Daniel Lacalle

New Year, Old Financial Repression

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This article was published in El Confidencial on Dec 21st, 2012 and in The Commentator on January, 2013

“I have seen the future and it is very much like the present, only longer.” Kehlog Albran (parody)

As every year since I started in this business, all banks and analysts expect market gains throughout the year. Global recovery and improving the economy? No, unfortunately.

The market expects another two billion-plus of scam stimulus policies.

The last conference given by Ben Bernanke, Federal Reserve governor, basically came to say “another day, another 283 million dollars down the drain”. And as Monopoly money … it’s gone.

Financial repression version 2013 and nominal GDP targets

More government debt, very low rates, more taxes, less disposable income, more money printing, less value of money, more inflation. The inflation that they say does not exist but that you feel in your pocket every day. As the formula has not worked so far, and the economy is getting worse, now we hear that central banks should aim their policies at “nominal GDP growth.”

What does that mean?. freedom to print and intervene the money market even if inflation soars, because the goal is to create nominal GDP growth -not real, ie inflation-adjusted-. No matter if you see prices skyrocket, the important thing is to continue to maintain the illusion that we can grow the economy of an OECD that will increase its debt by 2,5-3 trillion dollars in 2013.

Despite the fact that the results are entirely unconvincing, the printing press and raising taxes machine is well oiled and that means that our governments and their central banks will do everything possible for you to panic and, seeing that your money is worth less and will earn less interest or see it disappear in taxes, force you to invest, take risks, buy houses, shares. “We are here to support if things go wrong.” Until they don’t because the weight of the burden is too large. Or, as has happened only ninety times in the past fifty years, central banks have to attend another sovereign debt hole.

So be clear about the goal and let’s be aware that is not supported by fundamentals. And once you acknowledge that what is sought is to keep debt afloat, high prices and growing this huge bubble, make good use of it.

If we play bubbles, commodities, stocks etc. … remember to sell in February, because if you think that 2012 has been a volatile year, I see it only worse in 2013. This market is a good bet and a bad investment.

Crisis year seven: This is not crisis, is a total change of cycle.

This is a cyclical change, not a dip. It will be for many years. An orgy of debt over a decade is not resolved in seven years in which the circus has not dropped the curtain.

Monetary injections and low rates do not help the needed deleveraging or allow cleaning unproductive sectors, thereby changing the model to areas of high productivity, long-term real investment is distorted and delayed. Would you invest for the long term in a highly indebted model where there is no confidence in the three most powerful forces in the system, banks, governments and legislation?

Therefore, careful betting against interventionist forces that have more money-even if its fake, created out of nothing- than all investment funds in the world. But beware of dependency.

In the law of this state casino, which compels you to throw dice but does not let you get your money back because it is confiscated at the door, lies the trap.

All governments, companies and central banks are entities that react to past events, not carry out a proactive strategy. And the consumer knows it. Until we see consumption rise strongly -and in periods of financial repression this is very difficult-, all movements of stock markets and risk assets-commodities- will be aggressive, volatile and short term . But the trend of contraction will continue in the medium term. There is no real investment and without the consumer, and confidence, this pyramid scheme does not work. And I fear that consumers are already very chastened to hear that “this time it’s different” and that “there will be growth in 2014.” Consumers will not accept promises, but realities.

True, this interventionism raises prices and lifts the multiples of ​​listed stocks, but results and margins stagnate. But since everything is driven by fake money, stock and debt markets suffer expansive and contracting shocks in very short periods.

More debt than ever

In 2013 most OECD states will plunge more into debt, despite the imperceptible “austerity”.

United States will increase its debt ceiling, for the ninetieth time, I believe, United Kingdom will continue the process of moderate spending and devalue currency, but with a solid financial balance, all central banks will continue to increase exponentially their debt, now without sterilization .

Of course, you pay for it. And when one of the largest investments in the global economy, monetary stimulus, is used to keep state debt and finance current expenditure, the hole gets bigger.

Can you imagine how quickly we would have exited the crisis if the injected money had been used to finance investments by private companies rather than trying to maintain prices of risky assets and sustain obese states?

The race to see who loses the first

In 2013 the European countries have to issue debt for an amount exceeding one 1.3 trillion euros. France, Italy, Spain and Germany in the lead.

Guess how does one issue so much debt in countries in recession but do so at low rates? Pointing to the next one and saying, “teacher, this one is worse and uglier.” Welcome to another year of volatile risk premiums as this wall of debt rises. The European Central Bank cannot plug all the holes. Will Germany allow such expansion of a balance sheet of an ECB whose debt now accounts for 34% of GDP in Europe? I hope not.

The best that Spain has done in 2012 has been to avoid the bailout. It should do the same in 2013 at all costs and show it can improve cutting expenses.

Economists tend to err. But not due to pessimism, but optimism

Every year the same. We start with expectations of economic growth that we “review” a little at a time. These adjustments then end up being 15%, 20% or 25%.

If you start from the premise that economists are usually wrong by excess, you will avoid avoid unpleasant surprises.

It’s the same in the corporate world. Except in the megabubble of 2004-2005, estimates of corporate earnings have always been revised down aggressively  A hoax? No. What happens is that even analysts find hard to admit that everything that seems conservative in our analysis is “influenced” by our optimistic nature.

No real investment

If you were the CEO of a company, would you increase investment when suffering constant tax changes, global uncertainty, lack of credit and regulatory challenges? Probably not. Most of the improved performance of listed companies has been through overall cost reductions, including financial charges (remember, the manipulation of interest rates prevents swift debt reduction).Should governments invest? Of course not, definitely not in the scale it did in the last decade, given the absolutely ruinous consequences and poor returns that such spending entailed. Never give money to invest to someone who not only suffers no consequences for any loss or debt generated, but is rewarded with a cool job. Worse remedy than the sickness.

In summary

Nothing will change substantially in 2013. Governments will not carry out the policies of deleveraging, recapitalization and “red pencil” on spending that I defend. Worse, Europe will probably fall into the mistake of going back to “invest in growth” driven by the same bad managers who have created this hole. But it will be less damaging, because, fortunately, there is no money.

Debt will remain the problem. Although the fundamentals of the European economy are poor, there will be growth in many countries and companies and families are ready and respond … In addition, there are entrepreneurs eager to invest when conditions are attractive. But credit cannot improve because banks have big holes to solve and, although systemic risk has been somewhat contained, banks cannot increase their own balance.

Best of 2013 is that people will have largely ceased to swallow fairytale stories and prudence in consumption and investment are clearly part of the solution. Avoid going back to 2004, to “centralized planning growth plans”, spending spree and overcapacity.

Of course there are positives. Spain and the world will learn to adapt to the new model, as they have always done. Not thanks to the governments and central banks, but to the initiative of entrepreneurs who already know that they cannot count with debt and subsidies. These leaders are not employees in large conglomerates, state officials or hedge fund managers. The solution will not be decided in a committee, or a government agency at a summit, or by the support of a central bank buying mortgage products so house prices don’t drop. These leaders are now somewhere in the world building the next Apple, Inditex, Grifols, Google … not in the politburo in Europe.

Remember, crises -cycles-are nothing more than opportunities.

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