Le Grand Plan

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Bugarach SignNestled in the foothills of the French Pyrenees lies a tiny town that boasts a mere 176 inhabitants.

The town centre consists of just two narrow streets, there is little agriculture in the surrounding area, wild orchids grow in abundance, and the air is as fresh and clean as you will find anywhere on earth.

Looking down upon the sleepy little hamlet is the mountain from which the village takes its name. At 1,320 m, Bugarach stands out against the skyline in stark relief to its surroundings, and its shape is eerily familiar to science-fiction fans the world over as many believe it inspired the mountain that Richard Dreyfuss would fashion out of mashed potatoes in Close Encounters of the Third Kind.

As tiny as it is, Bugarach has always had an attraction for the... how shall I phrase this? Quixotic exotic quirky dreamy starry-eyed weird. Yes, that's it. Just plain weird.

(UK Guardian): The village has always attracted people with esoteric beliefs, they were here before and they will come afterwards, but this is something quite different," [Jean-Pierre] Delord [mayor of Bugarach] says. This corner of southern France has long been a cauldron of mystic fables and occult conspiracy theories. Nearby Rennes-Le-Chateau, described in the Cadogan Guide as "the vortex of Da Vinci Code madness", is famous for its riddles of hidden treasure and a supposed cover-up of Jesus and Mary Magdalene's married life in France. All around is the countryside of the Cathars, the mysterious and persecuted medieval heretical sect, who have now inspired a local tourism drive. Nostradamus is said to have spent some of his childhood in nearby Alet-les-Bains.

But back to that mountain, which is also something of an oddity to even the most-informed geologists in that somehow the lower layers of rock are younger than those at the top:

It is also host to a bewildering number of caves. Strange sounds from underground and odd light effects at the top have for decades seen the mountain likened not only to a UFO landing pad, but a "UFO underground car park", with regular spaceship vrooming and revving allegedly heard from within. UFO believers often travel here, looking for bits of spaceship amid the mountain rock. It has been claimed that the former French president François Mitterrand came here by helicopter to investigate.

But as kooky as all his seems, in a little over two weeks, Bugarach is likely to be the focal point for all the world's media for the simple reason that it will be literally the only place on earth.

Why? Well, for that you can blame our old friends the Mayans.

According to a prophecy/Internet rumour, which no one has ever quite gotten to the bottom of, an ancient Mayan calendar has predicted the end of the world will happen on the night of 21 December 2012, and only one place on earth will be saved: the sleepy village of Bugarach.

You think "goldbugs" love a conspiracy? Well, the visitors to Bugarach are in a league all of their own:

...rumours of the impact on Bugarach got more outlandish, helped by media that couldn't resist the saga of a rural doomsday. Planes from America were said to have been fully booked for December with passengers who had only bought one-way tickets, hippie cults were claimed to have built bunkers beneath the village, and half-naked ramblers were said to be seen wandering up the mountain in procession, ringing bells. This turned out to be far from true. But as D-day approaches, the rumour has created a heavy atmosphere among villagers, who are keen for all of this—though not the world itself—to end.

Bizarre in the extreme. But perhaps, just perhaps there is some method in this madness, a little foresight in the folly. It could be that this is all part of Le Grand Plan. We will get back to that a little later, but for now let's concentrate on Les Deux Françoises.

The mention of François Mitterand segues nicely into today's topic du jour, which is those lovable funsters in France, specifically their government and the sparkling prime ministers that the French tend to elect in times of crisis.

Mark Twain once said that France is miserable because it is filled with Frenchmen, and Frenchmen are miserable because they live in France. Perhaps that is the reason why they elected l'autre François—M. Hollande—last year. It's hard to say. But this past week, a run-of-the-mill an extraordinary outburst from one of Hollande's cabinet (specifically, the grandly titled Minister of Industrial Renewal, Arnaud Montebourg) harkened back to the dark days of Mitterand's Socialist government of the 1980s.

Ambrose Evans-Pritchard takes up the story (but of course he does):

(Ambrose Evans-Pritchard): Thirty years have passed since French President François Mitterrand launched Europe's last great wave of nationalisation, seizing the banks, insurance groups, arms makers and steel industry in the culminating debacle of the Collectivist era.

The whole world has been living in an era of privatisation ever since.

So it seems like a strange step back in time to hear France's minister of industrial renewal, Arnaud Montebourg, threatening a "temporary public takeover" of ArcelorMittal's steel operations in the Lorraine plateau—purportedly to save the blast furnaces of Florange and their 2,500 workers, so sacred in the Socialist Party catechism.

It is even stranger to hear him say "we don't want Mittal in France anymore."

Is it, Ambrose? I don't know...

A little over six weeks ago, France's richest man and head of the LVMH luxury goods empire, Bernard Arnault, announced that he was seeking Belgian citizenship for "personal and business reasons."

This decision—quite coincidentally—came a few days before Hollande's finance minister, Pierre Moscovici, confirmed the trial balloon that had been floated rumours that had been circulating for weeks about France's latest attempts to tax Les Riches into oblivion when, in his budget speech, he announced the decision to raise the top rate of tax in France to a stifling 75% on income over €1 million per year.

I'll say this for Monsieur Moscovici, he's a man of singular confidence:

(FT): Pierre Moscovici, the finance minister, said €20bn of tax increases on business and the well-off and €10bn in savings from a nominal terms freeze in spending next year, plus continued savings over the next four years, amounted to the "biggest effort since the [second world] war".

The savings include €2.2bn in a scaled-back defence budget.

Another €2.5bn will be saved in 2013 by limiting the rise in state health spending to 2.7 per cent. Extra tax measures in 2012 will add another €4.4bn.

A total of €10bn will come from extra taxes on individuals and a further €10bn from new taxes on businesses.

Did you see what he did there?

Another €2.5bn will be saved in 2013 by limiting the rise in state health spending to 2.7 per cent.

Extra tax measures in 2012 will add another €4.4bn.

A total of €10bn will come from extra taxes on individuals and a further €10bn from new taxes on businesses.


If nothing else, you have to admire their certainty.

How did the French media react to the loss of one of the prime sources of this guaranteed additional revenue, I hear you ask? Why, in typical fashion:

(Sydney Morning Herald): "Get lost, you rich jerk!" said a front-page headline in the left-leaning Liberation daily, next to a picture of Arnault smiling in front of an overnight travel bag.

Arnault announced in a lawyer's statement he was suing Liberation for public insult over the headline, calling it vulgar and violent.

Leftist Jean-Luc Melenchon told RTL radio that France did not need such "parasites" and Socialist lawmaker Bruno Le Roux said Arnault was "betraying France's recovery".

"When you love France, you don't leave when the weather turns bad!" Harlem Desir, national secretary of the Socialist Party, wrote in a Twitter message.

Union leaders accused Arnault of profiting from French workers only to take his wealth across the border.

"It's immoral when you consider the situation of the workers on whose backs he makes his money," Francois Chereque, head of the CFDT labour union, France's largest, told France 3 TV.

"France, love it or leave it," read a headline on the front page of communist daily l'Humanite.

Now, it is a common argument as to whether tax increases ever result in the increased revenues predicted (personally I believe that they NEVER do), but there's no need to listen to me when we are fortunate enough to have a recent test case to which we can refer; Britain's increase of the top rate of income tax to 50 per cent, which would mean that half of everything earned above a certain threshold would be donated to Her Majesty's government (positively laissez-faire when compared to the new scale being instituted across the channel).

When announced in April 2010, there was a familiar air of certainty afoot:

(BBC): A new 50% tax rate for top earners has come into force at the start of the financial year.

The new rate will affect the 300,000 highest earners in the UK, out of the 29 million people who pay income tax.

It will be levied on taxable incomes greater than £150,000 a year and aims to raise an extra £2.4bn by next year.

The 600,000 people who earn more than £100,000 a year will have their personal tax allowance eroded too, raising £1.5bn for the government.

Bless their hearts.

How did things pan out? Well, this week we found out:

(UK Daily Telegraph): Almost two-thirds of the country's million-pound earners disappeared from Britain after the introduction of the 50p top rate of tax, figures have disclosed.

In the 2009-10 tax year, more than 16,000 people declared an annual income of more than £1 million to HM Revenue and Customs.

This number fell to just 6,000 after Gordon Brown introduced the new 50p top rate of income tax shortly before the last general election...

Far from raising funds, it actually cost the UK £7 billion in lost tax revenue.

Doesn't bode well for our friends in France, I'm afraid, now, does it?

But why do the French government need to raise this extra revenue? Well, not to put too fine a point on it, they are up le creek sans paddle.

France Metrics
Source: Economist

France's 60 million inhabitants generate approximately $40,000 per head in GDP, though the rate of growth in that number has slowed dramatically of late. By any metric, as you can see from the chart above, France—far from being one of Europe's leaders—is becoming something of a drag on the Eurozone. Granted, it doesn't have Spain's unemployment woes or Italy's negative GDP, but for a country that is supposed to do its fair share of the heavy lifting, France's shoulders are looking woefully weak. In fact, upon closer inspection, France would seem to have been punching above its weight for some considerable time with the majority of that firepower coming from—you've guessed it; le gouvernement:

(Economist): In fact, the French economy has been deteriorating for many years and this has simply become more obvious since the arrival of the euro, which precludes the tempting cure of devaluation. Ever since the end of the trente glorieuses, the 30 highly successful years after the second world war, France has come to rely heavily on public spending for growth. As Michel Pébereau, a banker, put it in a 2005 report on the public finances, "each time a new problem has arisen in the past 25 years, our country has responded with more spending." The budget has not been balanced in any single year since 1974.

Public spending in France is an astonishing 57% of GDP, which puts it above every other European country bar Denmark (not represented in the chart below, right), and there are few signs that this number is set to fall in any meaningful way despite the protestations to the contrary of the French government.

56 - GDP
Source: Economist

The moment François Hollande celebrated his election (on an austerité platform) in May by cutting the retirement age from 62 to 60, the die was cast, but, amazingly, and due in no part to the Hollande government's efforts, France's borrowing costs have actually narrowed both outright and in relation to Germany, which, in the face of an overtly Socialist government who have shown they mean to spend and keep on spending whilst increasing their revenues through tax increases that will plainly not work, is remarkable.

But this isn't the only problem facing France. Not even close.

Un: Unemployment

Unemployment 18p france

France's unemployment rate is above 10% and climbing. In fact, it has hardly dipped below 8%—represented by the dotted green line—in the last 30 years as the chart (left) demonstrates.

Deux: Competitiveness

According to the EC, between 2005 and 2010, France's share of world exports shrank by almost 20%. How bad was that? Well, amongst her Eurozone neighbours, only Greece performed more poorly. Further evidence was provided by the World Bank's "Doing Business" scorecard, which relegated France to 34th place in 2012 (table below). Almost comically, the only category in which France scored highly was enforcing contracts.

A familiar name appears at the top of the list again...

Doing Business
Source: World Bank, IFC

Trois: The Bloated Public Sector

A large part of the 57% of GDP that gets spent by the French government goes into salaries. According to The Economist, France has 90 civil servants for every 1,000 inhabitants, which equates to 22% of the workforce.

Compared to Germany (which has only 50), the French government look like the inveterate profligates that they are. In fact—and to my shame—the only nation that even comes close are "les Rosbifs" across the Channel in Britain who are just below 50%.

So... that is just a soupçon of the problems France faces. What do we get when we add up the various headwinds facing France?

(BBC): The credit ratings agency Moody's has downgraded France from its top rating.

The country's debt has been reduced from AAA to AA1 and has kept its negative outlook, meaning it could be downgraded again.

In a statement, Moody's blamed the risk of a Greek exit from the euro, stalled economic growth and the chances that France will have to contribute to bailing out other countries.

Rival agency Standard & Poor's downgraded France in January.

Moody's said the primary reason for the downgrade had been France's "persistent structural economic challenges" and the threats they pose to economic growth and the government's coffers.

"These include the rigidities in labour and services markets, and low levels of innovation, which continue to drive France's gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base," Moody's said.

Naturellement, the downgrade didn't go down well with Monsieur Moscovici, France's minister of Objectivity Finance:

"I take note of this decision, and while I deplore it, it doesn't put into question the force of our economy."

Hollande was a little less hyperbolic in his assessment and showed signs of understanding the problems facing his government:

"We must take note [of this], stick to our economic policies, keep on track and understand that we have every interest in improving public finances."

Bravo, François!

Chastened by the Moody's downgrade, the Hollande government were swiftly presented with an opportunity to show how they had taken note of the criticism levelled at them by les Americaines deplorables. That opportunity came in the form of the aforementioned ArcelorMittal. The French reaction at least demonstrated even-handedness of sorts:

(BNN): Global steel giant ArcelorMittal is no longer welcome in France, Minister for Industrial Recovery Arnaud Montebourg is reported to have said by French business daily Les Echos.

The daily reported that the minister has accused the steelmaker of "lying" and "disrespecting" the country.

The crux of the confrontation is the steel multinational's plans, announced in October, to close two blast furnaces at its steel plant in Florange and the 60 days deadline given to the government to find a new owner.

"We no longer want ArcelorMittal in France because they didn't respect France," Arnaud Montebourg told French business daily Les Echos.

Plus ça change indeed.

Threats were immediately made to nationalize Arcelor, but after much scrambling ensued, a deal was struck that would avoid any forced layoffs at the two furnaces at the heart of the dispute.

Phew! Problem solved.

Not quite, as les Americains deplorables struck again within hours:

(UK Daily Telegraph): The eurozone was dealt a fresh blow as Moody's Investors Service downgraded the region's rescue funds and unemployment hit a new record high.

The ratings agency cut its rating on the European Stability Mechanism to AA1 from AAA and maintained a negative outlook. It also lowered the European Financial Stability Facility's provisional rating to (P)AA1 from (P)AAA.

Moody's said its decision was driven by its recent downgrade of France, because the credit risk and ratings of the rescue funds were "closely aligned to those of its strongest supporters".

Naturally, Klaus Regling of the ESM/EFSF disagreed with the decision, calling it "difficult to understand", but, again, the die had been cast. "We disagree with the rating agency's approach, which does not sufficiently acknowledge ESM's exceptionally strong institutional framework, political commitment and capital structure," said Regling.

Really, Klaus?

Having Spain and Italy responsible for providing roughly a third of your capital constitutes an "...exceptionally strong institutional framework, political commitment and capital structure", does it?

esm commitments
Source: ESM

We've been through this before, but just by way of a refresher, the chart (above) shows the commitments pledged to the ESM by the various signatories. As you can see, France is on the hook for one-fifth of the authorized capital (approximately €142.7 billion) of which, thanks to those clever little bunnies in Brussels, only a trifling €16.3 billion will be paid-in capital. When originally conceptualized, there was a rather quaint notion about the ESM that bears repeating:

"...the ESM will be authorized to approve bailout deals for a maximum amount of €500 billion, with the remaining €200 billion of the fund being earmarked as safely invested capital reserve, in order to guarantee the issuance of ESM bonds will always get the highest AAA credit rating."


Folks, wake up! Please?

For Spain to receive, for example, the €100 billion bailout that has been mooted, it will need to contribute its full allotment of paid-up capital (some €9.5 billion) to the ESM in order that the ESM be fully funded and able to disburse the loan to Spain. Spain will likely need to borrow the €9.5 billion to pay into the ESM.

I know, I know. I feel just as stupid writing it as you probably do reading it.

I read this past week that of the full €700 billion committed to the ESM, €292 billion has already been pledged. That would leave a total of €408 billion in the kitty to be doled out to any further problem children—including any Spanish bailout.


But back to our friends in France.

Amazingly, the French 10-year bond has never—NEVER—traded higher and offered a lower yield to those foolish confident enough to decide it warrants a place in their portfolio. The chart below runs from the mid-1700s to 2010 (though yields have declined even further since then) and as you can see, there has never been a better time to have owned French bonds. Similarly, there has also never been a worse time to buy them. And yet... "investors" are doing just that.

Longterm French 10s
Source: BAML

Back in June, one of the smartest investors in the world, Greenlight Capital's David Einhorn, had this to say about the incoming Hollande government:

(Zerohedge): Under the new regime, France is now cozying up to its new anti-austerity, pro-money-printing allies, Italy and Spain. This makes sense when one considers that France's economy is more akin to that of its southern neighbors than it is to the German economy. Strangely, the French bond market hasn't figured this out just yet.

Even more strangely, five months and more appalling economic numbers later, the market still doesn't seem to have figured it out. That, I suspect, will soon change.

The main reason for the capital pouring into French OATs this year has been the fear of a fractious end to the Eurozone. Money fled Europe and rushed into such "safe" havens as Switzerland, Singapore, and Norway, and those central banks recycled their euros into, initially, German Bunds. But the Bund market wasn't large enough to absorb the flows (witness the all-time high prices on German government debt), and so, even though the only way France is still a "core" country in the EU is alphabetically, some of this money has leaked into what is perceived as the "next best thing." That is categorically an error in judgement on the part of those investors.

The great Dylan Grice wrote this week on the subject of safe havens, and, like me, he concludes that government bonds in general are nothing of the sort:

... what constitutes the 'safe haven' changes over time. It's important to remember not only that government bonds aren't always the market's safe haven, but that there will always be a safe haven somewhere. For all the headlines about the billions wiped off stock market values during market routs, that money had to go somewhere. It doesn't just disappear. It will go into whatever the safe haven is, which in normal times will be bonds. But what happens when government bonds themselves fall victim to the primary ills of the day?

This is a far more erudite way of covering the point I tried to make in my recent presentation (the title of which I shamelessly borrowed from Dylan who in turn—though not so shamelessly—borrowed it from Charles Mackay): that government bonds have historically been safe havens, but that investors haven't yet made the mental adjustment necessary to see them for what they are now, which is Ground Zero for the world's ever-ballooning liabilities. Once that adjustment is forced upon them—possibly by the sudden unraveling of the euro despite all those late-night promises we were made—their real current value will quickly become apparent.

But what are the French government going to do about the state of their economy and the Damoclean Sword that hangs over them? It's true that Hollande, with his Socialist Party in control of both parliamentary chambers, has perhaps more power than any French president since de Gaulle, but his cabinet (from Hollande himself to his prime minister and down through most of his ministers) have two levels of experience in either a business or a ministerial context—little and none. The ineffectualness of Hollande's policies has been demonstrated by the polls, which show him to be about as popular in France in 2012 as English soccer fans were in 1998. His current approval rating is 41% after six consecutive monthly declines—not bad for a president who has been in office for a little over seven months. Vive l'indifference!

Hollande needs to do something—and fast. He is running out of time to reverse the frantic deterioration his economy is currently undergoing:

(Economist): The biggest concern is not that Mr Hollande will repeat the Mitterrand government's extravagant follies of 1981. Nor is it any longer, as in May, that he refuses to admit that France is in economic difficulty. It is that on this occasion there is so little time for him to act.

In 1981 the economy was growing, the budget deficit was small, the national debt stood at just 22% of GDP and France still had its own currency. Today the economy is at a standstill, the deficit is above the 3% ceiling, the debt is over 90% of GDP and France is in the euro zone. The euro crisis keeps going, and although France is still able to borrow at low cost, market sentiment can switch suddenly.

Trouble. And Hollande is not exactly one to grasp the nettle:

(Economist): Mr Hollande has begun to talk about French competitiveness, though he gave a lukewarm reception to the recent Gallois report on the subject. Despite his campaign calls for less austerity and his (swiftly broken) promise to renegotiate the European fiscal compact, he has repeatedly insisted that he will stick to his target of cutting the budget deficit for 2013 to 3% of GDP and aiming to reach balance in 2017. The budget in late September included just about enough tax increases and (more modest) spending cuts to satisfy the markets.

Acknowledging the issues and then doing nothing about them is a familiar trait—not just of Hollande, in fairness, but of most modern-day politicians—but unless Hollande has a Grand Plan in the works, he is soon going to have to not only face a disgruntled populace but a far more dangerous enemy: an unhappy bond market.

Hollande is falling back on the tried and trusted Socialist recipe of raising taxes rather than cutting spending and, as the mass exodus from Britain has proven (once again), this is hardly a robust plan. The departure of France's richest man for Belgium (accompanied by a typically Gallic farewell from the press) is a warning shot across the bow, and the uproar in the wake of what will surely be seen as a modern-day French F'arcelor is a shake of the lapels and a slap around the face.

So what exactly is Le Grand Plan? Well, I think I have it figured out, and it all comes back to Bugarach.

The way I see things, Hollande has only one viable option left to restore his economy and avoid disaster.

On December 22nd, when the world has ended and the only place left is the tiny village nestled in the foothills of the French Pyrenees, everybody on earth who has survived will be forced to live there and to therefore pay French taxes. At that point, Hollande and his government will be able to raise them to whatever level they deem appropriate to fix their balance sheet, and voilà!

Problem solved.

Just in case, though, they might want to start working on Plan B...


This week's jeux sans frontières begins with a look at Vladimir Putin's posing before moving on to examine Chinese monetary policy since the turn of the century.

We visit Greece (of course) to find out just how far the Eurocrats have managed to kick the can this time, the UK to see the beginning of the backlash over the appointment of Canadian Mark Carney as BoE governor, and Messrs. Sprott & Baker explain why gold is the solution to the problems facing central banks.

Dim Sum bond sales are soaring, Jan Hatzius sounds the all-clear siren (sort of), and we hear all about some new Greek myths.

Doug Short takes a look at inflation as only he can, student loan delinquencies go parabolic, Chinese brokerage accounts are beginning to lay dormant in ever-increasing numbers, and it's time to see just how badly the cost of the Twelve Days of Christmas has been affected by inflation once again.

Eric Sprott has a few thoughts on the silver market, the ECRI's Lakshman Achuthan shows why the SU is already in a recession, and some fool talks to Geoff Candy of Mineweb about China and the gold markets.

Lastly, be sure to stay tuned for this week's "And Finally"... it's a doozy...

Until next time...

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