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Spain. Can Politics Kill The Austerity Star?

It was difficult to think that Spain would make a comeback in 2011 when the Conservative Party (PP) won the elections. The challenges were too large.

The previous administration, PSOE, Socialist, had left a deficit of 9% of GDP after promising a maximum 7%.

 

When the crisis started, the socialist government consciously decided to substitute the bursting real estate bubble with a massive civil works stimulus. It spent 3.2% of GDP, debt ballooned by 350 billion euro and destroyed more than 3 million jobs. On top of it, in the period from 2007 to 2009 the average annual trade deficit was around 6% of GDP and at one point in 2008 reached 9% of GDP. 

 

Spain was a Keynesian dream becoming a nightmare. 

 

Spain. Can Politics Kill The Austerity Star? - Spain Trade bal

 

When the socialist government left office, Spain had more than 40 billion euro in unpaid invoices from the public administrations to the private sector, the public savings banks presented a capital requirement of 100 billion euro and the regions and municipalities faced a bailout of 125 billion euro.

 

It was an unsurmountable situation.

 

However, after a large austerity plan that was split 50% in tax increases and 50% in spending cuts, and a very substantial set of reforms, including the financial sector, labor market, entrepreneurship programs and  early payment schemes, Spain recovered.

 

Between 2014 and 2015 Spain started to grow well above the EU average. It led job creation in the Eurozone, with more than one million jobs, and brought unemployment rates back to September 2010 levels. It went from a massive trade deficit to a balance by 2015.

 

In summary, Spain undertook the largest adjustment seen in an OECD economy, 15 points of GDP, and managed to do so growing and creating jobs.

 

Despite critics´calls of a recovery fuelled by the ECB QE and low oil prices, these claims are easily refuted as Spain is growing more than countries with a similar sensitivity to interest rates and oil prices, like Italy or Portugal, and has recovered with no increase in total (public and private) debt.

 

However, all was not well and many challenges remain.

 

-          A high unemployment rate, despite the reduction and the evidence that many jobs are hidden in the underground economy and counted as unemployed.

-          A large fiscal deficit. Despite the massive adjustment, Spain´s deficit is well above the EU stability pact target.

-          External debt remains at 100% of GDP and public debt at 97%.

 

The austerity plan helped bring Spain out of the living dead, but did not create social stability. Despite the conservatives´efforts to maintain social spending, the population perceived that the cuts were unacceptable. Public debt increased to 97% of GDP partially due to the bailout of the regions and savings banks as well as taking care of unpaid bills, but increasing pensions and keeping unemployment benefits didn´t please the public, as real wages fell. As in Greece, fringe parties started to appear fuelled by “magic solution” promises of default, massive increases in public spend and interventionist “miracles”.

 

Now Spain faces a historic election process. The Conservatives (PP) face the backlash of unpopular austerity measures and corruption accusations, and might win by a very small majority. The Socialists (PSOE) also faces a major loss of votes due to corruption and the past performance in government. However, the Socialists and the Communist-anti-establishment parties (Podemos, Ahora en Comun) could become part of a coalition for the next government with the promise of stopping the recent reforms, especially the labor market law. The moderate center party, Ciudadanos, which has steadily risen in polls, could be the deciding factor.

 

In any combination, the new government will not have a strong majority, and most of the likely agreements may only come with parties who promise more spending.

 

The risk of Spain falling under the QE trap, putting all the bets on the European Central Bank, as it did in 2008, and go back to the same mistakes of deficit spending and public sector white elephants to “boost growth” is not small. Halting reforms and going back to past failed measures will likely give the same results. Less growth, less jobs, more debt.

 

Spanish political parties tend to mention the Nordic nations and Obama as examples, yet they support the rigidity and intervention of France and Greece, not the economic freedom and flexibility of the leading economies. And when you copy France and Greece you get the growth of France and the unemployment of Greece.

 

Let us hope the decision on the 20th of December is not to bet on repeating 2008.

 

---Daniel Lacalle is an economist, CIO of Tressis Gestion and author of Life In The Financial Markets and The Energy World Is Flat (Wiley) 


Morgan Stanley Blames Wind, Rain and Volatility for Today's Train Wreck

It's been an ugly day for Morgan Stanley shareholders.

 

Morgan Stanley Blames Wind, Rain and Volatility for Today's Train Wreck - z wind

 

Shares have dropped over 5% on news that third quarter trading revenue fell 15% from the same time last year. For the firm’s bond trading business, it was the worst quarter since the financial crisis. It’s just another example — see JPM last week — on why we’re reiterating our call to sell financials. (See Real-Time Alerts)

 

Morgan Stanley CEO and Chairman James Gorman partially blamed uncertainty about the Federal Reserve’s rate hike for recent volatility. Meanwhile, no help appears to be on the horizon. At least not from New York Federal Reserve Bank President William Dudley.

 

Earlier today, a small Italian newspaper, CorrieraEconomia, quoted Dudley as saying:

 

"It's true we thought we could raise interest rates by the end of 2015, but turbulence on financial markets, modest global growth, energy prices and macro-prudential imbalances are slowing this process down."

 

It is “still too early to think about raising interest rates,” he added.

 

Morgan Stanley Blames Wind, Rain and Volatility for Today's Train Wreck - 10 19 2015 Morgan Stanley

 

For the record, #LowerForLonger on rates has long been our macro team’s call for quite some time. Cue more uncertainty…

 

(Sorry Mr. Gorman.)

 

Another gripe from the Morgan Stanley CEO was “historic” market moves in China that had made trading difficult.

 

… Again, no end in sight there for Morgan Stanley. 


Monday Mashup

Monday Mashup - CHART 1

 

RECENT NOTES

10/16/15 PEP | EXPANDING INTO SNACKS AND BREAKFAST?

10/16/15 REPLAY | THOUGHT LEADER CALL | LOOMING CRASH IN BEEF

10/01/15 CAG | IN THE BEGINNING

9/28/15 CAG | GOING LONG

 

SECTOR PERFORMANCE

Food and organic stocks that we follow were in-line with the XLP last week. The XLP was up +0.3% last week, the top performers on a relative basis from our list were Mead Johnson Nutrition (MJN) and Kraft Heinz Company (KHC) posting increases of +3.9% and +3.7%, respectively. The worst performing company on a relative basis on our list was Lifeway (LWAY), which was down -6.3%.

Monday Mashup - CHART 2

 

XLP VERSUS THE MARKET

The XLP has fared better than most other sectors in the YTD time period but struggled last week versus the market. In the last five trading days, while the SPX was up +0.9%, the XLP was up just +0.3%.

Monday Mashup - CHART 3

 

QUANTITATIVE SETUP

From a quantitative perspective, the XLP is BULLISH on a TRADE and TREND duration.

Monday Mashup - CHART 4

 

Food and Organic Companies

Monday Mashup - CHART 5

Monday Mashup - CHART 6

Monday Mashup - CHART 7

 

Keith’s Three Morning Bullets

So far, no good = 58/500 S&P names have reported = Revs -2.7%, EPS -7.9% - bull market, in storytelling (and Long-Term Bonds):

 

  1. USD – down for the 3rd straight week (post that terrible US jobs report) gave the SPX short squeeze what it needed (up, on decelerating volume, to lower-highs) but USD appears to be stabilizing this morning = Oil (-1.1%), Gold (-0.4%), and the “reflation” trade no likey
  2. NIKKEI – Japanese stocks no likey Down Dollar = Up Yen either; after closing -0.8% last week, Japan didn’t believe the China “news” and sold off -0.9% into the close, taking Nikkei -12% in the last 3 months (with USD -3.2% in the last 3 months)
  3. CHINA – look on the bright side of their storytelling, they didn’t stick a 7.0 this time and made-up “6.9%” GDP instead. Lol. Even the locals (who are paid to think a certain way) didn’t buy Chinese stocks on that – Shanghai Comp closes -0.14%

 

SPX immediate-term risk range = 1; UST 10yr 1.98-2.07%

 

Please call or e-mail with any questions.

 

Howard Penney

Managing Director

 

Shayne Laidlaw

Analyst

 


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.28%
  • SHORT SIGNALS 78.51%

Firefly Co-Founder on Fox Business: Firefly Is ‘Uber For Space’

Firefly Co-Founder and CEO Tom Markusic discusses the company’s new partnership with NASA to build the next-generation of space rockets and getting small satellites to space to feed the world’s increasing appetite for information .

 

“[This] has profound social and economic implications,” Markusic told host Maria Bartiromo. “Right now, upwards of 70% of the world doesn’t even have access to the Internet.”


The Most Important Thing I Learned In California Last Week

 

“It’s ongoing performance anxiety, or as I like to call it HPAD (Hedgie Performance Anxiety Disorder) that really was apparent from San Francisco to Los Angeles,” explained Hedgeye CEO Keith McCullough in response to a subscriber’s question on The Macro Show this morning on the most important thing he learned in meetings with investors last week.


MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY

Takeaway: It was a quiet week outside of earnings, but the risk/reward remains skewed negatively.

 

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - Soft spot of data cartoon 10.16.2015

 

 

Key Takeaway:

Last week was a relatively quiet one on the global macro risk front. That said, the intermediate term setup remains tilted toward the negative with a 3 to 1 ratio of red to green. Bigger picture, the overarching reality is that the environment is decidedly late cycle, and more and more data points are emerging in support of that conclusion.

 

Current Ideas: 


MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM19

 

Financial Risk Monitor Summary

• Short-term(WoW): Positive / 1 of 12 improved / 0 out of 12 worsened / 11 of 12 unchanged
• Intermediate-term(WoW): Negative / 2 of 12 improved / 6 out of 12 worsened / 4 of 12 unchanged
• Long-term(WoW): Negative / 2 of 12 improved / 2 out of 12 worsened / 8 of 12 unchanged

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM15

1. U.S. Financial CDS – Movement in swaps was mild last week with the median change at -1 bps. Swaps tightened for 15 out of 27 domestic financial institutions. 

Tightened the most WoW: TRV, ALL, MMC
Widened the most WoW: GNW, RDN, MBI
Tightened the most WoW: ALL, CB, ACE
Widened the most MoM: GNW, LNC, C

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM1 2

 

2. European Financial CDS – Swaps mostly tightened in Europe last week although change was mild with a median -1 bps change. CDS for Portuguese Banco Espirito Santo, however, widened by +168 bps to 679, as the country's political negotiations between leftist parties and the ruling center-right coalition remain deadlocked. The widening is interesting because it conflicts with the movement on sovereign Portuguese CDS. The key takeaway for Portugal is that the situation translates to volatility.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM2

 

3. Asian Financial CDS – The median change was zero in Asian financials CDS last week. However, Mizuho & Sumitomo financial swaps widened by +16-17 bps.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM17

 

4. Sovereign CDS – Sovereign swaps were mixed last week with mostly minor movement. However, Portuguese sovereign swaps tightened significantly, by -25 bps to 146, as the market interpreted the political situation in the country as a net positive; last week, leftist parties in Portugal signaled their willingness to work with the ruling center-right coalition on the formation of a government, although negotiations remain deadlocked. 

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM18

 

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM3

 

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM4


5. Emerging Market Sovereign CDS – Emerging market swaps mostly tightened last week. Russian swaps tightened the most, by -31 bps to 289. Brazilian sovereign swaps, however, widened by +30 bps to 441 as Fitch downgraded the country's sovereign credit rating to one notch above junk.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM16

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM20

6. High Yield (YTM) Monitor – High Yield rates rose 3 bps last week, ending the week at 7.54% versus 7.51% the prior week.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM5

7. Leveraged Loan Index Monitor  – The Leveraged Loan Index rose 2.0 points last week, ending at 1846.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM6

8. TED Spread Monitor – The TED spread was unchanged last week at 31 bps.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM7

9. CRB Commodity Price Index – The CRB index fell -0.1%, ending the week at 199 versus 200 the prior week. As compared with the prior month, commodity prices have increased 2.7%. We generally regard changes in commodity prices on the margin as having meaningful consumption implications.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM8

10. Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread was unchanged at 10 bps.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM9

11. Chinese Interbank Rate (Shifon Index) – The Shifon Index fell 1 basis point last week, ending the week at 1.90% versus last week’s print of 1.91%. The Shifon Index measures banks’ overnight lending rates to one another, a gauge of systemic stress in the Chinese banking system.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM10

12. Chinese Steel – Steel prices in China fell 0.9% last week, or 19 yuan/ton, to 2157 yuan/ton. We use Chinese steel rebar prices to gauge Chinese construction activity and, by extension, the health of the Chinese economy.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM12

13. 2-10 Spread – Last week the 2-10 spread tightened to 142 bps, -3 bps tighter than a week ago. We track the 2-10 spread as an indicator of bank margin pressure.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM13

14. XLF Macro Quantitative Setup – Our Macro team’s quantitative setup in the XLF shows 0.7% upside to TRADE resistance and 3.4% downside to TRADE support.

MONDAY MORNING RISK MONITOR | INTERMEDIATE ASYMMETRY - RM14


Joshua Steiner, CFA



Jonathan Casteleyn, CFA, CMT


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