Emmanuel Macron’s coronation was followed either by fretting that “over a third still voted for a fascist” or “he’ll never get anything done anyway”. While both of these are valid comments, they should not be concerns. Rather than fret over France’s secular uptrend in fascism votes, consider instead that neither of the big established parties got through to the second round. That gives a sweeping mandate to anyone who can deliver change. Much like how Theresa May is now likely to gain a significant majority by delivering Brexit that 48% of the country didn’t want, it is possible to capitalise on The Mood Of The People, even if they didn’t vote for you. France had had enough. This is Exhibit A for Macron to deliver some reforms.
Aha, but what about the fact his party hasn’t existed long enough to deliver a majority in Parliament? Surely that will stymy his efforts and we should be just as afraid as we were before the Presidential election began?
Mais non, mon petit choufleur. Stop for a moment and tell me the name of any French Prime Minister. Any at all. Not just the ones that have run for President, and that’s why you’ve heard of them. In fact, tell me about a time when France was resplendent, abundant with joy, awash with positive change.
Tricky, isn’t it? The French economy has struggled for years. The focus of any hopes for change have always rested on the head of one man alone, and that’s the President.
For all the attention on the US Presidency, the French equivalent has more power within the system. This is because he gets to choose his Prime Minister and approve his cabinet; whereas the US Speaker of the House is elected by the dominant party without any Presidential involvement. Thus in France, the executive has a much stronger hold on the legislature. During cohabitation it can indeed be tricky for the President, as he has to choose a PM with the support of the majority party of the National Assembly that may not be his. Many appear to think that Macron will suffer the same fate as En Marche will be too new a party to command many seats.
This is actually Macron’s trump card. He’s unknown, and his party is new. He can work with either of the biggest parties in the legislature without losing face. He can be flexible. He can put together a coalition of the willing, that changes as he launches each new policy – and he will not be criticised for it.
Equally, the tribal loyalties that prevent Republican MPs from legislating for Socialists (or vice versa) can also be put aside. The deputes can also therefore be flexible. And who wouldn’t want to back the man who came out of nowhere to easily win two-thirds of the vote? Momentum matters in politics.
Right now, Macron is at his most powerful. He’s not failed to deliver anything; he gained declarations of support from both Republicans and Socialists in the run-up to the vote; he is the figurehead for France. If parliament were to gang up and prevent him implementing his agenda at this stage, they look deliberately obstructionist. Now, if The People’s mood changes, then he will struggle. Let’s say Le Pen starts to poll 45% as the years go on and nothing changes; then he would have to change course. But that’s years away. Right now, he can do anything.
For all the murmuring about the National Assembly elections then, they’re really only of interest if you are specifically investing in an area that the minutiae of policy might affect. But from a macro perspective, they’re pretty much irrelevant.
Much more important for macro thinkers will be how Macron acts on the world stage. What stance will he take towards Theresa May? Or Michel Barnier? Or Juncker? Or Merkel? It’s much more relevant to consider what he might do with the rules over the UK/France border point created in the Le Touquet Accord – coincidentally, Macron’s family home is in this seaside town. Or his pledge to prevent UK firms from tendering for EU public contracts. The Brexit Battle Lines are being drawn, with significant ramifications for both sides. Now this, I am worried about. It’s going to be messy, noisy and nasty – as all negotiations carried out in public are.
For now, though, the VIX can continue to plumb the depths, on Tuesday hitting its lowest level since December 1993, and stocks and risk-positive assets can remain happy enough. In the new world, remember that volatility eats itself on the way down as well as on the way up. The systematic vol selling funds just keep on keeping on, picking off those who like to pick up a little portfolio insurance. As long as this insurance ends up worthless, as it has so far, the selling will continue. And as the selling continues, allocators continue to plough more and more into risky assets. It’s a virtuous circle.
What could cause this to change?
- A genuine unexpected risk-negative event pops up
- The market becomes unbalanced: just too much risk goes into positions that can’t be liquidated as quickly as thought
- A realisation that political risk is no longer just a binary election-driven event, but an ongoing process of governing electorates who are increasingly fractious and divided – leading to more volatile policy-making
- The secular shift towards higher interest rates globally causes a re-pricing of stocks
Now, these are all issues to worry about. They are in fact the issues that should occupy thoughts throughout the rest of the year. Not who wins the French elections, nor when the Fed hikes, or North Korea gets jumpy. Macron will govern. The Fed will be hawkish. North Korea will be jumpy. The question is how prepared the market is for these events and what positions would be vulnerable to a reversal. For starters, let’s expect the VIX to print a new all-time low very soon – and the longer it stays down there, the more violent the reversal will be. Climb that wall of worry!