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.
First Germany, then France, and more recently the UK; one after the other the mighty are falling. Italy and Spain still go on for the time being without an official lockdown announcement, but there are curfews in place. As temperatures continue to drop and the growth in new cases consequently accelerates periphery countries may follow suit. As of today, everybody in Europe has to be home and safely tucked into bed by the stroke of midnight at the latest. Ideally, citizens should be home even earlier so that they can watch the weekly performances of their fearless leaders on TV. Spanish politicians have split the responsibility evenly between the Tsar in the Moncloa Palace and 17 regional viceroys for they are likely to repeat the mishandling of the crisis in its second wave. There has been no preparation in general. In Italy, only one region, the Venetto, has increased ICU bed capacity. They have doubled capacity there. In Spain, none have, as far as we know. The Spanish Parliament has voluntarily relinquished some of its powers and obligations for an extended 6 month State of Alarm. Regions are setting up internal borders once again. Pestilence will bring out both the best in some individuals but also the worst inclinations of politicians to the surface.
Suffering business owners are distraught, few more so than those in the hospitality industry. For now, schools remain out of danger of being shut down again; enough damage has been done already to this generation. Surprisingly, except for a few violent youngsters unhappy to be homebound for Halloween, not a single person is willing to stand up to point out that, this course of action will be as self-defeating as the first time around. In spite of a prolonged, arbitrary, and harsh lockdown where children, of all people, could not leave their homes for two months, excess deaths as a percentage of the population topped the global league tables. This national meekness, that some may confuse for civility, is indeed the triumph of hope over experience. One possible explanation for this course of action is that the population at highest risk, the over 65 year olds, are numerous, very concerned for their wellbeing, and only willing to hibernate if everybody else does as well. While this cohort constitutes just 23% of the total population, they are much more important politically because they vote in larger numbers than other age groups.
Looking at the COVID-19 fatality data in Italy, a country that has both a very similar demography and per capita income to Spain’s, but which is keeping far better records, confirms what we have known for months. The disease is especially lethal among senior citizens while the fatality risk for people under 60 with no pre-existing conditions is very low. The case fatality rate for those who are over 70 is alarming at 30%, while the case fatality rate for those under 40 is close to 0%. The good news is that all these rates exaggerate the actual risk since they are measured as a percentage of recorded positives. These are just a fraction of total cases. National surveys reveal a prevalence of 5.2% of the population (vs. 5% in Spain). Thus, there are 3 million estimated cumulative infections vs. 709,000 positive test results to date. Thousands protested in Italy over the weekend, they see this data as evidence that justifies rebelling against new restrictions.
Yet, since we are more likely to see a repeat of the irrational response, we should ask ourselves whether these lockdowns are helpful in any way? To judge from the first wave, one should curb one’s enthusiasm and adopt a state of diminished expectations regarding the merits of these extraordinary measures. What these lockdowns do achieve is a distribution of cases over a longer period because barring widespread vaccination, only population immunity will put an end to the pandemic. While we wait for the vaccine, we have to advance slowly towards immunity so that the health services do not collapse. This strategy of course worked so well in Spain the first time around that we would wager that the second time around it cannot possibly be any worse. When we were growing up, policy was all about making decisions while assessing the impact of the trade-offs embedded in such hard choices. Not anymore. We have gone full circle to the time where cost does not enter the debate and only the best interest of a minority of the population is taken into account regardless of the overall cost.
Many argue that since Governments can, and do, literally print money there is no reason to fret over large deficits and huge increases of the national debt, especially since newly issued debt costs close to nothing. Therefore, these people conclude that large Government incomes support and corporate welfare programmes are easily affordable. Perhaps this is the case in Germany, where restaurant owners will receive 70% of their foregone revenues, but this is certainly not the case in Spain. Restaurant owners will suffer expropriation without compensation if there is a second mandatory shutdown. Some may protest and remain open, but their efforts will prove futile. They will likely end up in prison just in time to replace the seditious Catalan politicians that this government is seeking to pardon since March.
In Spain, there is no money for small business owners and yet a family owned airline will receive €450 million in state aid without any public discussion of the merits of such largesse nor any transparency. We worried such state aid decisions that would squander taxpayers’ money, or be easily misconstrued for corrupt practices, would be on the rise in these troubled times. It is starting in earnest. Thus IAG, the parent company of Iberia and British Airways, may complete this acquisition, which will reduce competition in many domestic and international routes even further to the detriment of the general public and more specifically of taxpayers who fly.
There seems to be not enough money for the minimum universal income program either as only a fraction of the applications have been processed, but civil servants have just been awarded what many people who pay taxes believe to be a much-undeserved 0.9% wage increase across the board. The Government is unable to deal with pension applications allegedly because many government offices are closed, but all civil servants receive full pay for doing nothing from home. There are many signs the Government has a cash crunch, from delays in paying invoices to other more complex schemes. Tax revenues will remain well below target for some time to come as many business owners and self-employed workers will hide income. Once businesses lose access to bank credit, and most have in spite of the propaganda, there is no longer a pressing need to keep precise accounts. It all smells of trouble ahead, yet thanks to the ECB, Spain gets paid to issue debt out to 8-year tenors.
This strange state of affairs will be with us as long as bank depositors remain confident that their claims are money good. Unfortunately, this may no longer be the case if some banks get in trouble and end up in resolution in this second economic downturn in just 10 years. Perhaps the ECB will succeed at eliminating the credit cycle altogether. In which case, their extremely accommodating policies may result in much higher inflation rates. Either because of fear of suffering haircuts on deposits, or because the debasement of the currency finally runs its course, there may be large withdrawals of deposits as investors seek the safety of gold and other risk-free inflation hedges.
The Sovereign Debt and Banking Crisis of 2010 set the stage for ignoring any laws that inconveniently stood in the path of achieving short-term tactical goals. Spain’s government and its banks get adverse rulings with shocking regularity from the judges at the Court of Justice of the EU. For example, the tax authority designed a clever way to discourage Spaniards from wisely entrusting their financial assets to solvent depositary institutions abroad. The judges in Luxembourg ruled that this barrier contravenes the Treaties of the EU on the free movement of capital. Yet, the Spanish law that makes onerous requirements to be able to do as one pleases with one’s financial assets remains defiantly and stubbornly on the books. Perhaps the EU Commission and the other members of the Troika should consider enforcing compliance with the High Court rulings as one of many conditions for the upcoming sovereign bailout. More than ever before, Spanish citizens need the protection of EU institutions from the wanton impositions of an increasingly despotic, tyrannical, and confiscatory regime.
It is not just the government that undermines the morale of the citizenry with mean and hare-brained schemes, large Spanish companies like nothing better than to abuse their oligopolistic positions. The new round of bank consolidation intends to make the financial system less unprofitable. As the former head of Bank Supervision once told a rapt audience: «banks need to earn higher fees». This was a desperate call for highway robbery just as Fintech is eating away at the fat in the financial system. They are certainly trying hard in Spain. The latest commercial action coming out of the boiler rooms of these impecunious organizations is a case in point. Branch managers call customers on the phone, at least they have learned the hard way not to leave an email trail, to tell them their account terms are changing. Going forward, they need to buy a financial product, typically an overpriced home insurance policy, to be eligible for lower account maintenance fees. Notwithstanding a Supreme Court ruling that makes these bundles of products illegal, they pursue 80-year-old retired people with fierce diligence. By the time this practice goes to court, and they get an adverse ruling, banks will have enjoyed several years of overearning. Whom do they think they are kidding? Certainly not the stock market, which continue to treat them as zombies.
Such is the sad state of affairs; most people find themselves between a rock and a hard place. Business conditions and job security are terrible but the Spanish Government, alone in the EU, is raising income taxes in the 2021 Budget. There is no cohesive national policy on pandemic prevention. Each of Spain’s 17 autonomous regions designs its own set of measures. There is no national policy on optimization of hospital beds or other resources. Once again, some people may be turned away from hospitals in big cities whereas a few miles away hospitals may have excess capacity. Yet the very same people who botched the first wave, and are side stepping their responsibilities today, continue to expect the citizenry to follow directions that are as onerous as ineffectual.
We are beginning to get the feeling that governments are going to be surprised when they learn that the mood on the street is quite different this time around. Thousands, if not millions, will ignore the new restrictions and will do as they see fit, as was the case in the US. The more loudly the authorities insist on crucifying younger people on a cross of shame and guilt for infecting their elders because of their social anti-social behaviour, the less likely they are to succeed. Because by now, most people intuitively understand far better the medical risks for their age group, the preventive measures that others should take, and the economic cost of shutting down the economy. They also understand that under the State of Alarm the Government cannot constitutionally constrain free movement, the right to work, nor tell them to leave the ball by midnight.