Venerable French investor Charles Gave has been managing money and researching markets for over 40 years; as such France’s elder statesman of asset allocation perhaps best captures the mood ahead of the most crucial Presidential election in a generation. In conversation with Dr. Pippa Malmgren, Charles breaks down national politics to understand why voters have rejected the establishment and the market impact of both outcomes, and what to expect from tomorrow's election.
First, Gave, who says "I'm not so sure that Macron will win", is asked by Malmgren to walk RealVision viewers through what Macron's agenda would look like in case of a victory. Gave is unable to do so for several simple reasons:
Well, first, nobody knows. Because during the whole campaign, all these talks were on one hand, on the other. I'm in favor of apple pie, and motherhood, you see. Basically he has, to my knowledge, very little program. So he's running. That is what Hollande said. That he was going to make some fundamental changes without hurting people. And so Macron is a big, empty suit. That's what he is. You did the right curriculum vitae, he went to the right schools. And you have the feeling that the guy never had an original idea in his life. He was always a good student.
And moreover, there is a strong suspicion that he's a kind of golem created by Hollande and all these guys. So since they knew they were going to lose the election, they created a guy in a hologram that would run for them and prevent them from losing power. So to a certain extent, the French political system has been captured by what you can call the Technocratic class. And whether from the left or the right, it didn't make any difference. And this Technocratic class is presenting Macron as a brand new fellow. He is nothing brand new. These guys have been in power for 50 years for God's sakes. So this is basically nothing.
Gave is then asked for his take on the market's reaction, first to the outcome which now appears to be fully priced in, i.e., a Macron victory. The French investor's response should be concerning to those who believe France is in for a period of calm and stability.
If Macron is elected, as I already said, I'm not sure it's not going to be a triumphant election. So I'm not sure they will have that much legitimacy at first. And second thing is that just after, we have the election for the French Parliament. And then it's going to be a total mayhem. Because you have four main different currents in France. The extreme left, the Macron left, you see? You have the Fillon right, and you have Le Pen's right. So you have four. The way it's done before is that you had only three. Extreme left and the left were joined. And you had the election, you had three guys, and if anyone from the Front National had any chance of being elected, then the worst position of the other two retired. Right away. And said, you must vote for my usual enemy, but we don't want to. It’s what’s called the Front Republic.
But you see, it's kind of easy to organize if the organization of the parties are very strong and can force people to retire and to stop running. But if you have four, the organization of the parties having lost all credibility, then nobody is going to retire. Until we are going to have elections. And you could have a majority of MP's from the Front National The majority of MP's from Melenchen. Anything is possible. So the fact that Macron is elected doesn't reduce at all. Not at all. The political risk in France. It may reappear at the election time, big time. So anybody who buys on the idea that the problem is solved in France, let’s move to the next one will have to wait till the middle of June.
Alternatively, what if Le Pen wins:
If Le Pen wins, it's pretty simple. The bond market in France, Italy, Spain cannot open on Monday morning. And I suppose the euro is dead in the following week. And then you have to buy Europe like crazy. Southern Europe.
Why Southern Europe? Because it is Germany's markets that would bear the brunt of the selloff, as the dissolution of the euro and European Union would effectively bring about the end of Germany's economic hegemony (while at the same time benefitting France).
The Germans have made a colossal mistake, which is that they have all the production in Germany. So they're extremely efficient, well-organized, and they have developed massive current account surpluses. Half of that surplus is in cars. The margin on cars is around 4%. Imagine that the euro breaks down. The deutschmark comes back. The deutschmark goes up 15, 20%. And the whole German industry, all the production base in Germany, becomes bankrupt in no time at all. Compare that to France. France we have magnificent big companies that have been intelligent enough to produce everywhere in the world, to operate from everywhere in the world, and be totally independent from what's happening in France. What they have in France is their headquarters. And that's about it. So if Europe breaks, you should be long France on the stock market, and short Germany. Big time.
Would a Le Pen victory also mean the end of the EU? Gave answers:
I wrote a book in 2002, sometime around then, called "Lions Led by Donkeys in France." It was kind of a bestseller. And I made the point in the book that the euro is going to destroy Europe, the European institutions. And I said, we must get rid of the euro to save Europe. So name of the game, if we have some kind of a crisis like that, is to basically close the market for three weeks and organize an orderly dismembering of the euro. But to maintain what has been good so far, which is the kind of common market. And it's a difficult call because the movement towards the euro was also a movement to create a European nation.
And so the institutions today are basically federal in nature. But nobody in Europe has ever voted for them. So to a certain extent, the guys with power in Brussels have not been elected by anybody, and you cannot fire them. So it's totally Technocratic. So we have a hell of a problem. We should not only destroy the euro, but should move back to what Europe was in 1988 or 1987 before they put all these Federalist legislations in. That is going to be a tall order. But if the euro disappears and Europe has a problem, then the negotiating between the UK and Europe is going to be amusing. Because UK is going to say, look, who are we going to negotiate with?
Finally, on his big picture thoughts ahead of tomorrow's decisive election:"it's going to be a close call, a lot closer than people think. And then we have the elections afterwards, which are going to be a total gamble." Gave adds that in a sense Le Pen has already won because the "worst case scenario" for her, the 2022 elections, is still achievable. As for the parliamentary elections, "Le Pen could have anywhere between 40 to 100 MP's (she currently has two).... which would be a total disaster for the ruling class."
In other words, even if Macron triumphs on Sunday, "the National Front isn't going anywhere." Furthermore, Le Pen's niece Marion Le Pen is poised to inherit the mantle of party leadership in time for the next presidential election in 2022. The younger Le Pen, already a French MP, would have a distinct advantage over her astringent aunt:
Marion, she's very young. She's 27, 28. She's an MP in the French Parliament. She's extremely pretty. And she represents what's probably very good in the French Catholic Right. She's very much a Christian person. Very much so. So a lot of people have problems voting for Mrs. Le Pen today. A lot of the Fillon's elector would have absolutely no problem voting for Marion, you see what I mean? So she has a big appeal on the Classical French Right. Big one. Big one.
His parting words:"be careful. If she wins, you will have a disaster in the lot of the European bond market. Doesn't mean a total disaster for the good quality companies. But the risk is not on the stock market. The risk is on the bond market. So be careful. Don't overstay on the bonds in Europe."
While these are the core excerpts from the interview with Charles Gave, there is much more in the full 40 minute version found on RealVision TV.