Machine-Translated Investment Research and the Spanish Debt Crisis

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I am not going to make the case that Spainis or isn’t on the brink. My opinion on investment in Spanish publicdebt is worth exactly a hill of beans in this crazy world, as well itshould be. But as a language specialist, I would like to point out a few waysin which this crisis is based on very badtranslations that, in practice, could lead to very flawed investment theses.

Spain might or might not default on itsdebt, I don’t know. I just know that when markets were saying that Spanish debtwas almost as good as German debt they were mispricing it. Now, when they sayit is worse than Zimbabwean debt, they might be mispricing it again. Focusing a lot on emotional images of pandemonium of Greeks orSpaniards throwing paving stones around is gripping, emotional, and targetedtoward the more primitive parts of our brains that are easily moved by thatsort of thing. 


Let me provide an example. The general strike in Spain a couple of weeksago was widely followed. The unions are obviously strong and command a lot offollowing from even people who are not unionized. But the country is far fromclose to chaos. The violent incidents in Barcelona were pretty isolated. Thestrike in Madrid was a very tranquil day, with the streets mostly occupied byGerman tourists in town to support Hannover against Atlético.
Madrid looks pretty normal and boring, asthe weather warms up and springtime is in the air. It is full of tourists doingtouristy things and, in the evening, reveling drunks doing drunky things. On WednesdayI was coming back from lunch and I bumped into the vice president of theSpanish government, Soraya Sáenz, chatting with some colleagues outside arestaurant. There was not a bodyguard in sight. 


This is hardly the picture of acountry on the verge of the largest sovereign debt defaults in history and massivestreet battles. Of course, my personal observations are purely anecdotal and worthless as investmentintelligence. The bottom line is that the bonfires in Plaza de Catalunya areequally devoid of value for a real investor in a rational market.
Except we know people aren’t rational andmarkets aren’t always efficient. And right now there are a lot of people fueling thefires of instability to profit on credit default swap bets. And even some ofthe less emotional gasoline being poured on the fire--which masquerades as cold,analytical number-crunching--is based on appallingly poor translations. Take the example ofa PowerPoint presentation that hascirculated heavily through the Internet over the past week. It was drawn up by aninvestment company called Carmel Asset Management. 


The .ppt document was loudly endorsed by ZeroHedge, a very popular “investment” blog that has a distinctly nihilistic attitude very typical of the trader mentality: the world is insane; politicians always lie; markets are rigged by Goldman Sachs; there is a huge conspiracy against the little investor; Armageddon is just around the corner; the same guys who killed Kennedy control Apple stock; you have to have a bomb shelter in your backyard; and you basically have to be a paranoid sociopath to make an honest buck in the markets. The main author’s handle is “Tyler Durden,” the co-protagonist of Chuck Palahniuk’s Fight Club. Look at his Twitter account. It features a picture of Brad Pitt with a bare midriff playing Durden. The odds are, of course, that the author is a pale, overweight bald dude called Louie who trades stocks from his living room in “Joysie”. The thing is that, in addition to very analytical blurbs on the problems facing the Spanish economy, ZeroHedge also loves to show images of rioting (viz. “The Spanish RiotCam Has Arrived”). And also of making the parallels between any sort of mayhem in the streets of Madrid or Barcelona with the scenes at Syntagma Square in Athens.


The .ppt makes the bear casefor Spain, the absolute worst-case scenario in which the country simplydefaults on its debt. It points out factors that are undeniable: highunemployment (23%); unfinished housing crash (perhaps only half over);spendthrift regional governments; and shaky cajasoverexposed to the housing bubble. 
One of the key claims in the presentationis that Spanish debt is actually much higher than many realize. The consensus is that Spanish debt is equivalent to 60% of GDP, which is manageable (sixtypercent is actually lower than the debt-to-GDP ratio of “serious” countrieslike Germany [83%], the U.S. [100%], France [87%], the United Kingdom [81%],and Japan [233%]).
“Aha,” reply the ZeroHedgers and Carmels,“but that 60% is deceptive, because it does not include the debt owed by the comunidades autónomas, the regionalgovernments.” The PPT tells us that: “Spain’s national debt is 50% greater thanthe headline numbers. Spain’s debt-to-GDP balloons from 60% to 90% of GDP withregional and other debts (Slide 2).” When you factor that in, the figure, theyclaim, is 90%, which is a lot scarier.
Well, it turns out that this is notactually true. The lower consensus 60% figure is accurate, because it includesboth the money owed by the central government and all the goodies on which regionalauthorities splurged throughout the boom of the past decade. Listen to LuisGaricano, a leading Spanish economist, responding in comments on his blog from a readerwho is freaking out after visiting ZeroHedge:

Zero HEdge se hace un pequeno lio. La deuda de lasCCAA esta incluida YA en el total de la deuda publica. Otra cosa es la deudabancaria con aval del estado y la “otra deuda avalada”

Which I translate as follows:

ZeroHedgeis tying himself into knots. The debt owed by the autonomous regions is ALREADYincluded in the public debt total. Banking debt guaranteed by the governmentand “other guaranteed debt” is another issue.

So, who you gonna call? The economicsprofessor who does this for a living (and, incidentally, is not a Spain bull),or the anonymous blogger who masquerades as the Nietzschean, psychopathicalter-ego of an alienated insomniac suffering from multiple personalitydisorder? I have my answer, but then again I’m an elitist, as some sock puppetsmutter under their breath when they read this blog.
And then you start to probe the detail ofthe .ppt document, and the picture shifts a little more. A Wall Street Journal blog carrieda very useful portrait of Carmel, the company making the bearish Spain call. First of all, Carmel manages $50 million. That makes it a very,very tiny player. Second of all, Jonathan Carmel, the head of the assetmanager, reveals that he writes his own investment research and that hisSpanish is very poor:

WhileMr. Carmel has yet to visit Spain for his research, he says he has spent muchof the past year combing through as many numbers as he can dig up, speakingwith as many people as he can find and reading as much as he can with what hecalls “my pretty bad Spanish.” “I’ve been using a lot of Google Translate,” heconfesses.

 So,basically, we have a manager from a tiny boutique firm who has never visitedSpain and who supplements mediocre language skills with Google Translate. Andthis is the research that moves the gigantic bond market that decides the ratesthat govern the lives of millions of people. I am not saying that any of thisis evil. After all, Carmel’s PowerPoint very transparently reveals his firm’s interestin the matter:

Webegan buying Spain CDS in Q4 2011 because the country has significantstructural problems within its economy, a debt load that is higher than theheadline number, and a banking system with unrealized losses (Slide no. 10)

This means he is betting on a Spanishdefault (probably using massive leverage). Spain doesn’t have to actually gobroke for him to make money. The CDSs only have to go up and his bet will payoff (if he cashes out in time):

Shouldthe Spanish crisis flare up in 2012 as we expect, we can generate a 300% returnon the annual premium (Slide no. 10)

Simply put, some of the financial mayhem isbeing fed by second-rate research based on machine translation. Markets are increasinglyfueled by this ever-greater mass of information that is easily available.According to the data worshippers, this will only end up being to our benefit. Andlanguage automation will only make the world an even better place by providingapproximate translations of this data. But that is a stupid illusion. Seeing grown men spout that silliness is the equivalent of watching those creepy middle-aged men at comic book conventions who still play with Star Wars figures. Because in investment, "close-enough" translation is actually "wrong" translation.


In financialmarkets, it is increasingly evident that greater information is not providingmore rational markets that are better fed with accurate information. On thecontrary, what we have is more noise. Noise like the one currently beinggenerated by ZeroHedge and Carmel for their own selfish ends using low quality translations(anonymous blogs don’t have to disclose their positions in the markets, by theway). The Google translations used by Carmel are not capable of providing thefine points of financial data that can be better conveyed by a humantranslation.
As such, the reams of Spanish-language datatranslated into mediocre English and consumed by Carmel’s analysts arethe equivalent of the stock-trading algorithms that are producing more and morefrequent flash crashes.


Miguel Llorens is a freelance financial translator based in Madrid who works from Spanish into English. He is specialized in equity research, economics, accounting, and investment strategy. He has worked as a translator for Goldman Sachs, the US Government's Open Source Center, and H.B.O. International, as well as many small-and-medium-sized brokerages and asset management companies operating in Spain. To contact him, visit his website and write to the address listed there. Feel free to join his LinkedIn network or to follow him on Twitter.