Monthly Archives: March 2015

Plus Ça Change…


On May 6, 2012, Françoise Hollande won a landslide victory in the French Presidential elections. Here's how that victory was reported in the (left-leaning) UK Guardian:

(UK GUARDIAN, MAY 6, 2012): François Hollande has won power in France, turning the tide on a rightwards and xenophobic lurch in European politics and vowing to transform Europe's handling of the economic crisis by fighting back against German-led austerity measures.

The 57-year-old rural MP and self-styled Mr Normal, a moderate social democrat from the centre of the Socialist party, is France's first leftwing president in almost 20 years. Projections from early counts, released by French TV, put his score at 51.9%.

His emphatic victory is a boost to the left in a continent that has gradually swung rightwards since the economic crisis broke four years ago.

The man Hollande defeated was Nicholas Sarkozy, leader of the right wing UMP party who had been in office for just one term (though that term - unfortunately for Sarkozy - just happened to coincide with the 2008 Global Financial Crisis).

However, Sarkozy's unseating was conclusive:

Nicolas Sarkozy, defeated after one term in office, became the 11th European leader to lose power since the economic crisis in 2008.

He conceded defeat at a gathering of his party activists at the Mutualité in central Paris, urging them from the stage to stop booing Hollande. "I carry all the responsibility for this defeat," he said.

In the wake of his defeat, Sarkozy, now no longer in office, couldn't help but make one more pledge to the French people (old habits die hard, it seems):

[Sarkozy] said that after 35 years in politics and 10 years at the top of government, he would now become a simple "Frenchman among the French".

Hollande swept into power on a wave of euphoria, promising all kinds of handouts to the French people - handouts which France couldn't afford to actually hand out, frankly, but when did THAT little inconvenience ever stop a politician from making a promise?

Fast forward precisely ten months to March 2013 and I think it's fair to say that the bloom was off the rose:

(UK Daily Telegraph): Some 67 per cent of [French] people now disapprove of [Hollande's] attempts at running the country, less than a year into his five-year term, according to a new poll. The score is 10 per cent worse than last month, according to Opionionway polling institute. 

Only three in 10 now think the Socialist is doing a good job, down eight points, while two thirds believe “things are not changing” for the better...

"Ten months after an election in a first term, this (level of unpopularity) is a record for a French president," said Bruno Jeanbar of Opinionway.


At the time of his defeat in 2012, the standing in which Sarkozy was held by the French public was, like the man himself, diminutive:

(UK Guardian, May 6 2012): The defeat of the most unpopular French president ever to run for re-election was not simply the result of the global financial crisis or eurozone debt turmoil. It was also down to the intense public dislike of the man viewed by many as the "president of the rich" who had swept to victory in 2007 with a huge mandate to change France. The majority of French people felt he had failed to deliver on his promises, and he was criticised for his ostentatious display of wealth, favouring the rich and leaving behind over 2.8 million unemployed. Political analysts said anti-Sarkozy sentiment had become a cultural phenomenon in France.

Now, however, after three years of Hollande's disastrous reign as French President, the people have been given a chance to voice their displeasure at his poor performance at the helm of Europe's second-biggest economy and, who should they turn to, but that 'simple Frenchman amongst the French' himself, Nicholas Sarkozy who, of course, couldn't stay away from politics:

(UK Guardian): The resounding election success by the traditional right UMP and its centrist allies catapulted Sarkozy back into the limelight after what was seen as his lacklustre return to politics in September. His party has been beset by debt, allegations of financial scandals and bitter in-fighting in recent months, but its score turned its fortunes around. Sarkozy described his party’s high score as historic and a mark of France’s “massive rejection” of the politics of his successor, Hollande.

Sarkozy’s campaign speeches have been sharply rightwing and openly negative towards the Muslim community to win over votes from the far-right – for example in his argument that school canteens should not offer alternative pork-free menus to children, or that the Muslim headscarf, or hijab, should be banned from universities. 

This has irritated some in his own party. But Sarkozy is likely to hail the UMP’s electoral gains as a personal victory for himself and a vindication of his veer to the right. The decisive win for the UMP will comfort his personal ambitions to win the party’s primary contest next year and run for president again in 2017.

Sarkozy's UMP party was seen as an acceptable alternative (for now) to the extreme right-wing Front National, led by Marine Le Pen, who have moved from a protest vote into a viable contender for office thanks to the paucity of the two main parties' leadership.

The 'cultural phenomenon of anti-Sarkozy sentiment' had to be swallowed in pursuit of a protest vote against perhaps the worst President France has had in living memory (and probably beyond).

The situation in France demonstrates, once again, the problem with modern Western democracies where a complete lack of true leadership has led to unpopular incumbents and comebacks by once-vilified ex-presidents across the political landscape.

The tipping point arrives when electorates realise that a vote for either of the two main parties is simply a vote for a horse of a different colour as, no matter which party takes office, the debt dynamics remain constant.

Eventually, impatience and frustration leads to a vote for extremism and that is something simply Europe cannot afford - but also a growing reality it has to face.

Greece's dance back and forth between PASOK and New Democracy (each of which was more hopeless than the other in successive terms of office) eventually resulted in the election of The Coalition of the Radical Left (Syriza) and we all know how well THAT little exercise in freedom of expression is working out.

Meanwhile, through it all, the cost to whoever inhabits the Élysée Palace of borrowing money from international bond markets is at a 700-year low (sorry, the chart 'only' goes back a couple of hundred years) and its yield curve is negative out to four years.

Despite appearances, France is a timebomb at the heart of Europe and, if reality were to reimpose itself upon markets, all hell would be let loose. However, for now, none of that matters.

Plus ça change...

France-government-bond-yield-Long-Term France Curve

Much Ado About Nothing

Today, in a Bloomberg video entitled "The Three Most Important Things Janet Yellen Said", this was #2:

"In December and January, the committee judged that it could be patient in beginning to normalise the stance of monetary policy. That meant that we considered it unlikely that economic conditions would warrant an increase in the target range for the Federal Funds rate for at least the next couple of FOMC meetings.

While it's still the case that we consider it unlikely that economic conditions will warrant an increase in the target range at the April meeting, such an increase could be warranted at any later meeting depending on how the economy evolves.

Lemme emphasise again, that today's modification of the forward guidance should not be read as indicating that the committee has decided on the timing of the initial increase in the target range for the Federal Funds rate. In particular, this change does not mean that an increase will occur in June - although we can't rule that out..."

These words? The entire financial world was hanging on THESE WORDS?

What she in effect said was this:

"Interest rates could increase from zero at some point in the future"

Then she said this:

"Rates won't necessarily go up in June. But they might."

Anybody who found themselves surprised by either of these statements should perhaps seek employment in an alternative industry.

So why the violent reaction in just about every asset class to a series of ridiculous statements which, again, "stated the bleeding obvious"?

Ah... well therein lies the rub.

Those violent moves in currencies, stocks, bonds and commodities are the first signs of the markets finally reacquainting themselves with reality and the reality is this:

The credibility of the Federal Reserve is hanging by the thinnest of threads and, unfortunately, that credibility is the ONLY thing holding back the tidal wave set to swamp the world once not just the Fed, but its cohort around the world are seen for what they really are and the complete hopelessness of their current situation understood is understood by markets lulled into a false sense of complacency by six years of QE-fueled gains.

One thing I can guarantee you is that the credibility and trust that took several years of concerted action by central banks to build up will disappear in a matter of days.


Painted Into A Corner

Surely Not?

“I am afraid this may not be a one-off episode... The timing of interest rate lift-off and the pace of subsequent rate increases can still surprise markets. The danger is that vulnerabilities that build up during a period of very accommodative monetary policy can unwind suddenly when such policy is reversed, creating substantial market volatility.”

These are the words of IMF head, Christine Lagarde and are taken from an article in the FT quoting a speech she gave yesterday in Mumbai in which she 'warned' of potential instability in Emerging Markets once interest rates begin to rise.

The article went on:

"...Ms Lagarde also warned that emerging economies faced a second risk from the recent strength of the US currency, with indebted companies that took advantage of low rates to borrow in dollars facing sudden and steep jumps in debt servicing costs."

There is a distinct lag in the delivery of messages such as these from the world's smartest investors and the world's smartest bureaucrats.

By the time the likes of Lagarde issue such warnings, it's likely too late to do anything about them.

For Lagarde to verbalise these ideas now, when the damage is already being done is of little use to anybody - other than to give the IMF the ability to say they foresaw the crisis.

Basil Fawlty called it "stating the bleeding obvious".

'Potential' instability in emerging markets, eh, Christine?

BRICS vs Dollar

See that chart? That would be the BRICS currency moves versus the dollar in the last 8 months.

Potential trouble spot? You think?...and these moves are essentially predicated upon the mere likelihood that the word 'patience' may be removed from a prepared statement issued later this afternoon.

Funnily enough, no sooner had Ms. Lagarde dazzled us all with her brilliant insight, than the other international home for financial geniuses, the OECD, wheeled out their chief economist, Catherine Mann, who offered the world this piece of cutting analysis:

"Excessive reliance on monetary policy alone is building-up financial risks, while not yet reviving business investment".

What would we do without them?

The serious point to understand about all this is that these are the same group of people who were certain subprime was contained, that the GFC was perfectly manageable, that QE1 would solve everything and that growth would have been back to 3% long ago.

The very fact that they are making these forecasts now tells us we are far nearer the denouement than many believe. If the IMF and the OECD think the world is in a degree of trouble, you can guarantee one thing; we're in WAY more trouble than that.