Today, Finalternatives sits down with macro-fund manager Said Haidar. His firm Haidar Capital Management is a catalyst driven niche/tactical global macro fund with a systematic component. The firm has $314 million in assets under management.
In a one-on-one interview, Haidar offers insight into the ongoing challenges in the European economy, the future of the euro, and what a possible crisis that is emerging that has been ignored by the North American media.
FINalternatives; What is Your Background?
Said Haidar (SH): I manage a global macro book heavily involved in global rate markets, including European governments bonds and European interest rates. We closely follow central bank speeches, meetings, and leaks to the press, as well as dealer commentary to understand the current thinking and reaction functions of central banks. Earlier this year I met with the Bundesbank and the European Central Bank to hear their views.
Fin: Given Macron’s election, what does that mean for the future of the euro? Given Marine Le Pen’s loss, what does it mean for the future of populism on the continent?
SH: Unlike with Brexit and the Trump victory, continental Europe has shown itself resistant to the siren call of the populist , with the exception of the Syriza victory in Greece. In Spain, Podemos was turned back. In Austria, the far-right presidential candidate lost to the Green Party. In Holland, traditional right-wing parties stole the thunder of Geert Wilders’ Peoples Party. France was no exception, where Marine Le Pen’s National Front faded as well in the final stretch.
The next major election involving a populist party will be in Italy in spring of 2018 where Beppo Grillo’s Five Star Movement appears on track to have a shot as Italy’s largest party. While populism has been staved off for now, keep in mind that Marine Le Pen’s father polled at just 18% in 2002, while Marine received 34% of the vote. Most voters are reluctant to back the National Front, given its promise to withdraw from the Eurozone. However, if there is another recession in Europe, it’s possible that more French voters might switch to the National Front in 2022.
Fin: Joseph Stiglitz has said that the Euro threatens the future and stability of Europe? A lack of structural reforms sits at the center of his argument. Do you agree that it is flawed to have one central monetary policy but 28 different fiscal policies across the continent? Do you have other concerns about the currency’s future? Do you believe it can be saved?
SH: A well-known problem is how to exit the common currency without bankrupting a country’s banking system and corporations. A country like the Netherlands could probably successfully leave, as a new Guilder would likely appreciate against the Euro. However, those countries which are expected to have a weak currency, would see wholesale capital flight ahead of any exit. This was the problem with Le Pen’s plan to leave the Euro.
A currency union where each participant is a sovereign government can lose members as soon as an anti-Euro government is installed in one. An ideal currency union needs to have elements like the free mobility of workers. While technically feasible, Europe’s language and cultural barriers are too great to imagine wholesale migration of people. A one-size fits all currency with poor labor mobility, no inter-state transfers that forces the weakest members to make all the adjustments while Germany earns the benefit of a weak exchange rate, seems one that is ultimately unstable.
Anticipation of a country exiting can put enormous pressure on that country’s government bond market and banking deposit system.
Fin: There is an odd perception here in the United States — we’ve heard some people say that Greece is holding the European Union hostage for another bailout. We’ve watched Greek visitors in Chicago get into arguments with people explaining that austerity is the real problem (and we agree with the people who actually live there).
SH: The Greek bailout did enormous damage to private creditors, as money lent by public creditors was treated as senior to that of privates. The more lent by public creditors, the less recovery was to be had by private creditors. Greek austerity in the early years involved draconian legislation that failed to carry out measures. As a patronage state, Greece overrode other interests and prevented implementations. They shuffled workers between state-owned enterprises but did not really fire anyone and failed to seriously address rampant tax fraud by politically-connected Greeks. However, there was massive pain for ordinary Greeks, with one of the greatest economic contractions for a developed country in modern history. As the economy contracted and missed targets, the hated Troika demanded more cuts.
European economic austerity programs have been designed around hefty tax hikes and cuts to those most vulnerable (e.g. in Greece, large cuts to pensioners). These have exacerbated the situation. Where measures have focused on liberalization of labor markets and reduction in public sectors, results appear to better. In practice, no bailout by its European “partners” would have been far better for Greece and its private creditors. Greece would have been forced to immediately live within its means, as its access to credit curtailed after default.
However, Greece would have started with a new Drachma on a more competitive basis and the state could have recapitalized banks with the new currency. Private creditors, not being subordinated to public creditors, would have likely fared better.
Fin: What has been the result of austerity? Do you expect the European Union to issue a much larger bailout to paper over the nation’s debts?
SH: Greece, with a high debt to GDP ratio, has low interest expense and, assuming a smooth completion of the latest review, will likely be offered a re-profiled debt, with interest payments pushed further out.
Fin: While Greece and Italy are generating the headlines, Spain, Portugal and Ireland also have debt concerns? Which one do you think will be the next shoe to drop?
SH: The perception is that Ireland is fast repaying its debt. Very little remains of the bad bank liabilities and Ireland is projected to have one of the lowest debt to GDP ratios in Europe over the next few years.
Spain is favored by investors, as it finally took sufficient measures to liberalize labor laws, reduce state pensions and has enjoyed strong growth. Weaknesses include a separatist movement in Catalonia (which seems to be losing popularity) and a minority government that keeps missing its EC budget targets, as it has been less successful in reigning in spending by regional states. If growth remains strong, investors will stay positive on Spain.
Portugal has been the surprise of 2017, substantially tightening vs Italy as growth has picked up, budget execution has been stellar and banking problems have failed to hit home as feared. Portugal has wisely used its market access to pay down the very high cost of an IMF loan. The market seemed to be overly negative on the left-wing government’s policies. Portugal kept its budget in check by deferring infrastructure spending (borrowing from the future) and raising taxes on investments, while maintaining entitlements. It also singled out foreign bank debt holders for discriminatory treatment. There are still large nascent banking issues that could throw Portuguese market access into turmoil. Portugal’s fate depends on how these play out over the next few years.
Italy’s reforms have been stalled and little was accomplished during Renzi’s administration. We suspect a key reason for the ECB to taper QE will be to force Italian bond spreads wider to put pressure on Italian politicians to finally act and liberalize their economy. Despite the strong European economy, Italy has singularly failed to grow. Compounding Italy’s problems is the continuing inability by Italy and the EC to agree on how to recapitalize parts of the Italian banking system. As QE winds down and Italian spreads widen, Italian politicians will be faced with a conundrum: to act or watch spreads widen further. At some point, Italy will need to decide whether to act decisively to liberalize its market (and the EC will need to act decisively to assist Italy in recapitalizing its banking system) or consider dropping the Euro, as its interest costs will start to rise unsustainably.
Fin: The financial press has a terrible happen of identifying crises until they are sitting on top of us. Are there any threats that no one is discussing that is on your radar?
SH: One threat is the Home Capital saga in Canada. The extremely low interest rates along with massive QE in certain countries has led to imbalances in asset markets around the world. Both Canada and Australia appear to have housing bubbles in large metropolitan areas, with many borrowers who have little ability to meet rising interest rates. Moreover, much like the US mortgage market in the 1930s, commonwealth countries tend to have mortgages with long amortization schedules, but balloon principal payments every 5 years. When principal payments need to roll over, and if the collateral house value has declined, the homeowner needs to put up extra cash.
A failure to roll over the mortgage will lead to a default. As housing prices fell in the US during the early 1930s, millions of homeowners lost their houses, despite being current on their mortgages, as they were unable to roll over their mortgage. I see no reason why a similar dynamic could hit one of these countries. In a declining property market, even many prime loans could be impacted and the banking sectors would suffer significant damage.
Fin: Looking ahead, where do you see opportunity in Europe for institutional investors? Is there a country or individual sector that intrigues you today?
SH: European assets appear undervalued relative to US assets. Years of underperformance seem to finally be at end. However, investor caution has been caused by a series of political events, starting with Brexit and its on-going negotiations, the Dutch and French elections, the upcoming French parliamentary elections as well as the Italian elections (although this might take place in 2018).
Eliciting additional caution is how leveraged Germany is on Chinese growth (which has held up remarkably well with some state support) as well the headlong rush into European equities in 2014 and 2015 in anticipation of a major re-rating due to European QE. However, it was too early in the economic recovery cycle and European equities disappointed on earnings growth. This was followed by Yuan devaluation scares in August 2015 and early 2016, which caused a large, painful unwind in these trades. Hence, while many profess to be bullish European equities, we believe positioning is still light. And European equities have finally started to show strong earnings growth, as European growth has improved. The European banks still appear quite cheap compared to US bank valuations.
As for fixed income assets, strong growth and a more traditionally monetarist approach from the ECB as opposed to the Fed, leads to expectations of a taper of QE from the start of 2018. Just as in the run-up to Eurozone QE, where we saw yield curves flatten and spreads compress, we expect the reverse in the run-up to the taper, with modest spread widening at first and modest curve bear steepening.