its bonds.

Venezuela also has increasingly entered agreements with China, Russia and Cuba, wherein it pays off loans and services with oil, giving those nations larger and larger shares of its oil revenue.

Dysfunction and brain drain

Despite having the largest oil reserves in the world, Venezuela can make hardly any money in the market. In addition to sending much of its own oil to other countries in return for earlier cash payments, Venezuela is unable to modernize or even maintain its oil industry. Maduro recently appointed a former general with no experience in the oil sector as PDVSA’s president.

That’s led companies, workers and citizens with knowledge and skills in the industry to leave en masse. Brain drain has left production plants and facilities empty, and Venezuela now operates half as many oil rigs as it did just five years ago. Oil production has fallen by 800,000 barrels a day in just the past two years, and that’s expected to decline further over the next year, with no apparent safety net to catch the falling knife of output.

Unfortunately for Venezuela, all of this means that the country is unable to fully take advantage of the recent surge in oil prices.

Maduro has made himself a dictator

Citizens have been demanding change. Last year, the nation saw weeks of protests against Maduro and the ruling coalition in which an estimated 140 people were killed. Maduro’s approval rating is stuck at around 20% and even that figure is in dispute. The country’s socialist system calls for regular popular elections, but Maduro has barred legitimate challengers from running against him by accusing some of crimes, forcing others out of the country and even putting some in jail. The group overseeing vote counting is seen as corrupt and loyal to Maduro as well.

It’s easy to say that these maladies are the result of a socialist system of government. But the truth is that Chavez’s redistribution of resources from wealthy business owners who oversaw the country’s oil industry to Venezuela’s poor did not create this mess, nor is it the primary drag on growth.

There’s ample evidence that the motivation of capital encourages new ideas and greater innovation, leading to stronger businesses and faster economic growth. However, Venezuela’s crisis is not a result of stagnant productivity. It’s the result of corruption and poor decisions in monetary, fiscal and governmental policy.

While president, Chavez was able to enrich himself and his supporters and pay for poverty reduction programs with oil money as prices and revenue soared. Maduro has continued to live lavishly and pilfer profits to those around him while the people of his country starve on what little remains of an increasingly dwindling economic pie.

Google Shares Fall Ahead of 60 Minutes Feature on Antitrust Threat

Google Shares Fall Ahead of 60 Minutes Feature on Antitrust Threat

 

The CBS news magazine 60 Minutes will lead its show Sunday with a segment on “The Power of Google,” and promises to talk to the company’s critics, who say it stifles competition, as well as the European Union’s antitrust chief.

Shares in Google’s parent company, Alphabet Inc., dipped about 1.7 percent in early trading Friday after the news was announced. The stock was trading down 1 percent to $1070.02 9:47 a.m. in New York.

Google, along with other U.S. tech giants like Facebook Inc., Apple Inc. and Amazon.com Inc., have come under scrutiny in recent months for becoming too big, and too dominant in many aspects of people’s daily lives. Google and Facebook for instance largely control the market for online advertising, fueled by information they collect on their billions of users, which feeds their bottom lines and has made them among the world’s most profitable companies.

Warren Buffett explains why he never listens to economists

Warren Buffett explains why he never listens to economists

 

 

Warren Buffett believes economists do not add value for investors.

In a 2016 interview video clip found using CNBC’s Warren Buffett Archive, the billionaire investor explained why he does not give much credence to financial market predictions from economists.

“I don’t pay any attention to what economists say, frankly,” Buffett said two years ago. “Well, think about it. You have all these economists with 160 IQs that spend their life studying it, can you name me one super-wealthy economist that’s ever made money out of securities? No.”

The Oracle of Omaha cited the example of the economist John Maynard Keynes, who went through periods of heavy losses trading currencies in the 1920s and 1930s and stumbled while speculating on stocks. Buffett said Keynes faltered using top-down economic forecasts such as credit cycle predictions.

But when Keynes switched to a value philosophy focused on owning stocks of a few well-run companies over the long term, his investment performance improved, Buffett noted.

“If you look at the whole history of [economists], they don’t make a lot of money buying and selling stocks, but people who buy and sell stocks listen to them. I have a little trouble with that,” the investor added.

The Weinstein Company said late on Sunday that the U.S. film studio, whose ex-chairman Harvey Weinstein has been accused of sexual harassment and assault, planned to file for bankruptcy

The Weinstein Company says it will file for bankruptcy

The Weinstein Company said late on Sunday that the U.S. film studio, whose ex-chairman Harvey Weinstein has been accused of sexual harassment and assault, planned to file for bankruptcy

The Weinstein Company said late on Sunday that the U.S. film studio, whose ex-chairman Harvey Weinstein has been accused of sexual harassment and assault, planned to file for bankruptcy in the coming days after talks to sell itself collapsed.

Filing for bankruptcy protection creates more uncertainty about how women who allege they are victims of Weinstein could be compensated.

The scuppered deal had a provision for a victims’ fund, but in bankruptcy the women may now be treated as unsecured creditors that can recoup only pennies on the dollar for their claims.

The Weinstein Company had been close to inking an agreement this month to be taken over by investors led by former Obama administration official Maria Contreras-Sweet for more than $500 million, but a lawsuit filed by New York’s Attorney General Eric Schneiderman on Feb. 11 complicated the negotiations.

Schneiderman had wanted any deal to provide adequate compensation to women who said they were victims of Weinstein, protect the company’s employees and to not reward executives who allegedly knew of the abuse.

Schneiderman’s office said in a statement on Monday it was disappointed in the collapse of the deal discussions, which included a commitment from the buyers for up to $90 million in victim compensation, and that it would continue to investigate alleged abuse by Weinstein.

More than 70 women have accused Weinstein, once one of Hollywood’s most influential men, of sexual misconduct including rape. Weinstein denies having non-consensual sex with anyone.

“A deal (to sell the company) would have been best for everyone involved, including victims, assuming a sizeable amount of money was set aside from the acquisition to compensate victims,” said New York lawyer Doug Wigdor, who represents multiple victims of Weinstein’s alleged abuse.

Others said the bankruptcy would not necessarily limit claims and could introduce more oversight to the creation of a victims’ fund.

“We don’t think that the bankruptcy will ultimately limit what the victims could get,” said Elizabeth Fegan, an attorney representing victims in a pending class action lawsuit. “Our claims are not only against The Weinstein Company but also against the board of directors, which will continue to have liability.”

Fegan added that victims may also be repaid by insurance policies for The Weinstein Company and its directors and officers.

Contreras-Sweet’s latest offer did not meet the requirements of Schneiderman’s office and did not set aside enough money to ensure the company’s approximately 150 employees would be paid while waiting for the deal to close, according to a letter from the board of directors of The Weinstein Company to Contreras-Sweet and one of her investors, billionaire Ron Burkle of The Yucaipa Companies LLC.

“While we recognize that this is an extremely unfortunate outcome for our employees, our creditors and any victims, the board has no choice but to pursue its only viable option to maximize the Company’s remaining value: an orderly bankruptcy process,” the company said in an emailed statement.

In its letter, The Weinstein Company said the acquisition offer would increase the liabilities left behind for the studio, “charting a financial path that will fail.” It added that the deal could take many months to close.

In a statement, Contreras-Sweet said that it was her understanding that she was “close to signing the transaction documents in a couple days.”

“Regrettably, it appears that this transaction has now ended,” she said, adding that it had always been her goal to build a company led by women, retain employees and represent the “gold standard in governance and transparency.”

Warren Buffett offers his 'strongest argument' against a practice investors are doing in record numbers

Warren Buffett offers his ‘strongest argument’ against a practice investors are doing in record numbers

Warren Buffett offers his 'strongest argument' against a practice investors are doing in record numbers

Warren Buffett doesn’t recommend going into debt to buy stocks.

But that’s exactly what investors are doing in record numbers.

Margin-debt balances — loans individual investors take from their brokers in hopes of beefing up their portfolios and maximizing returns — rose to a record $665.72 billion in January, according to data from the Financial Industry Regulatory Authority.

The regulator doesn’t share the Berkshire Hathaway CEO’s hardline position against margin debt. But last month, it issued an alert warning that “investors may underestimate the risks of trading on margin,” which involves using part or all of a portfolio as collateral. One such risk is a margin call; if an investment’s value plunges, a broker can demand a cash replenishment of the account or liquidate the portfolio without permission.

The warning proved prescient when the stock market plunged by more than 10% earlier in February. Margin calls were among the reasons strategists cited for the pace of the sell-off.

It’s these sudden, losing market moves that make Buffett skittish about borrowing to buy stocks. In his annual letter to shareholders released Saturday, Buffett illustrated the sharp drawdowns Berkshire Hathaway’s stock had experienced over the years.

Berkshire Hathaway”This table offers the strongest argument I can muster against ever using borrowed money to own stocks,” Buffett said. “There is simply no telling how far stocks can fall in a short period. Even if your borrowings are small and your positions aren’t immediately threatened by the plunging market, your mind may well become rattled by scary headlines and breathless commentary.”

But for a levelheaded investor who’s not deep in debt during a market crash, there are “extraordinary opportunities,” Buffett added.

In an interview with CNBC on Monday, Buffett suggested that greed was a primary driver of margin debt.

“Borrowing money is a way of trying to get rich a little faster, but there are plenty of good ways to get rich slowly,” Buffett said. “And — you can — you can have a lot of fun while you’re getting rich as well. My partner, Charlie, says that there’s only three ways that a smart person can go broke. He says, ‘liquor, ladies, and leverage.’”