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.
It is a rare occurrence nowadays for a politician to address a pressing problem candidly. Thus, when José Luis Escrivá, the Spanish Social Security Minister, stated the obvious in a TV interview, namely that baby boomers will have to work longer in return for smaller state pensions, all hell broke loose last week. Many left wing Spanish cabinet members live in a parallel universe where they pursue progressive policy goals with passion and utter disregard for fiscal targets. These inhabitants of a Sánchez sponsored Truman Show are not even remotely aware of the fiscal constraints enacted in the Maastricht Treaty, the Growth and Stability Pact, or the shotgun constitutional reform calling for a balanced budget which was imposed on Spain by its EU creditors before releasing any emergency funding in 2012. Certainly, none of these woke activists should be suspected of knowing that nine years later Spain has returned just €6,612 million out of the €41,333 million drawn out of the €100,000 million facility.
The allegedly secessionist parties that keep the Government afloat share this disaffection with the harsh realities of adult life. No sooner had the Catalan politicians and activists left prison thanks to a Presidential pardon, that they vigorously protested their undiminished intention to re-enact a referendum on independence, so much for atoning for their peccadillos. These politicians are wily but not very candid because actual independence, with all the responsibilities that true self-government entails, is the last thing they would ever want. How can we be so blunt? Because polls in the Basque Country reveal the lowest support for independence in many decades. This is perhaps the case because the Basque Country has obtained self-rule in all areas of government (except for monetary policy as long as it remains in the euro). Most Basques are very happy with the current arrangement; and why shouldn’t they, as for now, they may have their cake and eat it too.
While Spanish politicians play highly choreographed Kabuki theatre scenes on the national stage, both on TV and in Parliament, they leave the actual hard work of pandemic control and economic recovery plans partly to regional governments and largely to fate. In spite of the rally in cyclical stocks, the economic prospects do not look particularly bright. Let’s not forget that many workers are still in furlough programs, bankruptcy courts are not taking new cases, and banks are not providing for restructured loans, at least for the time being. Out of sight, out of mind! When the Socialist Party ran against Rajoy’s Popular Party, their economic advisors had a plan. They shared the EU’s concerns on the very high structural rate of unemployment as well as the very large contribution to employment and economic activity from SMEs that are far too small to compete not only on the global stage but also within the EU. Such facts based concerns have evaporated from cabinet meetings.
Lack of scale and scope are a major handicap for Spanish businesses. There are very few, if any, truly multinational companies founded in Spain besides the Company of Jesus (and even in this case, technically, it was founded in Paris). The largest public companies’ market capitalizations have been getting smaller on a relative basis vs. global peers for two decades as their massive capital deployment in Latin America has proven to be a fatal strategic mistake as we expected. Their falling share prices have more than offset the massive increase in share count. There are no big pools of domestic savings investing in equity risk. In fact, there are no pools of domestic savings large enough to finance the non-financial private sector debt. As a result, Spain has a large and growing net international debtor position, which is likely close to 100% of GDP even before taking on the additional burden of the EU’s Next Generation Program.
Spain is a very low trust society and for good reason as graft and corruption are rampant and accountability a foreign concept. When you meet investors there, no matter how small their size, they all agree that they only like to make investments in companies where they can exert influence over strategic decisions and have voting control. Not surprisingly their returns suffer as this is a perfectly good example of an algorithm with a built in negative selection bias. For starters, it is hard for them to find any investment candidates outside of Spain, and when they do, it is usually not a great situation. This stubborn policy is in stark contrast with Warren Buffett’s investment strategy. Berkshire Hathaway is content with finding good companies at attractive valuations and let the management run the company on their behalf. Their emphasis is of course on the quality of the business model. As Mr Buffett famously quipped: “I try to invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will”. Berkshire’s strategy has worked far better, even for the lacklustre last two decades, than any of the observable investment returns for Spanish investment companies or funds. Yet, the latter’s managers persevere in their blind faith on their apparently flawed model.
In a country where the private sector shows such idiosyncrasies, what should one expect from government directed investments? In our case, very little that may contribute to long-term productivity growth. In fact, productivity growth in Spain is extremely difficult as the contribution of services to GDP is very high. On a recent visit to the Basque Country, we discovered that self-rule is not a recipe for more enlightened rule either. We learned from a famous restaurant owner that because of a tax audit where the authorities could find no evidence of fraud, the inspectors nevertheless concluded that the restaurant’s employees were working far too many hours per week and sent their file to a labour inspector. Thus, this famous restaurant, perhaps one of the best fish and seafood restaurants in the world, will not be opening for dinner several days per week going forward. These luminaries are the same mandarins that will help Spanish politicians identify investment cases worthy of EU money. And so it goes…
In any case, until the mana from Brussels becomes available, the Government’s policy priorities are such important topics as passing a law that allows minors to choose their gender without parental consent. Indeed Spain is a country where one may choose one’s gender without changing one’s sex. Surprisingly, Spanish male citizens are not taking advantage of this gaping legal loophole. They should reconsider for two reasons. First and most importantly, it will put an end to a paradoxical and perhaps unconstitutional reverse discrimination situation built into the domestic violence prevention laws whereby male Spaniards bear the burden of proving their innocence when the plaintiff in such cases is female. Secondly, gender equality laws call for equal representation of women and men in Cabinet positions, seats in parliament, the civil service, and boardrooms. Thus for a male Spaniard to choose to become a female is a dominant strategy. The reverse is only true in the case of the King’s daughters. The eldest would ensure her status as the Crown Princess under any scenarios. Conversely, the second born would become the Crown-Prince as long as her older sister remains a woman, as the Spanish Constitution still gives priority in the line of succession to male over female heirs to the Crown.
The progressive visionaries in the Spanish government have economic policy initiatives such as a 30% increase of the minimum wage that has left most people under 30 unable to join the formal economy lately or resuming inflation indexing for state pensions when Social Security is already running a cash deficit of more than 1% of GDP. The reforms to public pensions will be disclosed to the general public over two years; nevertheless, the gist of it is what Mr Escrivá naively let out unwittingly, for pension sustainability is a demographic problem, not a political position. There might be a loss of consumer confidence as a result, which may or may not compromise the pace of recovery; perhaps these changes will have no effect. The Labour Minister, a Communist, has yet to make any pronouncements on the labour market reform, which is the second important point on the long list of conditions that comes with the EU’s funds. The local media do not seem to have Internet access and remain mute on this subject as well. Travel restrictions compromise the success of the summer tourism campaign and there is no 2022 Budget agreement in sight for now, as support in parliament is conditioned to the progress Sanchez will make in his discussions on devolution of powers with the head of the Catalan government. Other than that, it is all well in the best of all possible worlds until that is, any member of the Euro group decides it isn’t anymore. In the interim, the Truman Show will go into its 3rd season.
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