- Charles Gave: “France Is On The Brink of A Secondary Depression”!
Authored by Charles Gave of Gavekal.com,
France is engulfed by a political, economic and moral paralysis. The president has record low popularity, unemployment is making new highs and the tax czar of a supposedly left wing government just quit after repeatedly lying about a pile of cash he had stashed in a Swiss bank account. From such a sorry state of affairs, you might think that things could only get only get better. Unfortunately, economic cycles do not work this way and it is my contention that France is about to enter what was known during the gold standard era as a “secondary depression.” The rigid design of the euro system means the whole eurozone is prone to the kind of brutal cyclical adjustments seen in that hard money era of the 19th and early 20th centuries. But having reached the logical limits of its decades long experiment in state-run welfare-capitalism France is far more exposed than even its struggling neighbors.
By way of refresher the typical economic cycle during the gold standard era ran something like this:
– The first phase of the cycle sees investors respond to strongly positive returns on capital by bidding up the value of assets and boosting leverage. Banks loosen their lending standards, genuine entrepreneurs and charlatans become indistinguishable and commentators declare that some new innovation means this time is “different”. The scarcest commodity during this period of plenty is memory of past cycles.
– The first signal that the cycle has turned is a market “panic”. The trigger is the realization among market participants that the return on invested capital has fallen below the cost of capital. This shock adjustment phase usually lasts a few months at most, and is associated with collapsing asset markets together with a number of bankruptcies in the financial system.
– An end to the acute phase of the crisis is usually accompanied by a collapse in interest rates, causing market participants to conclude that normal business conditions have resumed. A massive relief rally usually ensues.
– What follows is the far more serious secondary depression which unfolds like a creeping hangover after an indulgent night on the town. This capitulation materializes as investors come to realize that the prevailing ROIC has remained below the cost of capital. Back in the gold standard era, such secondary depressions usually lasted three to five years and accounted for most investment losses.