20 November 2012

Why the US economy will substantially outperform the EU for the long run

I do not intend to be comprehensive with tons of indicators which are available: I will only focus on a few which, in my opinion, are making THE difference.
1. The banking sector
Whilst US banks have largely cleaned up their balance sheet, or more exactly dramatically reduce their leverage to around 15 x, and have been able to return to markets to fund themselves at market price (the FED has withdrawn its unconventional liquidity measures), the European banking system remains under life support from the ECB in the turn of EUR1 trillion Long-Term Refinancing Operations. The European banking system has a funding gap of EUR 1.3 billion, and as the WSJ writes “… if European banks were funded the same way as U.S. banks, they would have a deposit surplus of $3 trillion”.
This is why the US banks are lending t the US economy and European banks do not finance the EU economy whilst remaining too leveraged at 30 x. To worsen the situation, banks are increasingly hoarding money with the ECB: USD1.4 trillion as of 9 November.
2. Lending to the economy

The US commercial and industrial loans from all commercial banks is an indicator I follow on a regular basis and it proved to be a good early indicator of the US economy turnaround. Velocity is however part of the money creation and has dramatically fallen since the beginning of the financial crisis.
Today, I am adding velocity to present a more precise picture. Interesting enough velocity of MZM(1) * commercial & industrial loans by all commercial banks turned up +/- 1 year ago, adding a bullishness view on the US economy, despite the fact that MZM velocity is at 1.4 x, the lowest since 1959 (when it started to be reported). Banks are financing the US economy.

(1) MZM = M2 less small-denomination time deposits plus institutional money funds. Money Zero Maturity

3. Energy
One point largely occulted by commentators regarding the US fiscal and trade deficits is the energy sector. If the US, and everything seem pointing in this direction, becomes self sufficient within 10 years, this will be huge boost to the trade balance and therefore the GDP growth.
The oil & gas 2011 trade deficit stood at $993 bn for a GDP 15,321 bn or a negative growth of 6.5%; if one assumes that thanks to unconventional oil & gas the US can reduce its energy trade deficit by 50% this would add 3% to GDP: this is a game changer and the fiscal cliff would be much easier to climb.
The unconventional gas industry will have far reaching effects including job creation and re-industrialization. According to HIS, “the shale gas production supported 600,000 jobs in 2010, a number that is projected to grow to nearly 870,000 by 2015”.

PWC mentions in a 2011 report that by 2025 shale gas will save US manufacturers USD11.6 billion a year in gas expenses and add 1 million workers.
Hence my positive stance on the US economy.
What will enhance competitiveness of the US industry will have the reverse effect in Europe which largely ignores shale gas on the ground of ecological worries. This will represent a competitive disadvantage to Europe not only in term of price but also independence, since Europe largely relies on non-EU supplies.

When enlarging the picture, the map shows that the US competitive advantage goes well beyond Europe: other countries are paying 3 to 4 times the US price.
Finally, the competition between energy sources had a direct impact on crude oil in the US. The gap between the Brent and WTI started to widen two years ago to reach a 20% price advantage today, not petty money.


Federal Reserve Bank of St Louis: Economic Research
Federal Energy Regulatory Commission: Natural Gas Markets
Wall Street Journal: Why Europe’s Banks Trail in Deleveraging Process
Live Wall Street Journal: European Banks Still Hoarding Money
Penn State University: The Economic Impacts of the Pennsylvania Marcellus Shale Natural Gas Play: An Update
HIS: The Economic and Employment Contributions of hale Gas in the US
PWC: Shale Gs – A renaissance in US manufacturing?

17 October 2012

Europe wins the Peace Noble Prize: a farce!

After Obama in 2009, a new farce, the Peace Nobel Prize is attributed to the European Union which “for over six decades contributed to the advancement of peace and reconciliation, democracy and human rights in Europe”

Whilst nobody disputes that countries within the EU are still democracies, it is a different story for the EU where decision making is undemocratic and at best opaque, the European Parliament having nearly no power, and in any case all its members but a small minority are led by the EU integrationist dogma which does not accept any contradiction and debate about the construction of the EU.

Referenda are very rarely held to ask the opinion of the European population about major Treaties which take away local democracy to a central unelected bureaucracy in Brussels led by an apparatchik-like elite disconnected from the real world.

“The stabilizing part played by the EU has helped to transform most of Europe from a continent of war to a continent of peace

This is a travesty of the truth:

There have been no war in Western Europe since WWII thanks to the reconciliation between France and Germany, between two statesmen -General de Gaulle and Chancellor Adenauer-, statesmen that the EU has been lacking for a good 40 years while gathering plenty of shortsighted politicians whose sole horizon is the next election. This low quality politic class is unfortunately shared by the US.

Beyond this, peace was ensured thanks to the US nuclear umbrella and NATO that resulted in a power balance with the USRR and it Varsaw Pact allies might.

In terms of maintaining or advancing peace, one can be doubtful about the EU capability, or even willingness, when analyzing its failure during the war in the former Yugoslavia in the 1990’s, closing a prude eye in front of massacres (remember that at the beginning of the Yugoslavian disintegration the EU –and the US- supported the central power in Belgrade). Today nothing would change.

The Peace Noble Prize has always a political message. My reading for 2012 is the following: “To the European population, further EU social, fiscal and economic integration with more taxes and power centralized to Brussels is the only way forward to get you out of the economic, financial and social mess you are in. To the Scotts, Flemish, Catalans, Lombards, etc. do not break away from your country; solidarity from richer to poorest regions is the only option, whatever the origin of the gap.” 

The subliminal message is to frighten the population on the risk of an intra-European war following a return to a nationalistic agenda of the pre WWII. This is utter fallacy. Good governance, more research, better education, less bureaucracy, better tax regime, more working hours, late retirement, etc. is the only way forward for an over indebted region entering a recession, with a banking system living on the ECB lifeline.


The Nobel prize Organization

28 August 2012

Current account surplus is a key determinant to bonds market turnaround: Italy’s case

I am reproducing in extenso a market view published bay Horseman Capital which deals with the importance of current account in assessing the ability of a country to return to good fortune, i.e. when the bond market is turning around. In a previous review published in October 2011, Rusell Clark made a good case that returning to a current account surplus is key to the turning point in bond markets.

This espouses my views about France being the real sick man of Europe as exemplified by the graphs below (and see http://marketsandbeyond.blogspot.com/2011/10/who-should-be-single-rated-italy-or.html):
Let’s now read what Russell Clark has to tell us about current accounts, Italy and the bond market.
“Sovereign Debt – Italy
In my last note on Sovereign debt – sent out in October 2011 – I noted that in all the debt crises that I have looked at, the turning point occurs when the troubled country can turn its current account deficit into surplus. I noted that of the distressed peripheral countries in Europe only Ireland had achieved current account surplus, and hence we were buyers of Irish bonds.
Since then Irish bonds have recovered most of their losses of 2011, and the Irish government has been able to return to the bond market. This is during a period of sustained instability in the far bigger bond markets of Spain and Italy.
Italy has one of the biggest bond markets in the world, and financial commentators quite rightly point out that its size means that it would be difficult if not impossible to implement the same programs that have been used by the European authorities in Portugal, Ireland and Greece. Hence, in my view the future of the Italian bond market is probably a key determinant of the survival of the Euro in its current form.
Like the other troubled nations of Europe, Italy has been running a current account deficit for a prolonged period of time. There have been recent signs of improvement, but not enough to move Italy to a current account surplus. The Economist estimates that Italy will run a 2.4% current account deficit for 2012.
However, beneath the slowly improving current account numbers, Italy’s bilateral trade numbers are showing signs of big improvements. Italy has shown a dramatic improvement in its trade deficit with China, the EU and the US.
If Italy has improved the trade positions with three biggest economic regions of the world, why have we not seen better improvement in the Italian current account? The answer is apparent when we look at the break down of Italian trade by category. As can be seen below, Italy has improved its manufacturing trade balance significantly, but all the gains in this area have been lost due to increasing commodity (mainly energy) trade deficit.
Should we see lower energy costs, I believe we would see a significant fall in the Italian current account, potentially pushing Italy to a current account surplus. For investors looking to play lower commodity prices via a long position in fixed income, Italian bonds look attractive in my view.
Almost all of Italy’s energy needs are priced off the Brent oil price. In 2008, all energy sources were comparably priced, but since then we have seen large divergences, which have put Italy at a disadvantage. Should we see a convergence in energy prices, Italy should be a relative winner, and Italian bonds should also prove to be relative winners.”
Horseman Capital: Russell Clark – Market Views August 2012
Trading Economics

Markets & Beyond: Who should be single A rated: Italy or France?



17 August 2012

Greece: August 20 will not be the day of reckoning

After The ECB rejected a proposal by Greece to delay 1 month a EUR 3.2 bn bond repayment, Athens issued EUR 5 bn worth of 13 wk T-Bills August 14, including non-competitive bids, which was bought by local banks on a meager 1.36 x cover ratio (the worst to date) which really shows that even short term financing is becoming difficult. These banks will probably use the T-Bills as collateral with the Greek central bank to access its emergency liquidity assistance (ELA).
Below is the current schedule of T Bills redemption until year end, i.e. EUR 15.2 bn.
The situation remains most precarious. The lack tax collection, in particular due to a continued fall in the GDP y0y and to some extent persistent fraud, does not bold well for the Greek budget. The debt is again on the increase with a sharp EUR 23 bn QoQ: after investors wrote-down EUR 105 bn in March, reducing the debt to EUR 280 bn, end of June it was back above EUR 300 bn at 304 bn.
The budget execution is rather dismay, revenues being 24% behind plan for the period January-July 2012. Looking at it in more details, the PIB item is again manipulated this year in the turn EUR 1.4 bn to present an acceptable bottom line picture.
Despite the debt write-down, interest payments remain as elevated as last year but in line with the budget.
With no GDP improvement in the foreseeable future, and the troika requesting EUR 11.5 bn additional spending cuts in order to provide further financial assistance, the squeeze will continue on the population. This being said, even if Greece does not abide by its commitments, I have no doubt that they will get additional financial aid from the EZ (In my opinion the objective is until the 2013 German elections, but I doubt markets will allow it without the ECB jumping in full gear by buying EZ sovereign debt in the primary and secondary markets with no limit).

Greek Ministry of Finance: Budget Execution Bulletins

02 July 2012

Eurozone: This time is different, or is it?

Thursday, Germany lost twice against the Italians: once for the euro 2012 soccer cup semi-final and then, later during the night, when the Italian PM Monti’s (and Spanish PM Rajoy) blitzkrieg won over frau Merkel. He played tough by simply refusing to sign any agreement until Germany agreed that the eurozone must jointly back Spanish banks without Spain having to guarantee the deb.
1. The agreement
  • setting up a single European supervisory mechanism for banks under the ECB control
  • ESM allowed to directly recapitalize banks
  • Possibility for countries which are complying with common rules, recommendations and timetables, to make use of the existing EFSF/ESM instruments to stabilise markets. Financial assistance to Spain will be provided without seniority status for the financing provided by the EFSF/ESM.
  • mobilizing around 120 billion euro for growth measures:
    • A 10 billion euro increase of the capital of the European Investment Bank implying a lending capacity by 60 billion euro.
    • The other 60 billion euro comes (i) from the reallocation of unused structural funds (55 billion), and (ii) from the pilot phase of Project Bonds to be launched this summer and targeted at key initiatives in energy, transport and broad-band infrastructure (4.5 billion).
  • Adopting a Financial Transaction Tax by December
2. What’s next?
Ireland must rejoice since they now can lineup to require the same favorable treatment, which cost is put at EUR 64 billion.
European (read mostly EZ) taxpayers are on the hook thanks to the pan-EZ mutualization of the European banking sector rescue. Do not misread me, I strongly believe that for a monetary union to survive (if not thrive) the banking sector MUST have a single supervisory board and the costs must then be shared. However, we are mutualizing liabilities before having had any chance to mutualize benefits (and will probably share none, if any in the future) at nil cost for banks; in a capitalistic environment, the ones who rescue an ailing company take control: nothing near this simple and sensible criteria here… I also notice that no FDIC equivalent is set up to guarantee deposits with no limit on the number of accounts guaranteed one can hold.
The question remains: is this the first step towards the mutualization of sovereign debt? I cannot believe that Germany would carve in; if they do, the credibility of Europe would be jeopardized.
The direction towards fiscal integration is going ahead but many obstacles remain which let me think that the success is far from being certain (I am in fact very doubtful).
Fiscal union without social union will fail as the EZ failed (whatever politicians do to disguise it, it is a failure). The EU loves, and writes in many of its statements, the words “best practice”: ask the French if best practice is 67 years old retirement age, no minimal wage, 40h a week working time, etc.
What last week agreement achieved is reassuring markets for some time by reducing the amount of money Club Med countries will devote to save their ailing banking sector: Spain has gone from 100% down to 12%. Conversely, France is adding EUR 20 billion of liabilities. Remember my words for a rather long time, France is really sick economically and worse than Italy. Today, the French Audit Court is publishing a report that I will carefully read; the first comments are rather straight to the point: EUR 40 billion need to be found until end 2013 to abide by France’s commitments on deficit reduction…
Markets will however go back to the reality of the EZ: a monetary union with a widening competitiveness gap. NOTHING, I repeat nothing, of what was decided last week is addressing this gap; the EUR 120 billion to spur growth via infrastructure investments, particularly in distressed European countries, will take years to bear fruits and 1% of EZ GDP split over 5 or 10 years, with nearly nothing in 2012-2014, is not going to help them drive their way out of recession.
The core of the problem is still pending: lack of competitiveness of Southern Europe versus Northern Europe. As a matter of fact, French will never accept a 25-30% decrease in wages to become competitive again: understandably they will always prefer a currency devaluation than a salary devaluation (and no, the effects are not the same for the population concerned).
Yes, this time is different because Germany bent before blackmailing, but no, it is not different because the roots of the problems remain: lack of competitiveness and structural trade deficits that act as a drag on growth which is the only way out of the crisis. The necessary structural adjustments (lengthening of working hours, postponing the retirement age, reducing the share of the public sector in the economy, etc.) will only be accepted by the population if there is some form of growth. Austerity to bring public finances under control without devaluation is a death spiral – see Greece.
As reported by Bloomberg: “the EU’s two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain, limiting the ability to lower the nations’ borrowing costs.”, not mentioning France.
European Council 28/29 June 2012 – Conclusions
Remarks by President Herman von Rompuy following the European Council

Bloomberg: EU Leaders Ease Debt-Crisis Rules on Spain


07 June 2012

To my Greek readers: The sale of gold and silver coins by the Central Bank is a rip-off

On April 30 the Greek Ministry of Finance issued a press release announcing the sale of gold and silver collector coins. It is a rip-off, so keep clear!
The calculation is as follows:
1. Gold coins
17 g / coin @ 1,615 $/oz (1 troy oz= 31.1g) = 702.58 EUR / coin (1.2565 USD / 1 EUR)
Selling price: EUR 2,100 i.e. 3 X the value of gold!!!
2. Silver coins
24 g / coin @ 29 $/oz (1 troy oz= 31.1g) = 17.81 EUR / coin (1.2565 USD / 1 EUR)
Selling price: EUR 90 i.e. 5 X the value of silver!!!!!
Please also note that the title of precious metal is on the low end at 916/1000 of gold and 925/1000 of silver.
You are better buying alternative coins quoted on the market or gold bars. For example, for EUR 2,100 you could buy a 1 oz Canadian Mapple Leaf with 999.9 / 1000 purity and get 14.1 g more gold, a better purity and still have EUR 700 to go shopping! (and I included a fat 5% broker commission).
This deal is much worse than the issue of gold and silver coins by the French Mint in April 2011…et do not tell me that that the “collector” value makes the difference!
Ministry of Finance: Press release

Markets & Beyond: The French mint issues a limited series of gold and silver coins: a rip-off!


21 May 2012

Eurozone falling chikens’ choice: internal or external devaluation?

1. An awful political background
Since the financial crisis started in 2007, 8 elections in Europe have driven incumbent parties out of business. Whether justified or not, it shows how the European population is disgruntled by a generation of politicians whose lack of courage led to the current over-indebtedness mess (N.B. voters share the responsibility by voting for the same politicians they despite now).
For a couple of years I have written that Greece could not be saved and I strongly believe that European politicians did not give a damn about Greece to solve the crisis, and were solely interested in insulating their banks from a Greek default: to succeed, (1) time needed to be garnered (hence the succession of costly bailouts) and (2) the ECB involved by buying sovereign debt from banks and extending unlimited liquidities; banks used these liquidities to buy more European sovereign debt (the 3 years EUR 1 trillion LTRO is meant (1) to provide some breezing space for deficit prone Southern European countries –France included- and (2) give a free return to banks to strengthen their balance sheet in the turn of 2-4% i.e. EUR 20-40 bn a year, a disgrace– as a side comment, none of the executives of European banks benefiting from the ECB largess should get any bonus since the profitability of banks has nothing to do with managerial acumen, and should in fact, for many of them, be bankrupt; as I have advocating for so many years banks’ executives and theirs boards should have been fired: what shareholders are waiting for?).
Greece will again go the poll in June and I do not see why results would favor a corrupt and incompetent political arena which has ruled Greece for 30 years, and all poll are giving the extreme left SIRYZA party a large lead. Despite disguised threats to the Greek electorate (80% want to remain within the EZ but with no austerity but an open check book from the Germans – they are living in Cuckoo land) from policy makers about a possible exit from the EZ (if your vote is wrong i.e. you do not abide by our integrationist rules, then it will be a disaster for you and no more money from us), the PASOK and the so-called liberals will be out of business for good, hopefully. The trick is to propose at the same time a referendum about the exit of Greece from the EZ which would end up in a rather strange situation where the majority would vote for an anti-austerity parliament and at the same time vote again the exit from the euro whilst bailouts are linked to austerity; the discussions about adding growth to austerity are fine but will not address the roots of the problem: lack of competitiveness.
After the failure of economic convergence within the EZ, we are witnessing Greece’s standard of living fast converging not with Northern Europe but with its European neighbors, Romania and Bulgaria!
For the time being, Greece got its EUR 4.2 bn rescue payment from Europe last week (add EUR 1.6 bn if the IMF disburses its part of the deal) that will cover its liquidity needs for June and probably until late July since Greece has hardly any repayment due in July.
Parliamentary elections in France, also taking place in June, will see the current Sarkozyst party (UMP) lose a considerable number of seats pending unofficial local agreements with the FN, Mrs. Le Pen populist party. The socialist party will win the elections, the question being by which margin: if their victory is large enough, after gaining control of the Senate in September 2011 for the first time under the Vth Republic, they could hold 2/3 of the congress (Senate + Parliament gathering) to modify the constitution as they wish.
Germany’s Chancellor Angela Merkel registered a strong defeat in North Rhine-Westphalia state election in May, the most populated region. However the increased lead for the SPD (the center left) does not mean that this will end the austerity imposed onto Southern Europe since it is the SPD that enshrined budget balance in the Constitution: Germans will not agree to finance ad vitam aeternam Southern Europe for the sake of “peace and the European construction”, which is the dogmatic and untrue eurocratic motto.
2. An awful economic background
Economic forecasts for 2012 and 2013 are between bad and disastrous for Club Med countries (the IMF is less confident than the EC, and private forecasters are even more pessimistic), and downward revisions will crawl along the year and next.
As the table below exemplifies, GDP will turn negative this year and more deeply so in 2013, with hardly any EU country escaping, the EZ being more affected, and within the EZ, Southern Europe the most
In the case of France, the new President, François Hollande, based his economic program on official, and as usual over-optimistic, growth forecasts of 0.7% in 2012, 1.75% in 2013 and 2% until 2016, whilst the country will be in negative territory in 2012 and 2013 at least. Add a Greek default and you get an asset that becomes a straight loss in the turn of EUR 15 bn from the first bailout already paid plus any recapitalization of the ECB.
France’s deficit will not be reduced back to the 3% Maastricht criteria in 2016 and its debt will continue on its upwards trajectory. Expect 2 notch rating downgrade within 12 months.
 Like other Europeans, the standard of living of French citizens will keep up contracting.
The key issue of low competitiveness is structural, and economic, social and tax reforms are not addressed. Policy makers have focused for too long on what they thought, incompetently or dogmatically, were liquidity issues.
3. The choice
This foolish blindness is leading to one of two tough choices: internal or external devaluation to quickly regain competitiveness.
Let’s come back to my preferred equation:
PIB = Public spending + private spending + commercial balance
The World has huge imbalances which result from demand led economies (USA for example) whose consumption is satisfied by export driven economies (China for example), and these imbalances must be corrected to go back to some economic and financial normality.
Looking at the equation, and taking into account the state of debt and budget deficits in demand driven economies in the West, they MUST shift their focus to improving their trade balance, and export driven countries MUST stimulate domestic demand.
There are two ways to improve the trade and services balance: either increase exports or reduce imports or a combination of the two.
To increase export one needs to propose goods that others want to buy by focusing on added value products (there is no way to be competitive for goods very elastic to prices) or unique goods and improve competitiveness. Wage and social costs are the items a country controls which impact productivity and no Club Med country will escape harsh austerity. Energy is also quite important and must be addressed (the USA is thriving in becoming self sufficient again in the years ahead thank to technology which allows shale oil and gas recovery – this will all also have a substantial positive impact on the US trade balance).
To reduce imports, goods must become too expensive for consumers or find the same ones locally at attractive prices. This can be achieved via custom tariff and/or other tricks or via unfavorable exchange rates.
Therefore, taking the extreme case of Greece (but it is valid for Spain, Italy, France, etc.), to rebalance the economy and improve the terms of trade, the choice is between external or internal devaluation.
External devaluation corresponds to the exit from the fixed exchange rate mechanism (the euro) where the Drachma will loose 50-70% of its new parity with the euro (or DM) leading to much higher imported goods thus lowering consumption and more importantly lowering imports; this assumes that the goods and services needed will be substituted with locally produced ones, otherwise the country will continue impoverishing itself. The terms of trade for exports will also dramatically improve, assuming Greece will produce goods other countries want to buy. For the country not to crumble under debt servicing, this will be accompanied with a debt default (restructuring, straight default, inflating the debt away, you name it). Competitive exchange rate devaluation has always been and still is an economic policy tool (see the US and China manipulating their currencies at will).
Internal devaluation is where countries have chosen austerity without currency devaluation: the only adjustable variable is real wages and social benefits which must be reduced and this must be equivalent to a currency devaluation. The terms of trade will not improve and trade imbalances will remain. Debt servicing becomes unsustainable by eating a rising portion of taxes collected. This can only work with fiscal transfers from other countries if a social collapse is to be avoided, i.e. Germany continuing paying.
Whatever the course of action followed, the standard of living of Europeans will continue to fall for years if not for a decade. However, the internal devaluation route, if followed, would end up very nastily.
I will never sufficiently outline the need for Europe to focus on innovation (strength of the US which also explains why I am more positive on the US economic prospects than the European one) and demographics, an other factor of economic growth: spending money in these areas instead of Greece et al. would have been more beneficial to European growth long term.
Capital Economics: European Economic Outlook Q2 2012

26 April 2012

French Presidential Elections: First round and why it does matter

1. Results
For the first time under the Vth Republic, the incumbent President is behind his main challenger.
The official results are as follows (I do not provide the meaningless result from Jacques Cheminade):
2. Consequences
One of the central conclusions of the campaign is the rejection of the EU as it currently works and calls for increasing protectionism: even Sarkozy demands modifications to the Shengen accord and Hollande a renegotiation of the Lisbon Treaty. A quick analysis of the results show that, in one way or the other, the vast majority campaigned on a platform that will lead to a frontal shock with Germany: budget balance and austerity vs. social welfare and deficits, southern Europe vs. Northern Europe, domestic demand oriented growth vs. export oriented growth.
In addition, both Sarkozy and Hollande built their programs on an over-optimistic GDP growth forecast to cut borrowing at 0.7% in 2012, 1.75% in 2013 and 2% until 2016, well above consensus (most politicians do overstate future growth to buy votes). and neither is addressing the key issues holding back growth. For example, last week the IMF revised down 2013 French growth to 1.0%.
Whoever is elected President on May 6, he will not be able to hold by his promises. This will have a number of consequences:
  • Spread between OAT and Bund will widen
  • The eurozone will again come under strain and attack from markets (i.e. investors)
  • France will loose it AA+ and be downgraded (over a 18 months period, one notch if Sarkozy is elected, two notches if it is Hollande)
  • Expect social unrest within 12-18 months, particulalry if Sarkozy is elected
Then, the Parliamentary elections will come in June and there is no chance whatsoever that the current ruling party wins, even if Sarkozy is re-elected. The antagonism with the Front National is too entrenched and the possibility for the Front National candidates to have enough votes to remain in 1/3 of constituencies for the second round.
If Sarkozy is not elected (the likely outcome as of today since over 1/3 of Bayrou and 40% of Le Pen voters will abstain for the second round, the rest will go +/- 50/50 for each remaining candidate), I also expect the current ruling party to fall in shambles with infighting between Coppée (current Head of the ruling party - UMP) and Fillion (current Prime Minister – a senior member of UMP) each preparing for the next Presidential race in 2017 (Fillion will present himself at the mayoral election for Paris).
I then forecast the Front National to try its utmost to organize the opposition to the the socialists around its platform, with some with the right wing of the UMP joining forces with the National Front, and possibly Dupont-Aignan.

Ministère de l’Intérieur: Presidential elections 2012
Ministère des Finances: Stratégie Pluriannuelle de Finances Publiques
Capital Economics: French election won’t tackle key issues

02 April 2012

Stop Press: Markit Eurozone Manufacturing PMI – It’s really bad

Stop Press: Markit Eurozone Manufacturing PMI – It’s really bad

Stop Press: Markit Eurozone Manufacturing PMI – It’s really bad

I usually do not post this kind of economic data, since there are so many published every week. I am doing so since the numbers are striking, France in particular is a real disaster. As I indicated many time, forget about Portugal, Spain (well not really, do not forget Spain!) and Italy, France is the sick man.
Greece: 3 month high but still in contraction territory @ 41.3
France: 33 month low (yes, you read it right!) @ 46.7 (I heard on the French radio that the 2 French auto-manufacturers – Renault and Peugeot – had sales 30% down in March; the French auto industry, Peugeot in particular, is entering the danger zone for its survival).

The roots of the problem have not been addressed, and politicians are still in denial territory: the construction of Europe for the past 20 years is a failure due to a dogmatic approach.
Markit:  Markit Eurozone Manufacturing PMI® – final data

23 March 2012

French capitalism = socialist cronyism

French capitalism = socialist cronyism

Greece, Europe and the rule of Law

On 23rd February 2012, the Greek parliament passed a Law which at the time went mostly unnoticed in one of its provisios: the retroactivity of the CAC (Collective Action Clause) for Greek Law bonds. Greek bonds holders who do not accept the debt swap will be forced to do so.
EUR 205 bn were eligible for the debt swap:
Investors (well, banks) holding EUR 152 bn Greek law bonds accepted the offer (85.9%)
and EUR 20 bn of non-Greek law (69.9%), i.e. 83.7% for the aggregate.

The invitation period (to the public offer) for each series of PSI-eligible foreign-law bonds and of bonds issued by state enterprises and guaranteed by the Hellenic Republic has been extended until 9:00 p.m. (C.E.T.) on March 23, 2012. Note that not only content to renege on past contractual agreements on Greek-Law bonds, Greece is threatening to default on bonds held under foreign (Brtiish) Law if bondholders do not accept the terms of the bond swap agreed (read forced) on March 8.
I thought retroactivity of laws was the benchmark of totalitarian regimes, but no, it is happening in 2012 within Europe, in the birthplace of democracy. All European leaders are applauding to something they should utterly reject, but for futile self-political interest. There is one basic principle of democracies: the non-retroactivity of laws.
I feel that any investor would successfully challenge this before the European Court of Human Rights.


Hellenic Republic – Ministry of Finance: Press release PSI


Eurobank EFG: Greece Macro-Monitor
ISDA: Unofficial translation of the Act of the Governor – Bank of Greece

28 February 2012

French capitalism = socialist cronyism

On February 20 the French financial newspaper, Les Echos, announced that Mr Proglio, former CEO of Veolia, the world leading environment company, now CEO of EDF (one of the world largest electricity companies), designed a plot to oust the current CEO, Mr Frerot who has been trying to sort out the mess left by Mr Proglio, still a Director of Veolia. His replacement was meant to be Mr Borloo, former Minister in the Sarkozy Government until last summer (when he was not nominated Prime Minister), and candidate for the Presidency who unexpectedly dropped out of the race a few weeks ago to support President Sarkozy… Please note that Mr Poglio was strongly promoted by Sarkozy to arrive at the helm of EDF.
This is typical of political cronyism which looks more like what is witnessed in banana republics than in a so called developed democratic country.
France has never ever been economically liberal despite what is said on media, in political circles or with outdated unions (few remember that during the early 70’s the French Stalinist communist party was gathering around 23% of votes!). France has always been a centralized country since the affirmation of the absolute monarchy with Louis the XIV during the 17th Century; such centralization might work when the ruler at the helm is able, otherwise you run to disaster: unfortunately for France, since General de Gaule (i.e. for the past 40 years), France has never been ruled by a statesman but by politicians of varying quality (generally average to low), always with a socialistic agenda. Since the Mid-90s, cronyism has developed at a fast pace which has been detrimental to French citizens well-being.
Mr Proglio is unfortunately not due to renewal as a Director of Veolia until 2014. I invite all shareholders of this company to draw a line in their agenda for 2014 and vote against his re-appointment (if he is a candidate indeed).
Please note that EDF share price lost 50% since Mr Proglio took over EDF as CEO.
Bloomberg: Veolia Falls After Les Echos Says CEO Frerot May Be Replaced: Paris Mover