Precious few PhD-trained economists understand the inner-workings of financial markets. Then again, very few economists have actually worked as a portfolio manager for such investment shops as PIMCO, the Ecofin Global Oil & Gas Fund and Citadel. Economist Daniel Lacalle holds this market pedigree and then some.
In the latest edition of our Real Conversations video series, Lacalle joins Hedgeye CEO Keith McCullough for a dynamic discussion about the divergence between the strengthening U.S. economic outlook and Europe’s slow slide into stagnation.
No punches pulled here. Lacalle draws a sharp contrast between the two.
“The problem with analyzing the U.S. economy is that if you base it on your political views, you forget that this is an economy that relies less on the government than in Europe,” Lacalle says in the video above.
“A lot of economists said the only solution for the U.S. economy was the government would have to start borrowing massively to drive the economy. But what has proven to be the success of this economy is that it is driven by families and companies. A profit led economy is a lot more sustainable than a spending led economy.”
Think of the big battle being waged between Wal-Mart and Amazon.
“Wal-Mart is a stronger company today because of Amazon,” Lacalle says. “The economy isn’t going to get stronger by poor capital allocation directed by the government.” Lacalle lays out a scenario in which U.S. growth heads back to 3.5% versus 3% reported most recently for 3Q 2017.
Europe faces an entirely different problem.
“The problem of the European Union is that every single economic position is based on the pillar of not touching the welfare state,” Lacalle says. Consider the numbers. Europe is about 3.5% of the world’s population, 24% of its GDP but 55% of its public spending, he says. “One of those numbers is at risk and it’s big.”
Most investors see newly-elected leaders, like France’s President Emmanuel Macron, and hope Europe is changing its ways. Lacalle is emphatically skeptical.
“In the EU we live in varying degrees of socialism. France is the epicenter of this. We have seen these reformists before. Sarkozy promised big reforms but it didn’t happen. You have to remember that the first serious economic position Macron took was to nationalize a shipyard. Yea, that’s going to definitely make the economy stronger.”
Another prime example: Think back to the European Union’s post-recession “austerity” measures. “The European Union took government spending to almost 50% of GDP, then it lowered it by 5% and they called it austerity,” Lacalle says. “It’s like you spent three years eating donuts, then you have an orange juice and say you’re in detox."
Lacalle shares some equally compelling thoughts on Catalonia, calling it “bad for Spain and bad for Catalonia.” He calls it “absurd” that economists “don’t pay attention to demographics.”
He rails against socialism: “Socialism doesn’t fix anything.”
You won’t hear another economist speak quite as eloquently about markets as Lacalle.