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When French People Say the State Is Too Large, Something Huge is Happening


A not-so-quiet revolution is sweeping the globe.


From Donald Trump’s surprise election win to Britain’s bombshell vote to leave the European Union, entrenched political elites are being uprooted and taken behind the woodshed by an irate electorate.


It’s easy for investors to view these events in isolation, says Pippa Malmgren, founder of economic consultancy DRPM Group and author of the best-selling book Signals.” But to truly understand the global zeitgeist, however, investors should consider this shocking fact:

On April 23rd, French voters will decide between the country’s two current political frontrunners. Marine Le Pen is president of the right-wing populist party National Front and Emmanuel Macron leads, En Marche!, a liberal political party he founded just last year. The two are neck and neck (and depending on the poll data you’re looking at, either candidate inches out the other, getting between 26% and 28% of the vote).


Both are outsiders. And both want to shift the balance of power from the government, back to the people, Malmgren says in the Real Conversations interview above with Hedgeye CEO Keith McCullough. (Meanwhile, embattled establishment candidate Francois Fillon has likely tanked his political ambitions. He is under formal investigation on suspicion of embezzling state funds. A recent poll found that three-quarters of French voters want Mr Fillon to pull out of the presidential race.)


Here’s the big picture takeaway from Malmgren in the video above:


“All of these European nations – Austria, Sweden, France, Denmark – they are all moving in the way of a Brexit but they may not go all the way to the exit door. What they’re moving toward is a smaller state, more personal freedom, especially more entrepreneurial freedom. More ability to build a business yourself because you can’t depend on the state. They’re broke.”


To better understand what this all means for investors, we encourage you to watch the entire Real Conversations interview between Malmgren and McCullough, “Pippa Malmgren Unplugged: Investing In An Age of Global Angst.” 


Are You Prepared For The End Of The Bond Bubble?

This special guest commentary was written by Daniel Lacalle


Are You Prepared For The End Of The Bond Bubble? - z lacalle


The biggest bubble in financial history is about to end.


With rate hikes, a stronger dollar and the return of inflation, bond inflows are normalizing, sell-off in negative yield fixed incme continues, and real rates increase despite central planners’ financial repression. High-yield bond funds saw their biggest outflows since December 2014 last week, as investors withdrew $5.7bn, according to EPFR Global.


Meanwhile, the total value of negative-yielding sovereign bonds fell to $8.6 trillion as of March 1 from $9.1 trillion at the end of 2016.


Three factors are helping the burst of the bond bubble:


  1. The price of oil falling to three-month lows on the evidence of the ineffectiveness of OPEC cuts, a record increase in inventories and a stronger dollar is helping to reduce the thirst for high-yield.
  2. A strong “America First” policy needs a stronger US dollar. The US economy benefits from a strong dollar and rising rates, not the other way around. Believing that the US needs to weaken its currency is a fallacy repeated by mainstream economists. The US exports are relatively small, about 13% of its GDP, and its citizens have 80% of their wealth in deposits. The new administration knows it. They are their voters. The only ones that benefit from a weak dollar and low rates are bubbles, indebted and inefficient sectors. If a rise in rates of 0.25% negatively impacts a part of the economy, after more than 600 rate cuts, it means that such part of the economy is unsustainable. Increasing rates is essential to limit the exponential growth of bubbles and excesses.
  3. The European Central Bank. The placebo effect of ECB policy has already passed. With more than € 1.3 trillion in excess liquidity and a dangerous environment where economic agents have become “used” to unsustainable rates to perpetuate low productivity sectors, it is inevitable that the central bank will begin to unwind its Monetary laughing gas sooner rather than later.


That dollar strength and US rate hikes, reinforced by the Trump administration’s capital repatriation policy, is exactly what the country needs if it really wants to “make America great again.” If you destroy the middle class with financial repression, you will not only lose its political support, but the policy will not work either.


Strong dollar, normalized rates and repatriation of capital create the vacuum effect. Higher demand for dollars is triggered and the attractiveness of low yield bonds outside the US is reduced.


… In Europe, we are not prepared for the bond bubble to deflate.


The vacuum effect can mean a loss of up to a $100 billion just from repatriations. If the top five technology companies repatriated half of their cash back to the US, it would mean more than $240 billion leaving the rest of the world and returning to the US.


But, moreover, rate hikes make it less attractive for investors to buy bonds from European and emerging countries.


At the moment, growth prospects in the Eurozone, and the US-European inflation differential keep the flow of investment in the European Union because in real terms it still offers a decent mix of risk and profitability. But the Eurozone has a problem when governments have to refinance more than a trillion euros and have become used to spending elsewhere the “savings” in interest expenses achieved due to artificially low rates.


Are You Prepared For The End Of The Bond Bubble? - z uno


Those savings have already been spent, and when rates rise, and it will happen, many countries do not seem to be sufficiently prepared. Same with many companies. The rise in inflation and rates, which has given some breathing air to banks, holds another side of the coin. Non-performing loans have not been adequately cleaned, and remain above 900 billion euro in the European financial system. Banks do not have enough capital cushion to undertake the deep provisions that would entail cleaning up such a hole and have relied on the recovery to try to sell these loans. The improvement in NIM (net income margin) coming from inflation and a rate increase does not compensate for the increase in NPLs and their provisions. A rate hike of 0.25% means an increase in NIMs of 17% for Eurozone banks, but the clean-up of NPLs would completely wipe out that benefit.


The European Central Bank should analyze the risk of fragility. Because it has not been reduced.


Europe continues to suffer from three factors: Industrial overcapacity, high indebtedness and excessive weight in the economy of low productivity sectors.


These sectors -industrial conglomerates, construction- have absorbed most of the new credit. The ECB and governments were too obsessed with increasing credit to the economy to worry about where that credit was going to. When Eurozone economies and companies are afraid of the impact of a hike of just 0.25%, it means we have a problem – really big.


Do you have a business? Are you prepared to pay 1-2% more for your financing in the next five years? Yes? Congratulations. You have nothing to worry about.


Do you have a variable rate mortgage? Are you prepared to pay a few hundred euros more per year in the next few years? Yes? You have no problem.


Do you have a country where net financing needs are going to continue to fall as rates rise? Yes? Congratulations, you are fine.


Do you think that the ECB will have to keep or lower rates because everyone is so entrapped that it needs to be more dovish? I wish you luck.


Are You Prepared For The End Of The Bond Bubble? - bubble cartoon 09.09.2014


The big mistake of central banks has been to create bubbles, then deny them, and afterward try to perpetuate them with the same policy that created the initial problem. Lowering rates and increasing liquidity has been the only policy.


Now central banks face a new US administration that sees currency wars and beggar-thy-neighbor policies as what they are, assaults on the middle class. Financial repression did not work in the past, and failing to adapt economies to normalized rates is dangerous.


Investors should really pay attention because real and nominal losses are more than evident in bond portfolios.


This is a Hedgeye Guest Contributor note written by economist Daniel Lacalle. He previously worked at PIMCO and was a portfolio manager at Ecofin Global Oil & Gas Fund and Citadel. Lacalle is CIO of Tressis Gestion and author of Life In The Financial MarketsThe Energy World Is Flat and the forthcoming Escape from the Central Bank Trap.

Poll Of The Day: Which BEST Describes The US Economy?

Takeaway: What do you think? Cast your vote. Let us know.

Poll Of The Day: Which BEST Describes The US Economy? - bull bear


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Economic Acceleration? Your Decision Will Impact Your Portfolio Performance

Economic Acceleration? Your Decision Will Impact Your Portfolio Performance - boxing gloves image


There's a fight playing out right now among investors in the U.S. stock market on which way economic growth is heading. As you’ll see in the numbers below, it's a fair fight right now from a performance perspective. But we think that's going to change very soon. 


(For more, click here to get 3 specific trading ideas from this morning's Early Look.)


Breaking down the S&P 500 year-to-date performance by sectors reveals this emerging conflict:


  • Financials (XLF): +5.2%
  • Utilities (XLU): +5.5%
  • S&P 500: +6.2%


As a reminder, the Utilities sector outperforms the broader stock market when U.S. economic growth slows and interest rates fall. On the other hand, Financials outperform the broader stock market when U.S. economic growth accelerates and interest rates rise. 


Investors placed bets last week that were crystal clear. Interest rates fell and here's what happened in Utilities and Financials:


  1. Financials (XLF) were down -1.3% week-over-week
  2. Utilities (XLU) were up +0.5% week-over-week


Which side of this fight are you on? U.S. #GrowthAccelerating or U.S. #GrowthSlowing...


In today's Early Look, Hedgeye CEO Keith McCullough explains which side we’re on, why we’re on it and how investors can take advantage of this emerging fight.


In fact, we've got three specific ideas.


Click here to learn more.


Economic Acceleration? Your Decision Will Impact Your Portfolio Performance - 03.20.17 EL Chart 2


Cartoon of the Day: Happy St. Patrick's Day!

Cartoon of the Day: Happy St. Patrick's Day! - 03.17.2017 pot of dollars cartoon


We've been bullish on the U.S. Dollar since August 2014. We still like it here.



Click here to receive our daily cartoon for free.


Poll Of The Day: What's The LIKELIEST Next Stop For Oil Prices?

Poll Of The Day: What's The LIKELIEST Next Stop For Oil Prices? - oil prices question2


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