The Ibex 35, the most important share index in Spain, had the best month in its history last November, mainly driven by banks and the tourism sector. December is here and the rally continues with one euro at $ 1.20. Advances in Covid-19 vaccines, favorable data in the manufacturing sector, and slightly less pessimistic macroeconomic outlooks have once again sparked optimism among investors, despite rising infections and new restrictions. Optimism is of course global, not just Spain. Stock markets around the world are in the green and breaking records.
Many in the bitcoin space are playing the creepy global collapse game because they mistakenly believe that bitcoin will benefit from it. This group unfortunately copied the bad tricks of the gold beetles (gold bugs) who waited decade after decade for the system to fail. These vultures traditionally buy gold as a systemic hedge and encourage fear of increasing the price. However, this strategy has had extremely limited success in the past. Sooner or later the stock markets always win against gold. In this case, optimism always trumps fear. How many billionaires on the Forbes list have left the stock markets? How many came out of the gold?
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In the long run, a productive asset is always better than a non-productive asset. The market rotation caused by vaccines has helped Spain a lot as Capricorn 35 is mainly made up of cyclical stocks. The technology sector is not the dominant one. With the SP 500, technology is much more important. Bitcoin is, strictly speaking, an uncorrelated asset, but it is clearly more in line with optimism than fear. November should be enough proof of that. Have you already compared the 2020 SP 500 chart to Bitcoin’s?
Back on the subject of Spain: The European monetary authorities are much more talkative than the United States Federal Reserve. This means the Ibex 35 companies did not receive the cascade of money that US companies received with the controversial QE from the FED. The rescue plan in Europe differs from the American rescue plan. This implies that the differences between the Spanish stock market and the real economy were not that radical.
On the other hand, The Spanish economy was particularly hard hit by the pandemic due to its heavy dependence on the hospitality industry (hotel, restaurant and cafeteria). According to the Organization for Economic Cooperation and Development (OECD), Spain will have to wait until 2023 to restore GDP to before the pandemic. In 2020, the Spanish economy shrank by 11.6% and became the second worst country in the G20. The economy is projected to grow 5% in 2021 and 4% in the following year.
In some ways, the European bailout plan is much better than the US bailout plan because the monetary instruments used in the United States have a more violent effect in the short term, but they benefit financial markets more by creating more inequality. In the European case, the effect of his plan is slower and delayed. The process may be more painful in general, but the main beneficiary (in the long run) is the real economy.
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Of course, that does not mean that the stock market in Spain has not risen. In the second half of 2020, the world’s major stock markets were positively correlated with the SP 500. The Asian markets in particular have grown enormously. Mainly because China is technically not in a recession.
Latin America continues its chronic dependence on raw materials and Spain continues its dependence on tourism. The big difference, of course, is inflation. Crises in Latin America are almost always inflationary, and panic generally leads to great capital flight. In Spain, on the other hand, crises tend to be deflationary. The problem in this case is unemployment. In this case, the hope lies in fiscal stimulus. In other words, government aid.
Kristalina Georgieva, the new director of the International Monetary Fund, has repeatedly mentioned the importance of further stimulus during this crisis. In other words, despite the growing national debt, these are not times of austerity. The lady is absolutely right when she says that the new stimulus “should prioritize the households hardest hit by the crisis and the businesses most likely to be viable after the pandemic”.
“If containment measures are lifted, there will also be a need to give more support to aggregate demand, particularly public investment, to enable green and digital transformations. And as the recovery picks up, the focus must gradually shift. Facilitate the relocation of Capital and labor, promoting inclusive growth and reducing budget shortfalls, “he adds.
In the case of Spain, the IMF advice seems very appropriate. “An even bigger stimulus may be necessary.” In my opinion, the thrifty in the north should be a little more flexible with their Mediterranean neighbors. There are economic arguments for larger injections of liquidity. And there are humanitarian arguments for more aid.
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The strength of the current euro is not very favorable for the Spanish tourism sector. In the new normal, tourists may tend to go for “cheaper” destinations. Turkey with a much weaker currency can take advantage of this. The English, Germans and Russians who really enjoy the Spanish beaches will certainly take the exchange rate into account on their next vacation.
Of course, we have to remember that the European Union is a big bureaucracy with 27 members. Every member is different and has different interests. A depreciation of the euro can be good for Spain but bad for others. I would say the smartest thing is to get creative. In other words, to offer a better product to attract European tourists and take advantage of union membership. In the meantime, state aid can ease the burden.