Llevo 31 años subido al andamio de la industria financiera, los últimos 25 gestionando patrimonios. He vivido en Nueva York y en Londres, donde he tenido la gran suerte de conocer y trabajar con algunos de los mejores inversores de nuestro tiempo. A ellos y a mis socios les estaré siempre agradecido por la formación que he recibido.
Our medical and other sundry, yet generally faceless, science experts anticipated a second wave of this tedious pandemic, and yet politicians apparently did not follow their advice to be on the ready. In the face of such a daunting and inevitable problem, our political leaders made a big decision in the summer: they decided to call victory on the pandemic, accept a new normal, and go on holidays; at least that was the case in Spain. Politicians chose to use taxpayers’ money to mitigate the economic shock of the confinement and lockdown measures. Thus, vast numbers of people enjoy government-sponsored furloughs and other incomes protection schemes (except as usual in Spain where many people have yet to touch their furlough checks). Other similarly futile alternative pursuits such as vast corporate welfare programs are embraced full heartedly.
We wonder whether our fearless leaders might not have been better advised to invest in hospital beds’ capacity when economic activity recovered, and far more importantly, to have deployed massive testing and tracing capabilities. Do their choices make sense? How could there be money to bailout airline shareholders when nobody is flying, but no money for basic protection from the second coming of the virus? These policy choices do not make sense if the goal of governments is to ensure the wellbeing of the people and to protect their constitutional right to life, liberty, and the pursuit of happiness.
When observing the manner in which otherwise fiscally frugal and liberal (in the European acceptation) politicians such as Angela Merkel jumped at the opportunity of first bringing economic activity to a crawl and then dishing out hundreds of billions in state aid, you might have concluded that there was no other choice. You might have been persuaded as well that traditional epidemiology responses are no longer valid, or that developed economies are devoid of the legal mechanisms for companies to seek protection from creditors. The latter is especially dumbfounding, as banks are not even trying to collect on loans for now. The very same Merkel who only a few years ago did her utmost to prevent taxpayers’ money to bail out bank shareholders, has become today the most active promoter of helicopter money for business. How did this come about? We will try to provide some background as a truly satisfactory explanation may not come for some time.
Let us wind back the clock a few years. Our generation came of age with the dawn of a counter-revolution led by two conservative reactionary politicians, Margaret Thatcher and Ronald Reagan. As it turned out it was a short-lived experiment. The role of government in the economy and many other aspects of private life had been growing since the Great War, which marked the end of the first contemporary era of globalization. The Great Depression finished off whatever there remained standing of the Pax Britannica era of capitalism. The Great Depression enabled the public management of the economy. It became a primary function of government. Economic nationalism became the central policy tenet for most countries during that dark period. This isolationism brought about beggar thy neighbour policies such as high tariffs and competitive devaluations that undermined the managed international currency system based on exchange rates pegged to gold within narrow 1% bands. This arrangement came to an end with WWII.
The New Deal, and later a New World Order negotiated at Bretton Woods, were the basis for the post WWII rules based system. The Bretton Woods agreement of 1945 was largely the US’s vision of cooperation in trade by lowering trade barriers. These policies were designed to foster economic development and growth. The European Reconstruction Plan announced by George Marshall in his 1947 commencement address at Harvard University offered an alternative to central planning and state intervention for the reconstruction of Europe. The US dollar became the new gold standard. The IMF’s founding mission was to be “the keeper of rules and the main instrument of public international management”. In spite of all the good intentions of this more liberal economic and financial order, by the 1970s Governments the World over were still in charge of large swathes of the economy. Some of the largest companies in the developed western economies were government owned especially in oil and gas, banking, telecoms, and utilities. Regulation stifled competition by design in key industries, principally banking and insurance. There were still high barriers to trade in the form of tariffs and other more subtle obstructions. Most countries had capital controls in place, thus citizens could not vote with their feet and move somewhere else with their money.
Then came the Vietnam War, the 1973 Arab Oil embargo, and stagflation. Faced with a dire economic backdrop, Governments tried to fine-tune the rise in prices with price controls and other equally self-defeating exercises. The time was ripe for change and a new frame of mind gained favour with the electorate of the United Kingdom and the United States. Thatcher and Reagan popularized smaller government and individual responsibility. They also effectively contained the USSR until it imploded under the weight of central planning and government interference with all aspects of production.
Arguably, 9/11 marked the end of the lull in global tensions that followed the fall of the Berlin Wall and the demise of the Soviet Union. The hastily arranged Patriot Act of 2001 was a legal, even legitimate, self-imposed curtailment of civil rights in the US. It marks the beginning of an era hitherto unknown in democracies of boundless government intrusiveness into our private lives. This explicit consent to live in a state of surveillance in the interest of national security and our own protection became the enabler of the data Platforms. Google, Facebook, or Amazon use the abundant data that we provide them willingly and freely to peddle back to us products and services. They also feed us lines that persuade us and tell us what we should think. This sets the stage for the unexamined contemporary life. Large swathes of society are preconditioned to follow instructions from our fearless leaders meekly, no matter how bizarre or ineffectual. More worryingly, apparently it also conditions the masses to accept disinformation and propaganda as an alternative to mainstream news media and learned opinion.
The War on Terror also marked a period of large Government deficits in the US as George W. Bush fell the victim of one of the classic blunders and got involved in not just one, but two, land wars in Asia. The Financial Crisis that unravelled at the end of his second term provided the excuse for politicians to orchestrate a massive power grab over the financial system in plain daylight and with the consent of the electorate. We strongly believe the Pandemic will extend Government influence to most formerly private enterprises because politicians will not be able to contain their desire for this second opportunity at grabbing more power and control over the means of production. Wherever they succeed grief and want will descend upon the land for they cannot be trusted with such sensitive responsibilities. Unfortunately, no Reagan counter-revolution lurks around the corner as today the political zeitgeist has shifted to the rise of populism and neo-socialism. Such politicians have gained momentum because of the damaging outcome of the policy response to the Great Financial Crisis.
Whoever designed a combination of ultra-loose monetary policy to reflate the value of the assets of the 1% in tandem with fiscal austerity was either irresponsible, stupid, or alternatively very cunning in advancing their nefarious objectives. The elevation of inequality to the highest ranks of society’s problems is a self-inflicted wound of epic proportions that has no satisfactory solution. Yet here we go again, because while lockdowns may protect college students and professional classes who may work from home, they are an enormous burden on the working classes. The ensuing rise of populism and anti-globalism may not be universal, but it is nonetheless causing enough damage already as it is. Whenever you feel exultant, you need only remember that both Germany and France banned exports of medical supplies and equipment to other EU countries in March, just before they closed their land borders for good measure.
As Jens Weidmann, the President of the Bundesbank, pointed out in his recent address to the students and faculty of Harvard University; “deglobalisation, disrupted education, and debt are the economic policy challenges ensuing from the pandemic”. We would add a fourth, intergenerational fiscal warfare. Add to this economic problems the externalities and collateral damage that the self-imposed economic stoppages have unleashed upon the most unfortunate of our brethren. Economic collapse has placed the lives of millions of poor people worldwide at risk of starvation, even in middle-income countries such as Ecuador. Millions of children and young adults face medical and psychological risk from lockdowns far more real and dangerous that they do from Covid infection. The life earnings of contemporary students are very likely to be lower because they will fall behind in this remote learning system. Many people are not going to the doctor and thus we are seeing worsening incidence of cardiovascular disease and cancer. Some inoculation programs such as TB in India are suspended. Other infectious diseases such as polio may also come back with the disruption of immunization programs.
Thus, we may conclude that in the centuries old ebb and flow between liberalism and socialism, between individualism and collectivism, between reason and myth, we are drifting slowly but surely into a new Dark Age. The resources available on the Internet, such as free online courses, do not seem to be a good replacement for classroom education. Most people today do not seem well equipped to analyse even the simplest logical or probability problems. Even worse, it has become acceptable for all issues to be politicised. The observation by one of Trump’s advisors that there exist “alternative facts” is nothing short of brilliant, because this is precisely the case in our society. There is no objective reality to speak of today.
The left has embraced unquestioningly several issues including global warming and the benefits of confinement. Such is their blind faith in their own ideas that the same epidemiologists who advocated lockdowns also said it was OK to protest when the BLM movement took to the streets. Politicians are enjoying their newfound powers. They have seized largely unchecked God like influence over people’s lives and business activity. The relaxation of fiscal rules must be a most welcome source of joy as well. Yet there are costs to bear.
Most developed countries will have Government debt to GDP ratios at or above 100%. As a result, central bankers have become responsible for the creditworthiness of many sovereign issuers, especially in the euro zone. They can no longer reverse course, as higher rates will lead to financial ruin. The only way out of this mess is a combination of confiscatory taxes on wealth, liquefying debt with inflation, re-profiling of sovereign debt, pension reform (an euphemism for pension cuts), outright sovereign default, or combinations thereof. Certainly should you own any bonds, especially in euros, you might be well advised to part with them before it is too late.
Current policies compromise explosive nominal GDP growth, which is a fifth way out of this morass. With the end of the independent central banks, we should expect inflation, if it ever reappears, to run unchecked. Thus, the most benign scenario might be one of slow impoverishment, nationalizations, and populist income redistribution policies that will lead to massive capital flight as was the case in the 1970s. Ten or more years from now, when and if, politicians have run the economy into the ground there may be a new generation of leaders that may succeed in peddling prosperity with a new angle. We wager that they will sound very much like Thatcher and Reagan did forty years ago, and so it goes.