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It is tempting to paint the competing factions backing Venezuelan President Nicolás Maduro and newly declared President Juan Guaido as East vs. West or socialist vs. capitalist, but the real delineation is about the money.
On one side: Most of the official bonds, around $65 billion worth issued by Venezuela and state oil company PdVSA, are held by investors in the U.S., Canada and Europe. Almost all of those bonds have been in default since November 2017.
(This situation played out perfectly for investors when Mauricio Macri was elected president of Argentina and settled almost immediately with that nation's creditors on terms that were very favorable.)
The other side: China and Russia have enjoyed an off-the-books arrangement with Venezuela wherein the nation with the world's largest proven oil reserves ships them crude in exchange for discounted payment of outstanding debts and fresh cash.
These agreements would be in question under a new president who was backed by the U.S., Europe and the IMF.
Iran and Russia also benefit from Venezuela's greatly reduced oil-production capacity, which props up crude prices.
Closer to home: Latin America's 2 major country alliances — Mercosur, which includes Venezuela but does not recognize Maduro, and Allianza Pacifico — have denounced Venezuela for years. Maduro's assault on democracy threatened international trade agreements and 3 million displaced Venezuelan emigrants have spilled into neighboring countries causing economic and political strain.
The bottom line: Venezuela previously funded itself through debt financing and oil sales, but as the cost for Maduro to stay in power rose — with higher bond payments and more security — and he ran low on U.S. dollars he looked for partners who would take alternative payments. Those partners are now invested in him holding power, while defaulted creditors are invested in his removal.
While major banks including Credit Suisse, Barclays, BMO and Citi have softened their bullish expectations for 2019's stock market gains, analysts at Capital Economics have upped the ante, saying they expect the S&P 500 to end the year lower,
In fact, the firm is expecting the U.S. economy to "slow sharply" this year with the S&P some 22% below its 2018 peak. Further, analysts say they do not rule out a mild U.S. recession this year.
"The data from the US have held up for now, but we expect the economy to slow further over the course of 2019 as the sugar-high from last year's fiscal stimulus wears off and the lagged effects of monetary tightening start to bite."— Neil Shearing, chief economist at Capital Economics
Economists are cutting expectations for 1st quarter GDP to reflect the government shutdown's hit to the economy, but not all of the growth lost during the shutdown is forever gone, Axios' Courtenay Brown writes.
The big picture: The CBO estimates the shutdown cost the economy $11 billion, including $3 billion of activity that won't be recovered.
What's going on: Three of the big banks raised estimates for 2nd quarter growth, alongside their 1st quarter downgrades, saying that the lost economic activity will resurface in the second quarter.
Yes, but: Ethan Harris, an economist at Bank of America, who also upped his 2nd quarter growth forecast says "only some of the lost private sector spending will come back."
Watch this space: S&P points out that lost productivity from furloughed employees won’t be recovered and business confidence will slump, especially if it appears that we’re headed for another government shutdown in 3 weeks.
Dion's thought bubble: It's important to note that the length of this shutdown is unprecedented. The 35-day shutdown was 2 weeks longer than the previous record in 1995-96 and more than twice as long as the 16-day shutdown in 2013.
Two companies reported earnings this week and had dramatically different readings on what their slowing China sales mean, Courtenay writes.
Caterpillar, which makes 10% of its annual revenue in China, missed profit expectations by the biggest margin in 4 years. But executives say they aren't worried about a broad economic slowdown.
The other side: Nvidia, which cited China's economic slowdown as the reason for its "extraordinary, unusually turbulent, and disappointing quarter."
Ahead of this week's now-delayed report on U.S. GDP, think tank Prosperity Now produced an economic report it says shows how Americans are feeling the economy.
The big picture: The situation for American families is improving, with increased levels of savings, higher wages and fewer people in dire financial straits. However, the organization argues the data shows many Americans are still hurting in a time of strong economic growth.
"Income poverty rates haven’t fallen below where they were in 2008 and 2007. The cost of living is greatly outpacing growth in wages, and the numbers show that too many of the jobs people do have are not setting them up to afford their healthcare, put money away, or securely meet their housing costs.
The numbers show people of color feel it the most and are vulnerable to the kinds of small disruptions that — as the shutdown demonstrated — can escalate very quickly if you are living paycheck to paycheck.”— Kasey Wiedrich, director of applied research at Prosperity Now
Wages and Income
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