April 2017


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The initial market reaction to the actual outcome of the very competitive first round should be positive for risk assets and the euro, though not necessarily ebullient. The extent of the rally depends on what the final numbers say about the strength of Le Pen’s showing, especially now that both Fillon and Benoit Hamon, the Socialist Party candidate who was badly defeated, have rushed to throw their support behind Macron for the May 7 runoff.

Looking ahead, and based on the widespread conventional view that a majority of the French electorate will again seek to vote for any alternative to the National Front, most market participants will likely assume that, when push comes to shove, Macron will be elected president — even though he lacks a political party and now faces the prospect of being pressed much harder on policy positions and past actions.

So Le Pen comes a close second and markets are writing her off? The extreme vote that Fillon and Hamon received will now likely go to Le Pen. That could be enough in a 2 horse race to see her over the line. Another terrorist attack……more votes her way. This thing is far from over and I would prepare for a Le Pen victory. Brexit and Trump could never happen……and yet, here we are.

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So who is likely to win one of the two run-off spots? Well, let’s take a quick look at the field. The current front-runner by just a hair (at 24%) is Emmanuel Macron, a young, smooth-tongued, hyper-educated (Sciences Po and ENA) technocrat who was once Hollande’s economic minister but has never himself held elective office. His newly invented centrist party, En Marche!, is designed to please all sides. He believes in complex market reforms to make government work better. He loves Merkel’s open immigration party and firmly believes in the future of the EU. He is, deliciously, a total outsider that total insiders can feel comfortable voting for. Whatever Marine Le Pen likes, he finds offensive. He is especially popular among the urban and the educated.

 

Trailing Macron by a hair is Le Pen herself–who will almost certainly repeat her father’s feat (considered astounding back in 2002) of qualifying for the second round. She is of course “Madame Frexit”: resolutely populist, anti-immigrant, anti-globalist, anti-Euro, and anti-EU. In recent months, the very possibility of her presidency (she has explicitly promised to redenominate some or all government debt in Francs) has widened the credit spread between Bunds and OATs. Her supporters are disproportionately rural, lower income–and young. According to one recent survey, 40% of 18- to 24-year-olds support Le Pen, nearly twice the share supporting Macron. Youth support for Eurosceptic political movements is in fact the rule in continental Europe (and has been critical where these movements have triumphed, as in Poland and Hungary). Unlike the youth in America or the U.K., the youth in France are desperate–and see no future in the status quo.

 

Hovering in and out of third place is Jean-Luc Mélenchon (at around 19%). Mélenchon, a career politician transformed into a left-wing populist firebrand, has risen swiftly in the polls in recent weeks. As he has become more popular, he has been trying hard to walk back his more incendiary proposals (like 100% tax rates on high earners) to improve his mainstream appeal. But his defiantly anti-establishment message–he calls his movement “La France insoumise” (or “unyielding France”)–actually competes with Le Pen’s emotional space. Like Le Pen, Melenchon wants to “renegotiate” France’s “submissive” relationship with the EU and possibly even pull out. So while Le Pen bashed the unloved EU from the right, Mélenchon bashes it from the left.

 

François Fillon (also around 19%), hammered over the last couple of months for a scandal involving large public payroll payments to his family in return for no work (he was of course shocked–shocked–to find this happening!), is still hanging in there in the polls. He is the favorite among the socially conservative pro-business bourgeoisie. He remains the only real hope that an establishment party candidate might win. Yet Fillon’s program is anything but conventional: He advocates radical tax- and spend- and regulation-cutting reforms that critics not unfairly describe as “Thatcherism” (definitely not a complement in France). So here again an irony: The mainstream “Republican” candidate is prescribing the most revolutionary package of actual policy changes of any candidate.

 

The fifth candidate, Benoît Hamon, is representing the utopian left wing of the Socialist Party after defeating the more pragmatic Manuel Valls in the primary. Squeezed from the left by the outsider Mélenchon, Hamon has no realistic chance. In France, as in most of Europe, the Social Democratic mainstream is rapidly downsizing. If ex-Socialist Macron wins, the Socialist Party in France may disintegrate entirely.

 

Generational membership? It’s a young group. Melenchon (age 65) is the oldest. You can think of him as the left-wing Bernie Sanders of the bunch, though in fact he is ten years younger than Bernie. He and Fillon (age 63) round out the Boomers. Then you have two Gen-Xers: Hamon (age 49) and Le Pen (age 48). And finally there’s Macron, who (at age 39) is getting close to Millennial territory.

 

The less-than-alarming market reaction to the election outcome (no big recent drop-off in EUR or CAC) is predicated on a dominant narrative that the financial media are peddling as gospel. The experts tell us, first, that Macron seems certain to be one of the two winners in the first round; and two, that Macron will win one-on-one against any hypothetical opponent in the second round by a fairly large margin. Sounds logical, right? He’s the mushy “center.” So by default he triumphs over any single opponent who’s not in the center. Et Voilà, France remains a loyal cornerstone of the EU and nothing much changes.

 

The big weakness in this bullish consensus, however, is that elections are decided by both preference and intensity–not just by preference alone, which is all that the polls measure. This is the big lesson we learned in the Brexit vote, where Brexiteers often lagged in overall polls but more than made up for that deficit in their passion to vote and make their preference heard. Today, most pollsters are conceding that the share of voters who are “undecided and unsure”–who may have a preference but are still unsure how or whether they’ll vote–is very large, still around 26% on the very eve of the election. What’s more, the uncertainty varies by candidate. According to the most recent IFOP poll, it is highest for Macron, perhaps around 33%. And it is lowest for Le Pen, maybe only 15%. (Fillon also attracts a pretty dedicated followership.)

 

Another French Revolution? - Are you sure

 

What this means is that no one knows which two candidates will make the cut. For those who are betting on a bullish market reaction–in other words, a “relief rally”–perhaps the best outcome is either Macron-Le Pen (the current consensus prediction) or Macron-Fillon. But consider some more disruptive possibilities, such as those in which Macron does not make the cut. What about Le Pen-Fillon? Most disruptive of all, what about Le Pen-Mélenchon–an outcome in which both candidates are threatening to pull out of the EU? That would trigger a huge sell off.

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Even if–as expected–it is Macron and Le Pen who make the cut, the second round may not be the sure victory for Macron that everyone is assuming. According to Serge Galam, the French scientist and complexity theoriest who predicted Trump would win last fall, the rise of “dégagisme” (literally disengagement-ism) among the uncommitted voters could actually allow Le Pen to beat Macron. And the share of uncertain and abstaining voters will certainly rise much further in the second round, when they no longer get to vote their first choice. If enough voters “voter blanc” (translation: vote “none of the above”) rather than vote for Macron, Galam believes either le Pen or FIllon has an opening.

 

So don’t be complacent. Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C’est vraiment possible.

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I haven’t bothered with this chap for a while, but he has an article out currently that is just simply bad.

I’m not going to reproduce all of his post as it is mostly a waste of time: here is the article.

As I predicted back in 2008 and 2009 QE did not cause high inflation, surging interest rates, high growth, and was not really all that impactful given all the fuss about it. Yes, I have argued that QE1 was probably very effective because it shored up balance sheets at a very unusual time, however, the future iterations of QE and the aggregate impact has been fairly small given how expansive the policy was.

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Inflation is high, very high and it was [and is] caused by the expansion of the money supply by the Federal Reserve and other Central Banks around the world. As this plot is of ‘everything’, clearly inflation is widespread throughout the economy. There are obvious ‘bubbles’ again in real estate around the world. So Mr Roche is incorrect with regard to ‘inflation’ and his prediction.

The entire purpose of the Fed expansion was to create inflation. This is because with MBS losing value as the real housing market collapsed due to rising defaults, MBS securities were going to ‘zero value’ very quickly.

Who owned this trash? Banks, Hedge Funds, Pension Funds, worldwide. Suddenly everyone was demanding cash….There wasn’t enough in the system, thus the massive and very fast deflation that occurred. QE has been an exercise in [re] inflation.

Importantly, what this process was not akin to was “money printing”. This is due to the fact that operations like QE do not actually expand the quantity of net financial assets in the private sector. In other words, the Fed created reserves and traded them to the private sector, but the Fed also removed a T-bond or MBS at the same time. So you could say that they printed a super short-term instrument into the private sector and unprinted a long-term instrument from the private sector.

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So again, pure nonsense.

The ‘money supply’ increased and has continued to increase as a result of QE. QE and the expansion of the money supply is what has caused the increase in the inflation data.

So the concern of market commentators about the ‘shrinkage’ in the Fed’s Balance Sheet is a very real concern, as, the commercial banks capital reserves are largely composed of Fed assets. We saw in 2008 what happens when the commercial banks become illiquid. Apparently, once again MBS securities are expanded. So all of the ingredients are again present for problems, particularly if the Fed’s shrinkage is too fast or too far. The castles are once again built on sand and people are worried what happens if the tide comes in.

 

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Raymond James’s’s’s Andrew Adams is out with a reminder about the bear market you may have already forgotten about – it took place in 2015 in a very stealth way and effected all but the ten largest stocks in the S&P 500. The indices weren’t nearly as effected as their underlying components were, so it doesn’t show up in your favorite index ETF’s price chart, but, my friends, it was grueling.

Here’s Mr. Adams:

I’ve used this stat before, but it still astounds me that during 2015 if you had put all your capital into the largest ten companies in the U.S. stock market, you would have ended up making about 20% on the year, yet if you had held the other 490 companies in the S&P 500 instead, you would have actually been down about 3%. Talk about a strangely narrow market! Of course, that period culminated in the stealth tactical bear market in early 2016 when, at the February 11 low, the S&P 500 stocks were down an average of 26.7% from their 52-week highs and stocks in the Russell 3000 were down an astonishing 37.3%, on average. We still contend that was probably the “bear market” that many are still predicting even now, but it does not qualify in the eyes of some purists since the S&P 500 itself was “only” down about 15% from its previous all-time high instead of the requisite 20%.

Batnick and I were talking about this just now. We were screaming about this stealth bear as it was happening. Nobody cared much at the time in the financial media, because the index Bigs were holding up appearances.

But the enlightened investor takes note of this sort of thing and keeps it handy for the next time a doomer calls the present state of affairs “euphoric” or “irrationally exuberant”.

It wasn’t very long ago that the indices corrected through time, while their components corrected through price, beneath the surface.

Source:

Investment Strategy: “Charts of the Week”
Raymond James – April 19th 2017

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Finally, a brief prediction. One of the mistakes people make when thinking about the future is to think that they are watching the final act of the play. Mobile shopping might be the most transformative force in retail—today. But self-driving cars could change retail as much as smartphones.

Once autonomous vehicles are cheap, safe, and plentiful, retail and logistics companies could buy up millions, seeing that cars can be stores and streets are the ultimate real estate. In fact, self-driving cars could make shopping space nearly obsolete in some areas. CVS could have hundreds of self-driving minivans stocked with merchandise roving the suburbs all day and night, ready to be summoned to somebody’s home by smartphone. A new luxury-watch brand in 2025 might not spring for an Upper East Side storefront, but maybe its autonomous showroom vehicle could circle the neighborhood, waiting to be summoned to the doorstep of a tony apartment building. Autonomous retail will create new conveniences and traffic headaches, require new regulations, and inspire new business strategies that could take even more businesses out of commercial real estate. The future of retail could be even weirder yet.

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To understand why, readers need only consider the 2nd stage result of any individual decision to save at the alleged expense of consumption.  If those who choose not to consume deposit the money in a bank, their decision to save powers consumption every bit as much as it would if they chose to spend every dollar in their control.  That’s the case given the basic truth that banks don’t pay for deposits so that they can stare lovingly at the dollars deposited.  If they did, hoarding banks would soon be insolvent, acquired by another bank, or both.

What this should remind readers is that no act of saving (short of hiding one’s extra disposable income in a safe) ever subtracts from consumption.  For an individual to save is for that individual to merely shift the ability to consume into the hands of someone else with near-term consumptive desires.

What this ideally indicates to readers is that production is all that matters when it comes to economic growth.  If we’re producing we’re consuming.  Simple as that.  The only non-question from there is whether we’re producing with an eye on our own near-term consumption, or with an eye on saving that will boost the consumption of others who access our savings.  It’s a non-question simply because it amounts to a distinction without a difference.

Applied to Lahart, correct analysis by the consumption-focused columnist would concern the removal of barriers to the very production that powers all demand.  If so, Lahart might note that taxes are a price or penalty placed on work that have the potential to shrink one’s desire to produce.  The columnist would also logically cast an eye toward regulations that don’t achieve much (see: banking, 2008), but that distract those engaged in the production of goods and services.

Taking this further, trade is the purpose of all production.  We produce so that we can get what we don’t have, so tariffs amount to a tax on the production that powers all consumption.  Lastly, Lahart might check the stability of the unit that facilitates consumption; in our case the dollar.  If it’s floating without definition, it’s less useful as a medium of exchange; thus rendering trade less likely.  In short, those desirous of more production would logically seek the reduction or removal of the tax, regulatory, trade and monetary barriers that lay a wet blanket on the production that is the source of all economic growth.

They should also ignore consumption simply because consuming is the easy part.  What we call an economy is just individuals producing with an eye on getting.  As human beings our wants are endless.  That’s why we produce in the first place.

Back to Lahart, his column assumes that if Americans just purchase enough cars, that the economy will be just fine.  He adds that if they don’t, the economy will be weak unless they “buy other things instead.” His analysis misses the essential 3rd stage result of saving; one that trumps the 2nd stage by a mile.

Interesting about all this is that while Lahart confidently asserts that the purchase of cars will power growth, he blithely ignores that we only have quality cars to buy thanks to the decision of producers long ago to forego consumption in favor of investment.  Lest we forget, no less than Wilbur Wright believed as the 20th century dawned that cars would never be broadly owned owing to their extreme unreliability.  In that case, thank goodness for savers.  As has been well documented in this column over the years, savers backed thousands of car companies in the early part of the 20th century that mostly failed.  But thanks to intrepid saving driven by production, what seemed impossible became a reality.

Notable here is that Wright was half of the Wright Brothers duo that disproved the consensus that man would never fly.  The Wrights luckily saved some of their earnings from a bike shop they owned, and their savings funded feverish experimentation which led to flight that, like the automobile, utterly transformed the global economy for the better.  What this ideally reminds readers is that when individuals produce with an eye on directing some of the fruits of their production into investment, technological advances that exponentially increase our productivity are the result.

Indeed, imagine what our economy would look like today if producers of the past had bought into Keynesian thinking only to spend all that they earned.  If so, the economy of today would be a slow-growth fraction of its abundant present.  We’re wildly productive today to the economy’s productive betterment precisely because producers delayed always easy consumption in favor of investment.

Of course, that’s why Justin Lahart’s commentary on the economy of the present is so disturbingly obtuse.  Limited in vision to less than the 1st stage of economic activity, he doesn’t see that his analysis in favor of rampant consumption, if followed, would author exponentially slower growth in the present and future thanks to reduced investment in the technological advances necessary for huge productivity increases.  Thanks to past savings in the 20th century, we now have the car, airplane, computer and internet in the 21st.  Unseen, assuming individuals actually abide Lahart’s analysis, is what we would lack to our extreme economic detriment in the 22nd century thanks to rampant spending limiting investment in new ideas in the 21st.

To say that consumption really doesn’t matter is ultimately to miss the much greater, booming growth point.  Consumption will always be evident so long as individuals are producing.  But if individuals continue to forego some or a lot of consumption in favor of investment, just imagine how much more advanced the U.S. economy will be in the future, and with this advance, just imagine how much more the hyper-productive of tomorrow will be able to consume.  In short, the answer to economic growth is to ignore the economists, along with the columnists who think like economists do.

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Which looks to be headed lower over the next few days at least.

This is the first opportunity I have had to look at the market for about 1 week. I have been busy moving house. This is a very tiring and stressful undertaking. Chaos reigns. At the moment mostly everything is still packed in boxes.

As to the market, overall, it would seem to have lost upside momentum and now will have a period of weakness. Having quickly looked at the various commentary around, much is attributed to Trump etc. Also mooted is the high P/E ratio etc, with market near all time nominal highs.

If already long, stay long and ride out the volatility. If not in the market, this could provide an entry point. I would not be short, unless you can manage the position on a daily basis. I think the ‘shorts’ will have some time to make a bit of money, but if the market turns higher, then it will likely move higher with higher volatility.

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