"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way- in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only."- Dickens, A Tale of Two Cities
Now that Hollande has edged out Sarkozy we can spend the next few weeks wondering if what's left of capitalism in France is about to go the way of the eight track. For those not familiar with the situation here are some of Hollande's key campaign promises.....
- Raise Corporate Tax Rate on Large Companies to 35%
- Raise Income Tax Rate for those earning over 1 million euros to 75% and to 45% for those earning between 150k and 1mil
- Institute a Financial Transaction Tax
- Ban French Banks from operating in tax havens
- Split French Banks retail and investment operations
- Curb Bonuses
- Ban toxic products
- Impose limits on LBO's and ban financial firms from participating
- Ban Stock Options
Impressive promises right?
Of course if Hollande wins most of these promises will get watered down, but you can't help but wonder what this means for the future of business in France. Investment bankers for example might as well just all shut down their operations on May 7th and relocate outside of the country. Entrepreneurs can do the same if they haven't already. If you want a lower tax rate, Luxembourg and Switzerland are right around the corner. France is not island, yet clearly a good deal of their population doesn't get that. They want more government spending, less cuts, more ECB support, freezes on gas prices, and of course a 35 hr work week. All fine and dandy except for one thing; Mr. Market works a little bit like the Cosa Nostra: once you are part of the family you just can't walk away at your convenience.
So, what to expect from here?
French stocks, particularly the financials, have been taking it on the chin over the past couple of weeks, and are now working their way towards pricing in a Hollande victory. The same goes for the bond market. France CDS has been widening again as fears mount that Hollande victory will drive a wedge through the Franco-German fiscal discipline alliance. What will the ECB's argument be if Hollande starts ramping spending and rolling back austerity? How can you get the already stressed and defiant periphery of Spain, Portugal, and Italy to comply if France changes its tune?
Despite his lead in the polls (55% to 45%), I remain skeptical that Hollande will win this election, but if he does expect all hell to break loose in the European bond market as the bond mercenaries (vigilantes doesn't cut it anymore) insure that the Franco-German alliance is maintained. At which point Hollande's austerity roll back agenda will be quickly watered down so the ECB can continue playing its game and the illusion of Germany fiscal discipline can be preserved. Hollande, rhetoric notwithstanding, seems to get this as he has not really advocated repealing the European pact. What he has instead argued for is that the pact be modified to include some pro growth elements to reduce unemployment and boost tax revenue. Basically, he is arguing for a pro Keynesian solution, which really translates into nothing more than demanding that the ECB follow other Western central banks and start promoting Eurozone growth. Since the whole financial world knows how Germany feels about such a move, you should have little trouble predicting what will happen if we find ourselves debating this question once again. Euro weakness, sovereign spread blowouts, gold rallying rather swiftly on the European disintegration fear trade, renewed pressure on the Swiss Franc to appreciate, and plenty of equity volatility will be in the cards.
But what if Sarkozy wins?
As the market is already starting to price in a Hollande victory, the opportunity right now would seem to be in positioning for a disappointment on May 6th. If Sarkozy can woo the anti-immigrant nationalist supporters of Marine Le Pen's National Front and pull in some of the votes from Francois Bayrou's centrist camp, he should be able to pull off the upset. The question is will Le Pen back Sarkozy at this point when a Hollande victory almost guarantees that she will be the leader of a much more vocal and unified opposition party?
Should be an interesting couple of weeks. Personally, I am keeping a close eye on the banks as this type of nonsense is just about the best type of money making opportunity you can ask for in markets. I also will be keeping a close eye on Gold as this European impending theater is enough for me to leave any bearish bets on the metal alone for now.
By the way, if Hollande wins, you might want ask yourself how long before Hermes and LVMH relocate to HK? Time to seek advice of counsel.