Notes From Underground: The Politics of the IMF and French Election

First, I am reposting part of the January 29 post as a reminder to pay attention to the narrative of Trump rolling back to the concept of Pax Americana. As the Trump administration begins to reveal its ambitions, there is a great deal of conversation about Trump becoming more presidential and that the “grown ups” are taking charge of policy. The demotion of Stephen Bannon ignited a discussion about the Wall Street crowd (Mnuchin, Ross, Cohn, Kushner) becoming aligned with the “Deep State.” The concept of the deep state is really the power of the entrenched bureaucracy as the primary source within the beltway.

This is what I warned about in January when I discussed the role of press leaks undermining the Trump administration. The bureaucratic influence and prestige supporting 70 years of Pax Americana is not to be easily dismissed. The entrenched bureaucracy has prevailed for the moment but the drain-the-swamp crowd will be fighting its own rearguard actions as it comes to understand the political terrain of Washington. Bannon is an ideologue, not a policy maker so he will resort to bomb-throwing attacks on his self-defined adversaries.

Tonight I am posting the latest episode from the Financial Repression Authority (click on the blue link to listen). I do these for no remuneration as I think the information flowing out of this group creates great conversation and can generate some very profitable investment opportunities. Yes, it’s 34 minutes long but it is more LEARNATIVE than the network news. So pour a stiff whisky and listen while doing other reading. I share this with, you readers because I am honored to be a part of this great dialectical process. One of the key points in tonight’s post is the development of a narrative in which to analyze the world of Trump. It is not a partisan narrative but one I am developing as I attempt to discern the unfolding global dialogue being put forward by Team Trump.

The major idea I forward is that President Trump is going to try to ROLL BACK Pax Americana. In international relations terms, Pax Americana was the theoretical basis to define American behavior in a post-World War II global configuration. America would bear any burden and any cost to promote a world order in which democracy and trade were promoted, and totalitarianism was to be confronted wherever it thought to expand. Yes, the Soviet sphere of influence was vast in territory but very few countries willingly signed up to be in the Soviet orbit. The U.S. had its empire and so did the Soviets. But the cost of maintaining an empire is expensive. The Soviets learned that when the price of oil rose and the cost of subsidizing the deficient socialist economies of eastern Europe became too exorbitant. Pax Americana, based on capitalism and its expanding growth, was much more capable of sustaining a global empire. But maybe we have reached the limits of what America can afford. I THINK THIS IS THE NARRATIVE ON WHICH PRESIDENT TRUMP IS OPERATING.

Now, this is just a conjecture but I think it is important to utilize a construct to help understand the nuances of the new administration. The VIX may say the financial world is comfortable, but we have seen money flows and experts be wrong in their assessments for their models fail to acknowledge the turbulence beneath the waves. The end of Pax Americana, or at least a move away from U.S. dominance, always promotes great anxiety and potential for upheavals. Trump is proclaiming that Pax Americana is over and if the present world structure is to be sustained more nations will have to bear the cost. This is why Trump continues to denigrate the established world order.

The problem is that the world is far more DYNAMIC than President Trump assumes so the global response will be far more uncertain than the Trump foreign policy team imagines. Going forward our task will be to recognize the financial opportunities in a radically changing global system. Also, what Trump may underestimate will be the bureaucratic battle that will take place in Washington D.C. as the foreign policy establishment ensconced in Pax Americana thinking will be fighting rearguard actions to undermine the attempts to displace the existing order (think, a great deal of leaking). This narrative is an effort to understand and navigate the markets in an age of  heightened uncertainty.

Remember, President Trump’s mantra during his campaign was that the NATO nations and other alliance partners were not paying their share of the cost of defense. Empires are expensive and when the cost is deemed a positive it is worth maintaining. But one the benefits accrue away from the CENTER of the EMPIRE questions arise about the sustaining of status quo.

This is just a reminder of the complexities involved in making policy in a world populated by with true believers. Trump has been moving away from the ideologues but watch this weekend’s meeting with the IMF to get a sense of possible changes in the status quo of Pax Americana. I noted the importance of the Wilbur Ross comment calling the IMF rhetoric on U.S. trade policy. Pure rubbish.

Today, Treasury Secretary Mnuchin attempted to soften any possible acrimony between the Trump administration and the IMF … again. Mnuchin talked nice about Christine Lagarde and in a Financial Times interview, he said he would not take a position on the IMF’s bailout of Greece. This was in violation of IMF rules as Greece is a wealthy country when it is part of the EU community. The IMF had no business in providing loans to Athens but Mnuchin wished not to stir that pot. However, Mnuchin did throw more RUBBISH on the pile with his comments about the U.S. dollar. He said: “What I’ve talked about is the long-term value of the dollar. And as the world’s currency, the primary reserve currency, I think that over long periods of time the strength of the dollar is a good thing. It’s a function of the confidence and the strength of the U.S.economy.”

Yes, Mr. Secretary, this is of course correct but it is always a reflexive, relative issue and the valuation of the U.S. currency has been manipulated for short-term political advantage when necessary. Define for us, if you will, what long-term means. In answering if the president was talking down the dollar, Mnuchin said, “The President’s comments, which again, I agree with, over short periods of time, the strength of the dollar creates certain issues which hurt our exports.” Mnuchin’s claim for a strong dollar policy is RUBBISH. Trump has shown that he will use dollar policy as a cudgel to brandish as an economic threat to affect foreign policy.

His tweet about not naming China as a currency manipulator in order to achieve cooperation on North Korea is a perfect example. The dollar will be a tool in this administration and in the long-term Mnuchin won’t be around to see its effective policy use. When Robert Rubin was Secretary of the Treasury he promoted a strong dollar policy until the Chinese complained about a weak YEN (June 1998). When President Clinton was on his way to Beijing, the U.S. Treasury intervened in the currency markets by purchasing Japanese yen in an effort to raise the currency’s value. It worked and the Chinese were placated. The dollar is a short-term tool of the foreign policy establishment and the politicians in Washington. So it goes.

***France: It’s too tough to call. The worst possible outcome for global financial markets is if the two “radicals” prevail into the second round. If the far-leftist Melenchon and the Front National’s Le Pen both make it to the second round markets will be in turmoil Monday morning. The polls seemed to be suggesting the next round will be Macron versus Le Pen, which markets would deem a positive outcome. It is significant that Francois Fillon is still hanging around with a solid base of 19%, according to pre-election polling data.

This is very tough to predict, more difficult than Brexit or Trump because the turnout will be key. The French electorate  has been so alienated in the past elections that a low turnout will favor the more fringe candidates. If Le Pen and Melenchon prevail it will cause French bonds and stocks to radically decline but the greater play may be in selling anything Italian. There can be no EU without France. Without French support, Italy and its troubled assets are toast.

The markets are very complacent in a period of great political uncertainty. Also, GOLD may rally but it is a suspect rally until we have a sense of the monetary impact from a low probability, high impact French election outcome. Greece and Brexit are non-events compared to a Melenchon/Le Pen victory. ECB President Draghi and IMF Director Lagarde will need two Ambiens on Saturday night. Watch the German/French 10-year bond spreads for some clues as to early market predictions going into the weekend. The ECB was evidently buying French debt today but will probably stay quiet as it will need all its resources if the improbable occurs.

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13 Responses to “Notes From Underground: The Politics of the IMF and French Election”

  1. Asherz Says:

    Didn’t Pax Americana end with the advent of Barack Obama? He withdrew American power as policeman allowing the bad guys to fill the vacuum. Trump seems to evolving in a modified US Pax with America leading from the front but its allies all paying their “fair share”. America First but not by itself.
    Exports encouraged by all means available, imports discouraged (border tax?) and a weaker dollar thrown into the mix. Higher interest rates would be a headwind not desired and a docile dependent Yellin Fed will get that message.
    The French farmers together with the reality of no-go districts that impress the urbanites will vote for the extreme candidates . The possibility that the left and right split the tally of the angry may allow the center to hold. Hard to predict.

  2. Arthur Says:

    “I don’t think of Trump himself as a change agent. I view him as someone who talked a good game on change but in fact has been doing nothing, doesn’t know how to get things done, was mostly about rhetoric.”

    Q&A: Economist Tyler Cowen

  3. frank c. Says:

    The most feared outcome would be a runoff between LePen and Melenchon in the second round. Both would seek to have France leave the EU.

    The probability of those two individuals finishing first or second in the first round is about 16%. (Assuming 4 viable candidates = 4 x 3 =12 outcomes with 2 of the 12 outcomes being Le Pen / Melenchon or Melechon/Le Pen). This 16% probability is based on if all were at 25% in the polls, which they are not. Given that Macron is polling stronger the probability of both Le Pen and Melenchron being in the runnoff may be slightly lower.

    Their are 30% of the voters still uncertain. Uncertains usually break more conservatively, but that may not be true with the populist movement.

    The markets are expecting Macron or Fillon or both to make it to the second round.

    Here are two articles that may be of interest..

    I don’t much about the integrity of French elections, but am generally skeptical that elections in general can be vulnerable to foul play. This article is about duplicate ballots in France, if accurate does not bode well for Le Pen.

    Lastly, it appears the US Bond market has been the beneficiary of the uncertainty in France with the 10 Year and 30 Year both breaking key resistance levels. (or is it the slowdown in Trump agenda and GDP?)

    If we do get LePen and Melenchon you are absolutely right that would cause complete turmoil in most markets.

    I don’t trust polls, pollsters, or politicians, but there is about a 45-50% chance that one of either Le Pens or Melenchon will be in the May second round. And perhaps that is when the markets spreads move.

  4. Mike Temple Says:

    We live in a world where Berlusconi won in Italy and Trump has won in the US. After tonight’s Parisian “terror” attack, nobody can truly predict the French election outcome. Regardless of the outcome, the Euro is a truly flawed currency. The economic plights of Greece and Germany could not be more diametrically opposed. Reminds me of the joke about a man sticking his head into a heated oven while standing barefoot in a bucket of ice water…His “average” temperature is fine while his hair is singed and his feet turn blue.

    Horrific NYT front page story this week profiling the dramatic drop in fertility rates in Greece (and other southern countries) as young women/families despair that they can afford to have any children, let alone what the future holds for such kids.

    If this isn’t the most horrific example of austerity that has been visited upon the PIIG nation. Is any currency union worth this kind of sacrifice….Greece is literally sacrificing its future on the pyre of debt it can never hope to repay….Does nobody read their history to realize that modern Greece has spent more years in default on its debt than being current?

    Pollsters could not have been more wrong about Brexit and US election…..Even if France gets through this election in good shape, who can say that Italy or even Germany may not be the tripwire that blows up the EU.

    Sunday night could be something to behold….Stay tuned, indeed

    • yra Says:

      Mike–everything you write is something to be aware of but for the time being making Le Pen into the absolute evil ‘fascist ‘ is the narrative of the mainstream global media–let the games begin and as the post IMF meetings reflect and as Wolfgang Munchau suggests it will soon be the piling on of all developed nations against Germany—-how far will Merkel let it go before she bites back

  5. frank c. Says:

    Alan Greenspan on CNBC today regarding French election and future of the Euro..

    • yra Says:

      Frank–gibberish of the first order and CNBC needs to let him fade away—-he has been wrong for so long it makes him irrelevant

  6. Jeffrey R. Carter Says:

    not hearing any “gotta break the glass ceiling” comments from the left when it comes to Le Pen!

    • yra Says:

      It is France —no talk ever about the glass ceiling—-Le Pen is the “fascist” that the mainstream will align against—her father lost 82%-to 18%—-hard row for her to hoe

  7. Chicken Says:

    “Macron versus Le Pen, which markets would deem a positive outcome.”
    And Eurobanks are roaring, juicy gap up for these seemingly under priced jewels.

  8. Chicken Says:

    Probably not in our lifetime, will we see the Rotten Heart stop beating…?

  9. Arthur Says:

    What the French establishment is really worried about. Macron 2017… Le Pen 2022

    Front National votes through the years
    2002 1st round presidential: 4.8m
    2015 regionals: 6.8m
    2017 1st round presidential: 7.6m

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