Saturday, 26 May 2018

A triumph for Macron-omics

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Sunday was an important day in France as it saw the anointment of Young Macron as the undisputed leader of the country with a clear majority in the Assemblée Nationale. 

Once again the pollsters have got it totally wrong although the dismal turnout in both rounds of the parliamentary elections speaks volumes as to what the French think of the whole malarkey. According to final estimates Macron’s En Marche garnered around 301 seats in the 577-seat Assemblée Nationale, far less than the 400-plus that had been talked about but still just about enough to save the pollsters their blushes. 

Only 44% bothered to vote yesterday and at the time of writing, 97% of votes had been counted and Young Macron’s En Marche had secured 43% of the vote. That, on a 44% turnout, means that not even 19% of the eligible electorate backed the party, which now enjoys a comfortable but by no means crushing majority in parliament. In fact the 42.38% of the popular vote that Theresa May and the Conservatives won just 10 days earlier in the UK and on a 66.4% turnout looks like a much clearer victory, which as we all know proved not to be, As we stand, the way Macron is being carried on the shoulders of his supporters reminds me of first O’Bama election, which was nothing special in electoral terms but that was hailed as an event tantamount to the sun suddenly rising in the west. 

I hope that for President Macron, who himself had previously never held an elected office and for his supporters in the Assemblée, also replete with first timers, lessons in real-politik come more easily than they did to the young and idealistic O’Bama. Having listened to the election speeches of Jean-Luc Melenchon, flag bearer of the left and of the trades unions, it would be premature to assume that the much vaunted reform of labour laws is going to sail through parliament and then be implemented without touching the sides. The fight for the soul of the French model, love it or hate it, has only just begun and with a majority of only 24 seats, Macron cannot take anything for granted from the parliamentary arithmetic.



Meanwhile, and on the back of the ceremonial funeral for Banco Popular, the Italian authorities are trying to get a grip on their own situation. Payments of interest on Veneto Banca’s subordinated debt have been suspended although a full wind-down of the bank has been ruled out. This is a very, very worrying development. Part of MiFID and of the single market’s objective was to create transparent and uniformly valid rules across the eurozone. It now appears as though we are being faced with idiosyncratic outcomes that render fair and transparent pricing of supposedly comparable instruments utterly impossible. 

Billions of euros of Tier 1 and Tier 2 debt is priced on a comparative basis, and that comparison is drawn on the basic principle of recovery rate adjusted default probability. The Popular interment appeared to have established that the recovery rate should be pegged at zero. The handling of Veneto throws a new variable into the mix, namely how the default probability is to be measured for two equally weak banks in two different jurisdictions. 

As in many things EU, the theory of a level playing field reads perfectly but implementation largely remains a pipe dream. The taxpayer, in the meantime, is left with no clue whatsoever of what rule applies to whom and when and, more to the point, how much of his money might be spent on lost causes. There are now reports that Monte dei Paschi’s non-performing loan portfolio, which was slated to be sold to one of the US vulture funds, is running out of potential buyers. It would appear that they are failing the old scratch-and-sniff test. 

Somewhat by coincidence I had the pleasure this weekend of welcoming as a house guest the former global head of credit of one of the principal European regionals. Not for the first time, the one thing that came to the surface in reminiscing about the good old days followed by the bad old days was the way that utterly incompetent local grandees were appointed to the boards of regional financial institution and who backed corporate strategies commensurate to their knowledge of the business and not to the prevailing state of the art. 

Regulations and personal liability of board members, both executive and non-executive, have been widened to an extent that the probability of anybody who actually understands the art of banking wanting to be involved in a board has decreased rather than increased. Sure, being on a board of the likes of JP Morgan or HSBC is still low risk but it is around the fringes of the financial system where the risks are highest and where more knowledge and experience is needed, not less. One senior headhunter I know who specialises in non-executive directorships advised one of the most competent City figures I know to steer well clear and to accept quiet retirement in the garden as much safer and much more dignified.



Today marks the beginning of the formal Brexit negotiations with Michel Barnier on one side of the table and David Davies on the other. The unwind of Britain’s membership of the EU is going to be very tricky but although the remain camp still believes that Brexit might be cancelled, both sides will be working on the basis that it can’t and that no solution is not an option. 

Does any of that help us to make money this week rather than losing it? Probably not but if in doubt still stay long. In early trading the FTSE is only 30 points off its all-time high. That doesn’t look like the end of the world to me as those who try to take a rational approach to valuations might be predicting. Keynes told us that markets can remain irrational for longer than we can remain solvent. All the MiFIDs in the world can’t change that and when the brown stuff hits the fan, the smell will still be no better. I simply still don’t believe it’s due yet. 

Have a good week.

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