Regime Change Adventures: Bush, Obama, and now Trump

Emerging market shocks follow a familiar pattern in quantitative investing. When the event occurs, quantitative factor responses in stock selection get thrown out the window. As the smoke clears, top-down strategists map out the direction and magnitude of the shock, and technical analysis factors like price momentum and reversals start to work. As the magnitude of the shock becomes known, company analysts revise their earnings estimates, and estimate revision and earnings surprise factors begin to work. Finally, as the investment environment stabilizes, conventional value and growth factors gain traction.

The same thing is happening when U.S. forces seized Venezuelan President Maduro and his wife in a weekend raid. The smoke is starting to clear, both metaphorically and literally, and invest0ors can see the direction of the shock.

The raid made some sense from a Trumpian geopolitical viewpoint. Bloomberg opinion columnist Javier Blas characterized the move as Trump building his own Oil Empire. The Donroe Doctrine countries in the Western hemisphere, the U.S., Canada, Venezuela and the rest of the Americas, control roughly 40% of global oil production and this allows the White House much greater control over oil prices and production to avoid energy shocks in the future.
 

 

It all sounds good in theory. But as the recent history during the 21st Century shows, this is the third time the U.S. has attempted regime change in oil-producing countries. Bush tried it in Iraq, Obama tried it in Libya and now Trump is trying it in Venezuela. None worked out according to their pre-war textbooks. Here’s what this latest geopolitical adventure means for investors.
 

 

Winning the Peace

U.S. military interventions in the 21st Century have followed similar patterns. They were mostly effective at the tactical and operational levels. The Pentagon has shown that it can win wars, but the military is not organizationally structured to win the peace.

This shouldn’t be a surprise to the Trump White House. The NY Times reported that Trump 1.0 ran war games on what would happen if Maduro was ousted, and the most likely outcome is the country descends into factional chaos.

As an example, Retired Lt. General Mark Hertling, writing in the Bulwark, recounted his “regime change” experience in Iraq.

One reason regime change is so easily discussed is that it is so rarely defined. Does it mean removing a single leader? Dismantling an entire governing apparatus? Installing a new political order? Each of those implies a radically different level of responsibility, risk, and duration. Removing a leader does not necessarily replace a regime. And even dismantling an entire regime does not, by itself, confer legitimacy on whoever and whatever comes after it.
 

Who governs the day after the old system collapses? Who provides security when police forces, militaries, and internal security services fracture, disappear, or form an insurgency? Who pays to stabilize the economy, restore basic services, and rebuild institutions when key members of the old regime’s bureaucracy flee? And for how long does the intervening power remain responsible for outcomes it can influence, but not fully control? The United States has repeatedly demonstrated an extraordinary ability to plan for the defeat of enemy forces, but what it has failed to do—and appears to be doing again—is plan with equal seriousness for the political, social, and economic vacuum that will inevitably follow.

President Trump has asserted that the U.S. will “run” Venezuela until the U.S. can carry out what a “safe, proper and judicious transition”. CNN reported that Trump isn’t insisting on regime change, and the Delcy Rodríguez government can stay as long as she “does what we want”. That plan is already disintegrating before our very eyes.

Venezuelan Vice President Delcy Rodríguez has been sworn into power as interim president. Any notion that she would act as a willing puppet of Washington is evaporating. As the existing power structure weakens, other players have rushed into the political vacuum.

Venezuela’s militias, specifically the Bolivarian Militia and the urban paramilitary networks known as colectivos, have taken the role as the primary agents of a potentially dangerous resistance. These paramilitaries are the most visible armed presence in the Venezuelan capital. And I haven’t even discussed the possible disruptive role of the Cuban advisors in Venezuela who were supporting the Maduro regime.

If the local resistance can reframe the conflict from “defending the Maduro regime” to “a war against American colonialism”, the Pentagon war game outcome of factional chaos will be the likely outcome.
Recall the experience of Obama’s intervention in Libya, where the U.S. only provided air cover to local allies. The country became divided and remains divided today, and it has become a jumping off point for migrants and refugees from the rest of Africa into Europe.
 

 

The Illusory Oil Prize

The economic prize in Venezuela is its oil reserves. But much of the potential gains may be illusory.
After the invasion of Iraq in 2003, the consensus western analyst production expectation for Iraq’s largest oil field, West Qurna, was about 2.5 mbpd in phase I and 1.8 mbpd in phase II. In reality, production never exceeded 0.6 mbpd and 0.5 mbpd, respectively.

An NPR news report of a Trump press conference makes it evident that the incursion is all about Venezuela’s oil. He explicitly stated “we’re going to be taking out a tremendous amount of wealth out of the ground” and that this wealth would “go to the United States of America in the form of reimbursement for the damages caused us by that country”.

Here are the problems with oil extraction in Venezuela. The oil infrastructure is aging, neglected and needs vast amounts of investment. In addition, the oil is heavy and sour, and trades at a discount to light sweet crude. Here are some back-of-the-envelope calculations from Brad Setser:

Venezuela’s 2024 production was 0.9 mbpd. Excluding domestic consumption, assume that it can export 0.75 mbpd at a generous $50, that comes to $14 billion a year in export revenue. Industry experts think the upper bound on how much additional production could be generated if the international oil service giants came in to revitalize the fields is an extra 1 million barrels, or $18 billion. That’s the revenue side.

Now consider the cost side. Estimates of investment in the oil fields, pipelines and export facilities start at $100 billion and the time frame could be a decade or more. What board member of oil major would approve such vast sums in a politically unstable region? Also consider the huge stock of existing debt of government bonds, bonds of the national oil company PDVSA and Chinese claims, plus supplier claims and outstanding interest. Estimates by Cooper and Walker, two lawyers with sovereign debt experience, outlined in a 2019 paper are at least $100 billion, and current estimates amount to $150 billion or more.
 

 

With total debts of about $150 billion and about $10 billion in exports, Setser concluded that “there isn’t a near-term oil revenue stream big enough to pay for current imports (which will go up if the U.S. wants stability), past claims (expropriation compensation, unpaid debt) and the new investment needed to raise production substantially”.

Moreover, the Trump Administration’s dual objectives of $50 oil and Venezuelan cash flows are contradictory. Venezuela’s oil fields need $80 oil to become economic and to ramp up production. You can’t have both.

In response, the Trump White House floated the trial balloon that it may subsidize investments into Venezuela. Already, the gains from the oil prize are looking illusory.In addition, China was caught off-guard by the American Maduro raid, as it had a delegation in Venezuela that weekend. Its initial reaction was to assert that “Chinese interest in Venezuela will be protected by law”. In other words, it isn’t threatening military action, though it could take steps to arm anti-American militias. It instead signaled that it was going to contest the regime change efforts in the courts. China will pursue international arbitration, invoke bilateral investment treaties and take its case to every court from New York to The Hague. In effect, Beijing plans to raise the cost of capital for foreign investors into Venezuela to such prohibitive levels that Trump and future U.S. administrations will think twice about regime change adventures.

 

The legal challenges may begin sooner than later. President Trump announced on social media that sanctioned Venezuelan oil will be seized, sold and the “money will be controlled by me…to benefit…Venezuela and the United States”. A Department of Energy factsheet formalized this initiative by stating that the “United States government has begun marketing Venezuelan crude oil in the global marketplace for the benefit of the United States, Venezuela and our allies” and the “funds will be disbursed for the benefit of the American people and the Venezuelan people at the discretion of the U.S. government”.

It is unclear under what legal authority the seizure would be conducted. Even the courts deem the diversion of oil sales to be legal, any funds “disbursed for the benefit of the American people“ should flow to the U.S. Treasury and spending needs to be authorized by Congress. As a reminder, the Reagan Administration’s efforts to create a private revenue source for the White House and spending it in a fashion that avoids Congressional oversight was the basis for the Iran-Contra Affair.

Companies investing in Venezuela will need ironclad assurances before spending a penny. The Financial Times reported that one private equity energy investor said, “No one wants to go in there when a random %&$! tweet can change the entire foreign policy of the country”.
 

 

 

Investment Implications

In summary, investors are starting to map out the direction, but not the magnitude, of the Venezuela shock. The situation remains fluid, and there are too many unanswered questions to pinpoint the full investment implications of this geopolitical pivot.

Based on a reading of past history, it is becoming clear that the U.S. will have to devote considerable fiscal resources, in the form of additional military spending, possible subsidies for oil development, and administrative resources to a Venezuela Project with uncertain and nebulous payoffs. Indeed, President Trump has called for an increase in military spending from $1 trillion to $1.5 trillion for fiscal 2027. These initiatives will exacerbate several trends that are already in place.
 

 

I expect higher fiscal deficits to put upward pressure on inflationary expectations, which are already rising. As inflationary expectations rise, yield curves will steepen. The Venezuelan Adventure is unfriendly to the bond market.
 

 

The only source of tactical restraint will be the financial market as the Trump Administration turns its eyes to other potential foreign adventures, such as Greenland. Right now, both the VIX and MOVE Indices are tame and within the “Assertive Trump” zone. Watch for upward pressure on the 10-year Treasury yield and spikes in implied VIX and MOVE volatility for Trump to pivot to a TACO (Trump Always Chickens Out) change in policy.
 

 

In conclusion, Trump’s Venezuelan adventure is following the script of past U.S. interventions by Bush in Iraq and Obama in Libya. Initial plans to stabilize the country and exploit its resources will prove messier than expected. As a consequence, investors should expect higher fiscal deficits from the cost of intervention, rising inflationary expectations and a bond unfriendly environment.