Wednesday, July 17, 2013

More than a year after the presidential elections, France is still in search of a leader

by Rainbow Murray

A little over a year since being elected, French President François Hollande’s popularity in the polls has plummeted as the French economy continues to struggle. Rainbow Murray writes that while Hollande’s first year has been beset by scandals and disappointments, France’s main opposition party, the UMP, have their own share of problems following a divisive leadership contest between François Fillon and Jean-François Copé. She notes that the in-fighting within the UMP may yet pave the way for a political comeback from ex-president Nicolas Sarkozy.

In May 2012, the Socialist François Hollande won the French presidential election, defeating his incumbent rival, right-wing Nicolas Sarkozy. Hollande offered two key things to the electorate: a change of style, and a change of direction. In terms of style, he offered himself as “Monsieur Normal”, a calm, grounded figure to whom everyday French people could relate, in contrast to the flamboyant, hyperactive, jet-setting, somewhat vulgar image of Sarkozy. In terms of direction, he promised to lift France out of recession by focusing on growth promotion rather than austerity. While Hollande was never inspiring even at the peak of his campaign, his opponent was sufficiently unpopular to hand the Elysée (presidential palace) back to the Socialists for the first time since Mitterrand.

A year later, the French voters appear to be regretting this decision. Hollande has distinguished himself by becoming the most unpopular president in history at each stage of his term, with a meteoric descent in popularity beginning last autumn and continuing largely unabated ever since. Whereas Sarkozy’s abrasive personality made him unpopular even when his prime minister, François Fillon, continued to be respected, Hollande’s PM, Jean-Marc Ayrault, has also nosedived in the polls. Hollande has endured a few embarrassing scandals, but the key driver of his unpopularity is the on-going economic crisis that his government seems at a loss to resolve.

In terms of scandals, Hollande has had to weather several storms. Right at the start of his presidency, his partner, Valérie Trierweiler, humiliated him after publicly backing a dissident candidate in the parliamentary elections, the same day that Hollande had publicly backed the official party nominee. This was all the more embarrassing as the official candidate in question was Hollande’s former partner of 30 years, and former Socialist presidential candidate, Ségolène Royal. This public and bitter feud between his current and former companions immediately undermined Hollande’s calm, statesman image and seemed to mirror the marital strife that had filled the tabloids during Sarkozy’s first year in office.

From personal to political, Hollande then faced acute embarrassment earlier this year after his budget minister, Jérôme Cahuzac, was embroiled in a scandal. Cahuzac was accused of tax evasion through the use of a Swiss bank account, a charge he vigorously and repeatedly denied. Hollande publicly backed his minister. However, it subsequently emerged that the charges were true, prompting Cahuzac’s exit from both the government and parliament. In the subsequent parliamentary by-election, the seat which Cahuzac had won in 2012 with 61.5 per cent of the vote in the second round was lost to Sarkozy’s UMP party. Hollande’s attempts to present a clean image free from the financial and sleaze scandals that had tarnished his predecessor were severely undermined by this scandal.

Most recently, Hollande fired his environment minister, Delphine Batho, after she publicly criticised cuts to her department in the government budget. This prompted a backlash from Hollande’s Green coalition partners, who felt that the budget cuts and the appointment of the third environment minister in barely a year indicated insufficient concern from the government for their key issue.

If these scandals have rocked Hollande’s boat, they have only briefly distracted the public from the biggest problem of all, which is the on-going dire state of the French economy. Unemployment continues to break record levels and the French deficit reduction is behind schedule. The promised growth has not come and the government is being forced to adopt some of the same austerity measures that it had decried during the campaign. Hollande has come across as hesitant, uncertain and incapable of taking the decisive action required to remedy the problem. While Sarkozy was often criticised for being too energetic, dynamic and quick to respond to issues, the contrast offered by Hollande has also done little to please. So slow has he been to show any kind of leadership on the issue that the door is slowly opening for a comeback for Sarkozy.

On the night of his electoral defeat, Sarkozy announced his complete withdrawal from public life. In the year that followed, he largely honoured this promise. However, it is becoming increasingly clear that we have not seen the last of the former president. His gently staged comeback has been helped not only by the woeful performance of the Socialist president, but also by the leadership vacuum and internal rivalries that have kept the UMP in turmoil over the past year.

The election held last summer to find a new party leader was nothing short of disastrous. François Fillon and the party’s outgoing general secretary, Jean-François Copé, emerged as the two front-runners. They coveted not only the prize of presiding over the party, but also the hope of becoming the default presidential nominee for the 2017 race. The leadership contest was therefore very fiercely contested and incredibly close-drawn.  So close, in fact, that both candidates declared themselves the victor, with Copé’s initial claim to victory being undermined by Fillon’s claim that a group of votes had not been counted whose inclusion tipped the scales in Fillon’s favour. There were widespread claims that Copé had abused his position within the party to influence the outcome. Nonetheless, he emerged the victor.

Furious, Fillon created a dissident party, thus splitting the parliamentary party. Party heavyweights Alain Juppé and eventually Sarkozy himself were called in to help sort out the ruckus. Promises were made to rerun the election a year later in order to placate Fillon’s supporters and create a fragile unity within the party. However, subsequent negotiations have led to an agreement, supported in a membership ballot, to suspend another leadership contest, with Copé remaining at the helm at least until 2015. The party realised that another fratricidal summer would be a gift to the beleaguered Socialists. Instead, thoughts have already turned to the presidential primary for the 2017 election, with Sarkozy starting to work his way back into the running.

Yet Sarkozy himself has not been immune to scandal, even since stepping down as president. Aside the on-going trials relating to scandals begun during his presidency – such as the claim that L’Oréal heiress Lilianne Bettencourt made illicit campaign contributions to the UMP – Sarkozy has now had his expenses for the 2012 presidential election rejected by the Constitutional Council, on which he has default membership as a former president. In addition to being embarrassing, this decision is highly costly to the UMP, leaving it more than 11 million euros out of pocket. Added to the losses they incurred by a downsizing of their parliamentary party following their 2012 election defeat (with the party receiving state funds for each seat it wins), and on-going losses of millions of euros per year for failure to respect France’s gender parity law, the party is now in real financial difficulties. The decision prompted Sarkozy to resign from the Constitutional Council, which actually facilitates his return to electoral politics. However, Copé, Fillon et al will be keen to defend their turf, so the battle for control of the UMP is set to rage for some years yet. With Hollande looking increasingly likely to be a one-term president, all eyes will now be on 2017 to see if the French can finally resolve their on-going leadership vacuum.

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When the Theatre Clears

By Chris Tell

James Rickards, the author of the book Currency Wars tells a short story along the following lines: you’re sitting in a movie theatre and a couple of people get up and leave. Nobody takes much notice, now a half a dozen people all get up and leave at the same time, people take more notice this time around. The tipping point of course comes when a sufficient number of theatre goers get up and leave all at once. At some point EVERYONE RUSHES FOR THE EXITS.

Fire? Bomb? Drone strike? Who knows, but nobody is waiting to find out.

I think the story is telling since it describes human behavior so brilliantly. I talked a bit about this in my post, Finding Your Sneetch.

Mark and I were having a conversation the other day with a friend and colleague. We were discussing what happens when the theatre clears, with the background to the conversation being the discussion of reckless monetary policy, profound arrogance, and incompetence on the part of central bankers across the developed world, but most importantly how their actions are affecting and will affect society.

weimar_hyperinflation

The German Theater Clears

There are the extreme examples, such as the rampant inflation of the Weimar republic which laid the seeds of Hitler’s rise, the Holocaust, and of course the devastation, death and destruction given birth by World War II.

Well before that was the collapse in currency that coincides with Robespierre’s reign of terror and the French Revolution. We could go even further back to Roman times to look for similar “coincidences”.

French Movie Theatre Clears!

French Movie Theatre Clears!

Myriad examples throughout history show us what and how people react when trust is lost. Trust, and ignorance after all are the key pillars holding together the worlds monetary system today. It certainly isn’t intrinsic value.

So the question we were collectively asking ourselves was this: at the moment of impact, which is to say when the realisation hits that one can no longer trust in a particular currency, or heaven forbid, the entire monetary system, how does one respond?

We covered the usual suspects, namely foreign currencies, precious metals, real estate in countries relatively uncorrelated to the breakdown-centric countries that can boast of existing resiliency, and of course owning agriculture in various forms. Then the topic of crypto-currencies came up.

My arguments against any crypto-currency, or indeed any alternative currency were as follows:

Anything not under the thumb of government mismanagement will come under fire from that same establishment. They don’t have to destroy it, and they may in fact be incapable of doing so. In that case it will simply be made “illegal” to use it! It will be “demonized”, and those using it will be pushed into the underground. Provided sufficient “examples” are made of those who refuse to comply, fear of use will be sufficient to marginalize its use.

Take the example of the liberty dollar. In May 2009, Bernard von NotHaus and others were charged with federal crimes in connection with the Liberty Dollar and, on March 18, 2011, von NotHaus was pronounced guilty of “making, possessing, and selling his own currency”.

The powers that be don’t want any competition, and they don’t want you to know what they are up to. Just look at the current environment surrounding any kind of “freedom to know”. Reporters are being hounded, whistleblowers like Snowden, Manning and Asange are pursued as if they are crazed psychopaths. The establishment WILL set an example.

It is the modern day equivalent of chopping off someone’s head and sticking it on a pole outside the city gates in order to warn others not to “misbehave”.

I make the analogy between crypto currencies and Mr. Snowden for the simple reason that we’re dealing with the same “powers”, and they are in control of the entire system – legal, monetary, military, and corporate – you name it. Watching their actions now provides us with insight into how they will react when things really come unglued. It promises to be ugly!

Increasingly the free market is and will continue to become a “black market”. This happens when the crooks are in control and citizens have to resort to alternative means simply in order to survive. When I say alternative I don’t mean immoral or unethical, but these actions will likely be deemed illegal nevertheless.

On the other side of the digital coin, what can happen is that a tipping point is reached which makes the use of these “illegal” currencies an absolute necessity and people flood into them. While the vast majority of citizens in most any country in the world today do not see a crypto-currency as a reliable or viable substitute for the scraps of paper they shuffle around daily, this perception can change rapidly when panic sets in. Suddenly ANYTHING seems viable.

This perception change can come before a revolution or during, where the “powers that be” are losing control. I’m not sure whether one breeds the other or vice versa, but history indicates that it happens all the same. As a recent test case we could consider Cyprus, and the Cypriots grasp of what was happening. How many would have given pause to a law banning their use of something like Bitcoin if such a law had existed, and if they had any inkling of the impending theft?

Was it mere coincidence that as the Cypriot banking crisis played out Bitcoins rose from around $35 to over $200?

In fairness I tend to spend my days focusing on private equity deals, so I’m not necessarily qualified to answer “unanswered” questions. Therefore I post this in the hope that others will contribute their own thoughts on the topic.

So as my parting “unanswered question”, I ask you: does a basket full of crypto-currencies deserve any place in a diversified portfolio?

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Thinking of Buying or Selling Gold? Keep an Open Mind

By Sasha Cekerevac

You’ve got to change with the times. One point that I’ve reiterated several times is that it’s vital to deploy an investment strategy that incorporates the current market environment when determining how to allocate one’s portfolio.

A great example of that has been the recent climb and rapid drop in the price of gold bullion. A couple of weeks ago, I alerted my readers that a majority of the selling pressure appeared to have been concluded, and that a short-term bottom might be developing in gold bullion.

Since that time, gold bullion has indeed begun moving up in price.

When considering an investment strategy, it’s always important to try to determine what the large institutions are doing. Because these institutions deal with such a vast amount of funds and their reputations are constantly at stake, their actions should help shape your own investment strategy.

As I have said before, it appears as though a large number of institutions are close to completing their distribution of gold bullion. Over the past week, sentiment among these large funds has shifted as they too are adjusting their investment strategies.

That can be seen by the “Commitment of Traders” (COT) report released by the Commodity Futures Trading Commission. The data from the July 9 report show that institutions did indeed increase their long positions in gold bullion. (Source: “Commitment of Traders,” Commodity Futures Trading Commission web site, July 9, 2013, accessed July 15, 2013.)

To have a successful investment strategy, whether it’s gold bullion or any other asset, investors must examine both the market’s technical and fundamental situations. Just because something is undervalued does not necessarily mean it will move up in price anytime soon. There are many occurrences in which a value proposition remains cheap for a very long period of time—a situation known as a “value trap.”

Since gold bullion has swung from optimistic to pessimistic, the investment strategy I would recommend is to use each extreme to look for attractive entry and exit points. Part of an overall investment strategy is to consider the risks and rewards at each price point, as well as having a diversified portfolio.

As I wrote several weeks ago, it appeared that gold bullion prices might have gone too far to the downside. Looking for an opportunistic entry point includes seeing a reduced level of selling pressure as the market bounced up.

This would indicate that there is a greater likelihood that the price of gold bullion is indeed forming a bottom, at least over the short term. Of course, if there is still more selling pressure placed on gold bullion, investors should adjust their investment strategy to account for this new supply.

While there are several fundamental drivers that are positive for gold bullion, including continued interest by the retail public, it is obviously impossible to predict the future. Because so much can change over time, every investor needs to be flexible in their investment strategy and incorporate a philosophy that is opportunistic on both the entry and exit point for any position.

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Great Graphic: FX Views

by Marc to Market

This Great Graphic was posted on the Financial Times and it comes from Bank of America.   It is based on the banks' survey of some 238 investors with $643 bln under management. The survey was conducted between July 5 and July 11.

The blue line shows the percentage of the survey who expect the dollar to appreciate the most.  At 83% it is the highest survey has recorded.  About 20% expect the euro to decline the most (solid black line), while nearly 80% expect  the yen to decline the most.   

The FT reports on other aspects of the BoA survey.  A little more than a third of the survey expect the Chinese economy to strengthen.  This is about half the number seen at the end of last year.  The survey found 52% were overweight equities up from 48% in June.  At 55% overweight bonds is the lowest in two years. 

Lastly, within the equity space, tech and pharma are preferred, while, utilities, materials and telecom was like the least. 

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It's always darkest...

by Marketanthropology

Keeping in mind our note from last week that featured a contrarian perspective on China, we came across the latest BAML survey which paints a rather bleak outlook by fund managers on the ailing giant. So bleak in fact that sentiment among fund managers is in striking distance of the January 2009 low for the series. 
What's interesting to note as well is the sentiment crash is practically the mirrored equivalent of the massive and rapid rise in expectations that fund managers placed on China directly in the wake of Lehman. Pimco's "new normal" described in last week's note was born out of this exceedingly bullish sentiment environment when the intellectual and market zeitgeist looked to China as the torch bearer for the next stage and turned in horror away from the U.S. 
Needless to say - and reflected in the Shanghai composite's performance in 2009 and through today, the light burned bright then out.

Click to enlarge images

Judging by these lopsided sentiment figures, another dawn is near.

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The Problem with Social Security and Medicare

by Charles Hugh Smith

Projections based on high rates of endless growth are delusional. Those who embrace these projections are equally delusional.


I regularly receive rants that accuse me of a "blind spot" regarding Social Security and Medicare. The j'accuse trots out projections that the program is solvent until 2037 (or whatever, i.e. the distant future). Then they accuse me of ignoring the real cause of our national bankruptcy, defense spending (every "progressive's" single-agenda cause of all our problems).

The ranters clearly count themselves among the "progressive true defenders of the poor and the working class" and critics like me as "enemies of the people," heartless Libertarians or worse.

Meanwhile, the latest Summary Report of the Social Security and Medicare Boards of Trustees concludes with this warning:

The drawdown of Social Security and HI Trust Fund reserves and the general revenue transfers into SMI will result in mounting pressure on the Federal budget. In fact, pressure is already evident. For the seventh consecutive year, the Social Security Act requires that the Trustees issue a “Medicare funding warning” because projected non-dedicated sources of revenues primarily general revenues are expected to continue to account for more than 45 percent of Medicare’s outlays in 2013, a threshold breached for the first time in fiscal year 2010.Lawmakers should address the financial challenges facing Social Security and Medicare as soon as possible. Taking action sooner rather than later will leave more options and more time available to phase in changes so that the public has adequate time to prepare.

Allow me to take the ranters' points one at a time.


1. I reject all ideological labels and boxes. My views do not align with any ideology. I am regularly accused of being right-wing, liberal, Marxist, Libertarian, all in the same week. I know this is frustrating to everyone with a desperate need to label others in order to dismiss them, but your labels mis-state my views.

2. There are few fiercer critics of unproductive defense spending on such programs as the F-35 or the Imperial Project than me. Here are a few of the dozens of entries I've written on these topics:

Are Empire and Democracy Compatible? (August 21, 2009)

The United States of Delusion (January 4, 2013)

If You Want Solutions, First Pin Down Where the Money Is Going (May 23, 2011)

Did The Roman Empire Have Corporations? (August 27, 2010)

How Empires Fall (April 17, 2013)

3. I do not object to social spending programs; what I object to is bogus accounting, delusion being fobbed off as reality, waste, fraud, embezzlement, profiteering, saddling future generations with unpayable debts and misleading projections that ignore real-world trends. There is a difference between blindly accepting what amounts to officially sanctioned lies about social programs' sustainability and supporting sustainable social spending.

Ironically, perhaps, I am just the sort of low-lifetime-income worker Social Security is designed to benefit. If there is anyone who supports a sustainable Social Security program, it's me.

The problem with Social Security is three-fold:


1. The so-called Trust Fund is an accounting illusion. The "safe, guaranteed" non-marketable bonds are merely markers for actual Treasury bonds which must be sold, and interest must be paid on. Social Security is as totally dependent on Federal borrowing as the Pentagon or any other program.

The brutal truth is the system is facing flat or declining revenues while its vast army of beneficiaries will rise from an already monumental 53 million. That's significantly larger than the entire population of Spain (46.5 million) and will soon equal that of Italy (60 million) or Great Britain (62 million).

Social Security is entirely dependent on the Treasury's sale of new bonds for its solvency. If interest rates spike and/or global buyers become wary of Treasury bonds, costs for borrowing will skyrocket, crowding out all other Federal spending.

Being dependent on Treasury borrowing, Social Security will be as impacted as any other program.

2. The demographics of the Baby Boom retiring and the skyrocketing cost of those getting lifetime disability payments from Social Security.

3. The projections of solvency are pie-in-the-sky fantasies in the End of Work. Government projections never predict a recession, much less a depression, and they always project growth rates from the last bubble into infinity, as if a bubble economy can expand forever.

Meanwhile, back in reality, the number of fulltime jobs is stagnant and almost 40 million workers earn less than $10,000 a year. Recent trends suggest that fulltime jobs are being axed in favor of part-time positions and flex-time contract labor. At least some of this dynamic relates to the soaring cost of sickcare, a.k.a. ObamaCare.

No government agency ever forecasts a recession or a systemic decline in fulltime jobs. How accurate have the Trustees' projections been?

In 2010, the SSA Trustees had estimated $41 billion deficit (excluding interest income) and reality turned out to be $76 billion--almost double their guesstimate. Their estimate of total revenues was too rich by $50 billion as well.

If the SSA blew the estimate for the fiscal year ending in October this badly in August of the same year, what faith can we plausibly place in their estimates of what will happen in 2025 and 2037? The SSA numbers published in the August 2010 report estimated that outlays would not exceed revenues (excluding interest income) until 2015--yet outlays already exceeded income by a staggering $76 billion in 2010.

The projections are ungrounded in reality, and this cripples our collective ability to deal with brewing crises in some non-ad hoc fashion.

I have explained all this is great detail many times:


Where There Is Ruin II: Social Security (July 25, 2006)

The Fraud at the Heart of Social Security (January 17, 2011)

To Fix Social Security, First Ask Why It Is Deep in the Red (January 18, 2011)

How To Fix Social Security: A 4-Point Plan That Faces the Brutal Realities (January 19, 2011)

4. I do not object to social spending on healthcare. What I object to is a system that fails to provide health while squandering 40% of expenditures on paper-shuffling, profiteering and fraud, and a government program (Medicare) of which an estimated 40% of expenditures are squandered on outright fraudulent claims, counterproductive tests, drugs and procedures, unproductive defensive medicine and blatant profiteering.

Sickcare Will Bankrupt the Nation--And Soon (March 21, 2011)

To cite another example of the distortions which end up costing the nation twice as much for health care (as a percentage of GDP) as competing developed countries such as Australia and Japan: Pittsburgh has almost as many MRI machines as the nation of Canada.
According to local media reports, Western Pennsylvania has about 140 MRI machines, while the 32 million residents of Canada share 151 MRI machines. And the machines are getting a lot of use: the number of CT and MRI scans (scans other than old-fashioned X rays) tripled from 85 to 234 per thousand insured people since 1999.
While proponents are quick to note that scans are cheaper than the alternative diagnostic procedures, one firm's research found that a doctor who owns his own machine is four times as likely to order a scan as a doctor who doesn't.
As if that wasn't enough to highlight the self-serving nature of "fee for service" cartels, MRI scanner manufacturer General Electric waged a two-year lobbying campaign to roll back cuts in Medicare reimbursements for scans. While the effort proved unsuccessful due to the intense political pressure to reduce soaring Medicare costs, some critics claim that providers simply made up the reduced reimbursements by increasing the number of tests administered.
The only solution that actually addresses the systemic problem is to get rid of the entire fee-for-service structure and break up the cartels. Healthcare must be reconnected to diet, nutrition, fitness, lifestyle and community, and to education and emotional well-being.
The odds of any of this happening are essentially zero, and so we can safely predict that sickcare will bankrupt the nation (with a helping hand from the Pentagon) within a few years.

While healthcare costs are rising around the developed world due to the demographics of aging and more treatment options, the U.S. sickcare system costs twice as much as our competitors' systems. In other words, we know that 50% of our sickcare costs are inefficiency, waste and fraud because other nations provide universal healthcare for half of what the U.S. spends per person.

That Which is Unsustainable Will Go Away: Medicare (May 16, 2012)

Healthcare: A Large-Scale Solution (January 4, 2011)

A Sustainable National Healthcare System: Prevention Only (August 20, 2012)

Why "Healthcare Reform" Is Not Reform, Part I (December 28, 2009)

Why "Healthcare Reform" Is Not Reform, Part II (December 29, 2009)

Attacking critics who have taken the time to study the data and trends is not going to magically make these programs sustainable or fix what's broken. Placing one's faith in government projections that always forecast high rates of endless growth (because "growth" fixes everything) is embracing delusion.

Reality trumps accounting trickery and delusional projections every time. Let's see how accurate all the government agency projections (including the SSA Trustees) turn out in September 2015, at the end of fiscal year 2015.

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