It would be easy to ignore what is happening on the other side of the world, especially when they involve the French. But to do so today in this interconnected and interdependent world would be extremely hazardous to your wealth. When a butterfly flaps its wings in Brazil, the tsunami hits Japan.
That is exactly the extreme sort of weather event we are witnessing today with the French presidential election results. This is how they came out:
Socialist François Hollande 28%
Conservative Nicolas Sarkozy 26%
Right wing Marine Le Pen 18%
Communist Jean-Luc Mélenchon 11%
Other parties and uncommitted 17%
To say this is a disaster for Sarkozy is an understatement of the highest order. It is the first time in more than 50 years that a sitting president lost in the first round. The odds of the socialists winning again in two weeks have moved from 50:50 to more like 80:20. For Sarkozy to pull things out of the fire from here would require nothing less than a miracle.
The socialist economic policies will require an increase in government spending, growing budget deficits, an extended retirement age, and a far heavier reliance on sovereign borrowing by France. It makes a complete hash of the careful progress made by German chancellor, Angela Merkel, made towards steering Europe to live within its means. More debt issuance means higher interest rates, falling stock markets, and a continuation of the European crisis. Message: bombs away for risk assets.
The only way that Sarkozy could keep his job is to do some sort of a deal with the right wing National Front to create a coalition government. And what would be their price for such an arrangement? The immediate withdrawal of France from the Euro to recover national pride and sovereignty. Message: more bombs away for risk assets.
Needless to say, this is all hugely positive for the dollar (UUP), the yen (FXY), and US Treasury bonds (TLT), and very negative for US stocks (IWM), the Euro (FXE), oil (USO), copper (CU), gold (GLD), and silver (SLV). That house you think you recently bought at the bottom just fell in value by 5%. If you have been reading this letter in recent weeks, you already have all of the right positions and are sitting pretty. If you don’t, you better start reading.
As a long time analyst of the American political scene, I have to laugh at the results broken out by prefecture on the map below. The conservatives dominate the cities, while the socialists control the countryside, which is the complete opposite found in US election outcomes. Similarly, college grads vote conservative while the uneducated vote liberal, which again is the polar opposite of American results. No wonder I have such a hard time digesting frog legs.
The Next Prime Minister of France?