“THIS TIME IS DIFFERENT”

Please do remind us strongly, if we ever utter those four words. This phrase is the curse of all wishful thinkers. It’s the ultimate hideaway used by optimists trying to sell you a story. They will always find an argument and an audience to discredit the past and “prove” why the historical norm doesn’t apply “this time”.

In our public presentations and in these reports, we are keen on showing historical records for whatever assertions we make. The reason for that is that after 25 years in the financial arena we have come to respect the law of the patterns. This is why we retrace 30, 50 and even 500 years to look for the patterns that prove the norm rather than the exception.

This is why we review the last 30 years of Venezuelan FX rates and come up with the recurring 10-12 year cycle of revaluation & devaluation that is coincident with the cycle of world oil prices. And the, we stubbornly trace back the oil price cycle since it was “discovered” in 1859, and note that it has been largely determined by the U.S. economic cycle, which itself has always been preceded by several irrefutable statistic events: among them an inverted yield curve and a plummeting “New Housing Units” curve.

The chart below, taken from the St. Louis Fed, traces the behavior of these two stats since 1962 in juxtaposition with oil prices (black line). Notice how the red line (new housing units) plummets ahead of every recession of the last 40 years (grey columns). Simultaneous with every drop of the red line, notice how the green line (3-month bond yields) topples the blue line (10-year bond yields) ahead of every recession –the toppling is indicative of an inverted yield curve-. Also note that the only exception to the rule occurred in 1966. The year after Lyndon B. Johnson’s decided to escalate the Vietnam war from 20,000 troops in 1964 to an eventual half million (by 1968). The corresponding increase in defense spending after 1965 stopped the imminent recession from materializing in 1966. Now that is quite an exception. Why would anyone think the inverted yield curve event that’s been happening since July 17th this year and the plummeting New Housing Curve that’s been occurring since October 2005 until today would equal the 1966 circumstances? If anything, it would be the opposite, the US seems to be getting ready to decrease its military presence in Iraq, not escalate it, thus military spending should trend down. Just by reading yesterday’s bipartisan road map “The Iraq Study”, you can tell what is coming is military reduction, not escalation.

Also with respect to our FX hedging advice of yesterday, we base our readings on the same historical principles as above: Every one of the years we have been under FX controls has encountered the same December-January behavior: parallel FX rates go up significantly. Additionally, every post-electoral February since 1983´s historical devaluation has been met with increasing fiscal deficits that have always been “cured” with some form of devaluation.

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