Friday, July 30, 2010

Spain "Austeridad (pero no mucha)" [Austerity (but not too much)]

I truly pity those who attempt to explain daily market moves. Last month, it was all about the PIIGS. This month, our manic-depressive portfolio managers, tired of waiting for another shoe to drop, have shifted their attention to the US economy.

Naturally, as they look at the US economy getting weaker, they had to do something, after all, what kind of a professional would you be if you didn't trade? So they sold the US dollar. Which of course means buying the Euro and the Yen.

So, for two weeks, we have heard that "the Euro is going up because Europe is stabilizing." Is it because of the stress tests? Well, not really, the tests had all the stress one can expect in the European continent in August. Not only did they ignore the true sovereign risk, but they made sure to render the results meaningless by allowing the banks to decide which risk would be tested while hiding the rest in investment accounts. I mean, would any buyer ignore any portion of a bank's assets on account that they promise to hold them to maturity?

In the meantime, the PIIGS are hard at work cutting their deficits for the benefit of the bondholders. Spain, for instance, has cancelled all sorts of public projects. Some of these, were only launched last year when the mantra was "Spend! Baby, spend!"

Canceling projects is relatively easy. After all, the construction workers are not the direct responsibility of the government. Public employment is another matter. As Spain announced today new record unemployment (click here if you can read numbers in Spanish) the report shows that the public sector continues to hire (click here if you can read charts in Spanish). According to this report, the "Autonomias" (regional authorities independent of the central government) have hired over 73,000 new employees in the last 12 months.

The conclusion is quite obvious. The markets focus on the big announcements by names they know like Trichet and Zapatero. If your competitors do the same, you can always say that you had all information available at the time. The reality on the ground, however, is quite different. In Catalonia, like in California, everyone the government fires/not hires is a voter. In the end, these are the people the politicians have to answer to, whether the bondholders like it or not.

Nobody has ever grown out of austerity without a devaluation. Although every situation is different, I suspect the reason is that the people on the ground, in the end, prefer bankruptcy to starvation.

I'll leave the moral judgment to the reader.

Disclosure: no stocks mentioned

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