Imperial decrees. On July 17, 1932, 7000 men of the National Socialist militias, SA and SS, paraded through the working-class district of Altona, now part of Hamburg. The demonstration is authorized by the Social Democrat mayor, but the provocation is evident. Communist armed militias take to the streets against the Nazis and the clash is immediate. Police open fire in all directions and kill 18 protesters. Three days after Bloody Sunday in Altona, Chancellor von Papen, a conservative Catholic, convinced President von Hindenburg to use the special powers conferred on him by article 42 of the Weimar constitution and to issue a Reichsexekution, an executive decree, with which the Reich dissolves the government of Prussia, the state in which Altona was then located. Prussia, governed by a centre-left coalition, was thus placed under von Papen's direct control.
The commissariat brings the Prussian police, the only non-private armed force of the Reich that could have opposed von Papen, under control. The Nazis are already part of his coalition and the following year, won the elections, will be able to assume all the powers without worrying about Prussia and its police.
Article 42 of Weimar comes from imperial tradition. As part of a general legal and political reorganization of the Holy Roman Empire, the Diet of Worms of 1495 had given the emperor the power to commission rebellious territories. The 42 will be reincarnated in 1949 in article 37 of the Fundamental Law of the Federal Republic. When Franco died in 1975, the two forces leading the Spanish transition, popular and PSOE, were financed and guided by the Adenauer and Ebert foundations, which belong to the CDU and the SPD. The German influence on Spain is very strong and the constitution of 1978 takes up the structure of the German one in many parts.
Among the articles copied, word for word, is the now famous 155, which translates the German 37 into Spanish. Noah Feldman, a Harvard legal philosopher, recalls in his column on Bloomberg that Philadelphia's constituents rejected Madison's proposal to give the president the possibility of commissioning a rebellious state as illiberal. It was only after the Civil War that the XIV Amendment introduced the obligation for states to respect the constitution, while later the Supreme Court, thinking more in historical than legal terms, will declare that a state can only leave the Union if of revolution.
Be that as it may, whether Catalonia is commissioned or not, whether it declares independence or not, many are starting to wonder if there is value in Spanish and Catalan bonds and the Madrid stock exchange. There does not seem to be any particular value on Spanish government bonds, at least in the coming months. Of course, the ECB will continue to support everyone's courses, but then we might as well stay on Italian government bonds, which yield the most.
The speech on the bonds of the Catalan Generalitat is more interesting. In long maturities, beyond 2030, they yield more than 5 percent. As Minister de Guindos keeps reiterating, the Catalan charter is guaranteed by Spain, but de Guindos takes it for granted that Catalan independence is impossible. For those who think like him, the performance is very good. On the other hand, for those who think that the situation may remain tangled and chaotic for a long time (which is indeed quite possible) or even become openly conflicting, there is no hurry to buy.
As for the Spanish stock market, the baseline scenario is that it moves in line with other European markets, with a downside risk linked to political uncertainty. David Rosenberg, who calculated the cyclically adjusted price-to-earnings ratio (Shiller P/E, also known as the Cape) for many countries, however argues that the Spanish Cape is 13.6, while the world's is 22. Before running out to buy Spain, however, will be good to take a look at this much-discussed metric.
The Shiller P/E. Awarded a Nobel, the Shiller P/E is a reworking of the idea that Graham and Dodd put forward in 1934, namely that the P/E should not be calculated on a single year (which could be particularly good or bad) but on an average more years. Shiller adds the inflation adjustment to the earnings average of the last ten years. Since there has been little inflation everywhere in the past ten years, we can safely say that the Shiller P/E is nothing more than the ratio between the price of a share and the average earnings of the previous decade.
The Shiller P/E has been and continues to be used by bears as proof that the US stock is expensive beyond belief. In fact, if the multiple on 2018 profits is 17 times, this rises to 26 if it is calculated over ten years. Since 26 was only reached in times of bubbles about to burst, the message is clear.
To date the Shiller P/E has only been debated in relation to the US stock market. Applying it to the rest of the world, however, its limitations become even more apparent.
Rosenberg gives the Italian stock exchange the highest Cape in the world, 27.9, and Russia the lowest, 3.5. Germany, France, Japan, UK, Switzerland and the United States are all between 20 and 26. China, Korea, Spain and the emerging countries in general are cheaper, between 13 and 14.
But is it possible that the Spanish stock exchange is really valued at half the price of the Italian one? Yes, and for a very simple reason. Spain has had broadly stable earnings over the past few years, so its Cape is equal to its current P/E. Italy, on the other hand, had higher profits in the early years, then a long slump and, recently, a recovery. The collapse, by lowering the ten-year average, dramatically raises the multiple and makes us seem particularly expensive, which is clearly not true.
After Yellen. American bonds are showing nervousness in view of the now imminent appointment of the next Fed governor. Cohn and Warsh have left the scene, Taylor the hawk, Powell the dove and Yellen, possibly reconfirmed, are sixth in the running. Trump likes all three for different reasons. Taylor is superqualified, looks cracked, and likes Congress Republicans. Powell guarantees low rates. Yellen is liked by the markets, the Democrats and, moreover, she guarantees reasonably low rates. Trump being Trump, he wouldn't be surprised by an attempt to choose all three. Yellen could be persuaded to stay on the board as a San Francisco Fed representative, Taylor could be named governor and Powell could be his deputy (or vice versa). If that were the case, the market would be initially puzzled, but not much of a move from current levels.
Dragons. The market imagined him a dove but he, as usual, managed to be even more so. By adding the 120 billion in November and December with the 270 in the first nine months of 2018, we arrive at 390 billion, equal to 40 per cent of public debt issues in the eurozone over the next 12 months.
The market then thought about the announcement of a certain end to Qe, but Draghi said that the machine will not stop suddenly and will rather continue to run until inflation approaches 2 percent (not before 2020, in the forecasts of the ECB). A journalist from the Frankfurter Allgemeine Zeitung, a liberal newspaper and harsh opponent of Draghi, slyly asked him if the ECB is willing to speed up the end of QE in case the economy and inflation go better than expected and the answer was negative.
The asymmetry is evident. In case of negative surprises, plus Qe, in case of positive surprises the program remains unchanged. Then there is the reinvestment of maturing securities. Nothing prevents the ECB from replacing maturing short bonds with long or very long bonds. Since the average monthly amount due will be 10-15 billion, the ECB will have at its disposal for many years to come an important tool for influencing the trend of the curve and will have an extra weapon of assistance in case of political complications in Spain or Italy.
Dollar and bags. Right now the dollar has three factors in its favor, the ultra-expansionary ECB, the possibility of Taylor governor and tax reform. It is possible that the market tries to go all the way to 1.15. For those with dollars it would be a good level to go out. There is no need to wait for even more favorable levels because neither Taylor nor the reform are guaranteed.
The European stock exchanges, especially German exporters, receive a boost from the ECB and the weaker euro, but even here there is no need to get too ambitious. European earnings are good, but not sensational, at least those published so far.
