Rabo: Over Half Of France Just Voted For Extreme Alternatives To The Status Quo

 Every Monday I enjoy reading the market review by Michael Every from Rabo Bank. His no-nonsense approach is refreshing and usually highlight interesting facts.

Over Half Of France Just Voted For Extreme Alternatives To The Status Quo by Michael Every at Rabo Bank

Le Pen is Mightier Than The Sword(?)

Markets may try an attempt at risk on today given the French elections saw President Macron win around 28% in the first round while far-right - and pro-Putin - Le Pen got around 24% and is also through to the head-to-head in two weeks. An even-further far right candidate got 7%, and the far-left candidate got 22%, while the centre-right got just 5%. Even if Macron wins, an advance risk-on rally will overlook that French society is deeply happy. Over half of it just voted for extreme alternatives to the status quo. Yet France is one of the world’s richest countries, with a nuclear power network to rely on, and a huge food surplus: if it is that angry, imagine the implications elsewhere.

In poorer countries, things look far worse. Food prices hit a record high in March according to the FAO; one reports suggests Ukraine’s harvest could be down 50% this year, which could make things far worse; we see headlines like ‘Rising Food Costs Push Arab World's Vulnerable to Breaking Point’; and Lebanon, a buyer of Ukrainian wheat, is allegedly out of it completely: its last delivery was ruined by moisture - and it does not appear to have the spare FX reserves to buy more at a time of tight supply and soaring prices.

Pakistan just saw the parliamentary ousting of pro-Chinese PM Khan, despite it being a nuclear power in a tense neighborhood; and the chaos in pro-China Sri Lanka, where the IMF are talking about a new loan rather than a new Marshall Plan; and that’s at a time when others are talking about a new global financial architecture – Russia on Saturday called on the BRICs economies to extend the use of national currencies and integrate their payment systems, for example. US President Biden is to talk to Indian PM Modi this week: certainly lots to discuss.

Today’s Chinese CPI picked up slightly more than expected from 0.9% to a still-low 1.5% y/y (it’s amazing what price controls and a policy of deliberate over-supply can do), while PPI fell back from 8.8% to 8.3% y/y (again, it’s amazing what price controls and going all-in on cheap coal can do). So, food prices may not be a major issue right now in China - but food *supply* is. The market voices who extolled China’s Covid restrictions are eerily quiet now tens of millions are locked down and reportedly struggling to get hold of enough to eat, prompting the US to withdraw its diplomatic personnel from Shanghai. The former editor of the acerbic Global Times states it is “rude, undiplomatic, and unethical” for the US to comment on China’s Covid struggles. I don’t recall the reverse being true when it was the US floundering with the virus – it was the US system that was seen as failing.

At least Covid has delayed a further China-US firestorm, as House Speaker Pelosi has postponed a visit Taiwan after testing positive. The same former editor says Pelosi is “playing with fire”: the Japanese press today says, ‘Taiwan conducts drills to prepare for possible Chinese attack on nuclear plant’, showing the kind of fire potentially being played with.

Meanwhile, we are days away from a huge new front in east Ukraine, as Russia reportedly calls up 60,000 reservists to fight there. That really will be the largest battle in Europe since WW2. Yet the even larger one many in markets still refuse to see. Former-oligarch Khodorkovsky argues, “The US and its Western allies fail to understand that from Putin’s perspective, they are already at war with Russia.”; Russian intellectual Karaganov, in an interview, says, “We are at war with the West. The European security order is illegitimate.”:

“We see that most of the [European security] institutions are, in our view, one-sided and illegitimate. They are threatening Russia and Eastern Europe. We wanted fair peace, but the greed and stupidity of the Americans and the short-sightedness of the Europeans revealed they didn’t want that. We have to correct their mistakes.… Americans and their NATO partners continue support of Ukraine by sending arms. If that continues, it is obvious that targets in Europe could or will be hit in order to stop lines of communications. Then the war could escalate. At this juncture it is becoming more and more plausible. I think the Joint chiefs of staff of US armed forces are of the same opinion as I am.”

That is as Finland and Sweden are both being reported as being on the verge of NATO membership, making the European security order even less legitimate in Russia’s eyes; and Western weapons are flooding into Ukraine from some countries, if not from Germany, whose dog ate its geopolitical homework again. Someone is bluffing; or someone is going to get a shock. We won’t find out which until we escalate.

So, trade as if Le Pen is mightier than the sword. Just consider how many daggers are being drawn behind you, and knives are falling: the dollar index DXY is just shy of 100 this morning, up over 8% over 12 months; and Aussie 10-year yields have flirted with 3%, perhaps flagging a warning to US Treasuries trading at 2.70%.

Regardless, many in markets think they are mightier than the likes of Le Pen or any sword. Indeed, a recent op-ed in The New York Times argued “Ordinary People Don’t Think Like Economists. It’s a Problem.” I will confess I didn’t read it. I will also confess I wouldn’t read it even if it were free, let alone requiring a subscription – which logically makes me one of the ordinary people and not an economist. However, that op-ed title points to how we ended up in our current mess: presuming neoliberal economics was a panacea for the longer cycles of history, class struggle, and even of national character, rather than an amplifier of all of them.

As an example, as Italy signs a new gas supply deal with Algeria, Germany is contemplating its Russian gas flows. Thinking like an economist, it sees voluntarily switching off the gas to hit the Russian economy is bad because it would mean a deep German recession. There are various figures bandied about, but some say GDP might fall as much as 6%. On the other hand, has Germany calculated the cost of buying Russian gas, for now, and de facto helping it win the war in Ukraine? I don’t mean the direct human cost, which social media is pointing out. I mean the future economic cost to Germany of having a victorious, entrenched, revanchist, irridentist Russia as a neighbour, and inspiring a new global alliance around it. You think that would cost less than 6% of GDP over time, and carry even larger tail risks? You must be an economist!

Knives are also out for UK Chancellor and until-recently-presumed-next-PM Sunak, as another rich (net food importing) country sees economic pain and rising public discontent. Sunak is now revealed as holding a US Green Card(!), while his wife is a ‘non-dom’ not paying tax on her foreign income. How both of these facts were apparently unknown until last week is politically jaw-dropping. Then again, so is Sunak’s alleged resistance to the UK acting to ensure its long-term energy security by fast-tracking seven new nuclear power stations. He is reported as believing Russia will win the war soon and we will all go back to BAU, so why bother spending so much? He is *obviously* an economist.