Global Market Insights | A Fisher Investments Blog

Grassroots Greek Capitalism

While Greece ’s government muddles through austerity and slow-going market reforms, some Greek citizens have taken it upon themselves to revolutionize their economy from the ground up. They’re starting businesses, organizing new markets and local trading systems, and filling the void left by public services cuts. Jon Henley at The Guardian gives an in-depth look:

Greece’s Cut-Price Potato Movement Shows Greeks Chipping in

In short, it’s capitalism at its finest: Free of a heavy regulatory hand, these innovative folks have found ways to literally cut out middle men and other commercial burdens—and the result is lower prices, more efficient allocation of resources, and easier access to goods and services. Makes one wonder what Greece could be if its government put the same effort into liberalizing the economy from the top down. 

 

Interpreting the Andalusian Election

I’m somewhat puzzled by the popular interpretation of the weekend’s Andalusian election results. Because Spanish Prime Minister Mariano Rajoy’s Popular Party (PP) failed to secure a majority in the regional parliament, commentators say the election suggests he’s losing popular support for his austerity program. Here’s a sampling:

Spanish PM Mariano Rajoy’s Election Defeat Fuels Bailout Fears

Louise Armitstead, The Telegraph

Inconclusive Vote in Andalusia Far Worse News Than Full Monti

David Roman, The Wall Street Journal

Troubled Times – Rajoy’s Support Begins to Fade

Sinikka Tarvainen , Oman Daily Observer

Spain’s PM Denied Symbolic Austerity Boost in Local Vote

Staff, Buenos Aires Herald

Certainly that’s one way to look at it … but here’s another: The PP won the most votes, taking 50 seats to the Socialists’ 47 and United Left’s 12, and making this the party’s best ever showing in Andalusia . This is the first time the Socialist Party (PSOE) failed to win the most Andalusian seats since fascism’s fall (see historical results here). That the PSOE suffered an electoral setback at the PP’s hands amid Rajoy’s austerity drive suggests socialism, not Rajoy’s platform, is losing popular support.

The results do present a sticky wicket in one regard, though. Much of Spain’s debt troubles come from profligacies at the state level. Spain’s states—Andalusia included—are semiautonomous and have full budgetary powers. Andalusia is one of Spain’s most indebted states, and the PSOE isn’t keen on sweeping budget cuts and revenue raises (or, in the political vernacular, “fiscal consolidation). Thus, the incoming PSOE/United Left coalition may try to fight Rajoy’s crusade to rein in regional spending. However, a new law gives Madrid the power to approve/veto every state budget before implementation, so while we may see more politicking between Madrid and Seville, the election results may not hugely impact Spain’s overall debt reduction efforts.

 

100-Year Gilts: A Tough Sell?

Earlier this week, word leaked that the UK ’s Treasury is considering introducing 100-year gilts, which would theoretically allow the government to lock in today’s borrowing costs for a very long time.

It’s easy to see why the government would find this attractive. As we’ve written in the past, one of the keys to sustaining a large sovereign debt load over time is managing borrowing costs. At 2011’s close, the UK ’s total interest costs were roughly 9% of federal revenues^[1]—on par with the US , and historically a very manageable level. Current gilt yields are low by historical standards—30-year gilts yielded 3.4% as of market close on March 14^[2]—so issuing debt at today’s low levels helps keep total borrowing costs suppressed. And by issuing longer-matured debt today, the government can effectively finance the future now, at low cost, rather than having to issue more debt at higher yields in the future. From the government’s perspective, there’s a lot to like.

However, for the plan to succeed, investors would have to buy these gilts—and unless the new gilts are index-linked (interest and principal payments adjusted for inflation), they may not be as enamored. Many investors purchase gilts in hopes they’ll provide a stable store of value and reliable income source. Inflation, which has averaged roughly 4% annually in Britain since 1926, would likely hamper both aims.^[3] Imagine an investor purchases £10,000 in 100-year gilts today and passes the securities to their heirs, who hold them until maturity. When the gilts mature, the heirs receive the full face value, £10,000. But chances are that £10,000 buys far, far less in 100 years than it does today. Similarly, the interest received over those hundred years would likely buy less and less as time passes.

 In short, it’s tough to imagine many investors queuing up to purchase 100-year gilts that aren’t index-linked. Even if they are, investors may not see much point in buying 100-year debt when 30- and 50-year debt is readily available (and of long enough duration to satisfy most pension plans’ requirements). It’ll be interesting to see whether the Treasury reaches the same conclusion.

 

 [¹] Sources: Thomson Reuters, Organization for Economic Cooperation and Development, International Monetary Fund; as of December 31, 2011

[²] Source: Bloomberg

[3] Sources: Thomson Reuters, Global Financial Data; as of February 2, 2012

 

Putin’s Chinese Logic

Fisher Investments Market Minder has written a lot about the likelihood Chinese officials make economic growth-oriented policy changes this year. In 2012, the communist party announces new leadership and holds local “elections” in which the ruling party is the only option. Sham elections and planned transitions could easily be a backdrop for civil unrest, which is the Communists’ worst nightmare (see their crackdown in the wake of the Arab Spring)—they don’t want another Tiananmen. So they do what they can to speed the economy, with the assumption faster growth leads to richer, happier people—which means less chance of demonstrations and uprisings.

Well, it looks like Vladimir Putin’s applying the same “money makes people happy” logic in Russia. In recent months, anti-Putin demonstrators have flooded Red Square, with over a hundred thousand marching against his planned return to power (and what they allege were fraudulent parliamentary elections in late 2011). And considering Sunday’s presidential election was written off as a sham before it even happened (Putin won handily, of course), he no doubt anticipated more protests. That’s not the ideal backdrop for his plans to reconsolidate power.

But it seems he has a plan to tame the masses, so to speak: He’s proposed an estimated $30 billion public spending increase on healthcare, infrastructure, teachers’ pay and medical research. This would be paid for, in part, by a new luxury tax (on goods like yachts, fancy cars, second and third homes and the like). In other words, a bit of wealth redistribution to funnel money to all those who are increasingly frustrated with Putin’s authoritarian crony “capitalism” (which looks rather like feudalism in certain regards), in hopes they’ll be more accepting of his return to power. (Though, to be safe, the interior ministry sent 6,300 more police officers to Moscow last weekend.)

Who knows whether it’ll work—15,000 marched against the election results in Pushkin Square Monday evening, and another demonstration is slated for the weekend. But while the protesters’ momentum has slowed a bit, rampant electoral fraud allegations could easily fuel further unrest. Thus, it’s likely this isn’t Putin’s last populist move—especially given the parliamentary gains made by the socialists and communists last year. If there’s one thing we’ve learned about Putin over the past 12 years, it’s that he’ll do just about anything to keep his firm grip on Russia. But how much longer can the world’s authoritarian regimes use opportunistic economic changes to placate increasingly restive and freedom-craving citizens?

For anyone interested in reading up on Russian unrest, Der Spiegel ran an insightful, entertaining series this week:

Part I: A Divided Russia Goes to the Polls

Part II: Russians Fed Up With Putin’s Manipulations

By Walter Mayr, Christian Neef and Matthias Schepp

A Lesson in the Law of Unintended Consequences

Britons have likely noticed the higher price of eggs in recent weeks—prices are up across the EU, as recent regulatory changes surrounding poultry farming have led to egg shortages across Europe. Under the “Welfare of Laying Hens Directive,” farmers are required to house hens in more hospitable cages (allowing them more room to nest)—but the cost of all the necessary upgrades is estimated at around €700,000 per farm, and many producers are opting to exit the egg industry and cull their flocks rather than take on these high compliance costs. As a result, production is down between 10 and 25%, depending on the country, and average prices have risen around 75% since last October.

But it’s even worse in Bulgaria, where egg prices have roughly doubled over the past 10 days. A war of words has hatched between the government and domestic egg producers over who’s responsible. The producers blame the new law’s compliance costs and production shortages (314,000 Bulgarian hens have been removed from the supply chain). But the government thinks the producers themselves are to blame. Or as Farming Minister Miroslav Naydenov put it: “Producers and traders are obviously gouging the market.”

If it were true, it wouldn’t be the first time—Bulgarian egg producers were fined for price-fixing from 2002 to 2007. However, trade protectionism seems a likelier culprit for Bulgaria’s high egg prices. After the Bulgarian cartel was busted in 2008, producers complained that prices fell below their production costs, partly because cheap Polish eggs flooded the Bulgarian market. In response, the government enacted import restrictions, and prices went up. Now it seems Bulgarian hens aren’t laying enough to meet demand, and since Bulgaria can’t import enough Polish eggs to cover the shortfall, prices are skyrocketing. Not coincidentally, Naydenov is considering lifting the import restriction.

There may be other forces at work—the farming ministry is still investigating, and they plan to announce their findings later this week. But this saga is a good reminder of the unforeseen consequences of even well-intentioned regulations and trade restrictions: A law to improve hens’ lives has led to the loss of many; resulting shortages have fueled higher prices; and a trade policy to “help” Bulgarian farmers ended up hurting consumers.

Lesson: Beware of the problems new “solutions” often create.

On the Irish Referendum

When EU officials agreed on their new fiscal compact last month, they hoped for an uneventful ratification process. But Irish Prime Minister Enda Kenny scuppered their plans on Tuesday, announcing Ireland won’t ratify the agreement unless it passes a referendum.

Unlike the Nice and Lisbon Treaties, which were jeopardized by Irish “no” votes, the new agreement can take effect even if Irish voters reject it—it comes into force once 12 of 17 eurozone states ratify it. But a “no” vote could make things interesting. The new agreement is tethered to the European Stability Mechanism (ESM), which is the eurozone’s forthcoming permanent bailout fund (the successor to the European Financial Stability Facility, or EFSF, which granted Ireland’s 2010 bailout). Only countries that ratify the new agreement will be granted access to the ESM.

Ireland is still receiving loan installments under the 2010 bailout, and that won’t change even if voters reject the new agreement. However, if the referendum doesn’t pass, and Ireland still needs external assistance when EFSF funding runs out in 2013, what happens? Relaxing the terms would be a sign of political weakness in Germany and France (assuming, of course, Angela Merkel and Nicolas Sarkozy, the new agreement’s primary architects, are still in power when the time comes…and that’s far from certain). But not assisting a member state is likely equally unpalatable for eurozone officials. We might see a rather sticky political dilemma if this happens.

A few things to keep in mind, though: There’s no guarantee Ireland will still need external assistance come 2013. The country has made significant debt and deficit reduction progress, and its treasury yields have fallen on the secondary market since last summer, which suggests investors view Irish debt as less risky. The Irish economy is on firmer footing than other peripheral nations, and its situation could easily continue improving over the year ahead. And there’s always the chance voters pass the referendum.

In other words, the “what-if” scenario above is just that—there are other possible outcomes, and it’s too soon to tell how this plays out. For now, it’s just an intriguing story to watch.

On the Irish Referendum

When EU officials agreed on their new fiscal compact last month, they hoped for an uneventful ratification process. But Irish Prime Minister Enda Kenny scuppered their plans on Tuesday, announcing Ireland won’t ratify the agreement unless it passes a referendum.

Unlike the Nice and Lisbon Treaties, which were jeopardized by Irish “no” votes, the new agreement can take effect even if Irish voters reject it—it comes into force once 12 of 17 eurozone states ratify it. But a “no” vote could make things interesting. The new agreement is tethered to the European Stability Mechanism (ESM), which is the eurozone’s forthcoming permanent bailout fund (the successor to the European Financial Stability Facility, or EFSF, which granted Ireland ’s 2010 bailout). Only countries that ratify the new agreement will be granted access to the ESM.

Ireland is still receiving loan installments under the 2010 bailout, and that won’t change even if voters reject the new agreement. However, if the referendum doesn’t pass, and Ireland still needs external assistance when EFSF funding runs out in 2013, what happens? Relaxing the terms would be a sign of political weakness in Germany and France (assuming, of course, Angela Merkel and Nicolas Sarkozy, the new agreement’s primary architects, are still in power when the time comes…and that’s far from certain). But not assisting a member state is likely equally unpalatable for eurozone officials. We might see a rather sticky political dilemma if this happens.

A few things to keep in mind, though: There’s no guarantee Ireland will still need external assistance come 2013. The country has made significant debt and deficit reduction progress, and its treasury yields have fallen on the secondary market since last summer, which suggests investors view Irish debt as less risky. The Irish economy is on firmer footing than other peripheral nations, and its situation could easily continue improving over the year ahead. And there’s always the chance voters pass the referendum.

In other words, the “what-if” scenario above is just that—there are other possible outcomes, and it’s too soon to tell how this plays out. For now, it’s just an intriguing story to watch.