CCA 40 take-off and pension reform in France: these are the two hot topics of the moment. And, as crazy as it sounds, there is a significant link between these two events: they are, like each other, poker moves particularly dangerous. Indeed, lasting blockages in the French economy and a failed reform of the retreats could lead to an economic, social and political crisis in France with serious lasting consequences for businesses and individuals. And this, especially as the morale of the French people remains at historic lows (source Insee, see graph below) and that the middle class has become very impoverished with the surge in inflation in 2022.
In other words, the extent of the mobilization against the pension reform is less related to it than to the general frustration of citizens, after several quarters of declining purchasing power. Furthermore, in a country where the economic culture is very weak and often diverted to the advantage of the “class struggle”, the French find it hard to understand why it is necessary to fill a pension deficit of around 12 billion euros a year, while from Then At the beginning of 2020, the French public debt rose by 581.9 billion euros.
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As we have consistently denounced for two years, French executives simply end up suffering the excesses of “whatever the cost” and handing out checks at the slightest nuisance. He short-term choices that led people to believe that “magic money” really existed and was “falling from the sky”. By dint of having used the strategy of “denial of reality” and the permanent “headlong rush” at will, the time has therefore come to pay the bills.
Furthermore, as we explained last week in these same columns, the economic cost of a day of hard strike (i.e. with the blockage of transport and the national economy) fluctuates between 1.5 and 2 billion euros of wealth creation ( i.e. GDP ) less. But beware, if social conflicts multiply and bog down, the economic cost could rise rapidly, exacerbating the recession that has taken hold in France since the fourth quarter of 2022. A development which obviously would not fail to weigh on the increase in corporate bankruptcies , then on unemployment.
And all this for what? For a reform which, even if passed, will not definitively save the French pay-as-you-go pension. Indeed, like all the pension “reforms” implemented in France for more than 20 years, the one being proposed to us today is based on an annual economic growth of at least 2% and an unemployment rate of 5%. However, the structural growth of the French economy is at most 0.9% and the unemployment rate is around 7.3% according to the International Labor Office meaning.
Much more serious, it reaches 12.6% if we include the unemployment halo (i.e. people who are out of work but are unavailable and/or not actively looking) and 16.5% if we include the part-time unemployed. This shows the extent of the damage to current and future social security contributions and pensions…
Full board for employees
In other words, the wager of a reform could cost the entire French economy dearly. Moreover, if the latter collapses due to the lockdowns and if, faced with the extent of the damage, the pension reform is canceled or emptied of its meager substance, the credibility of the French government on its ability to modernize the national economy will be still strongly weakened, which will weigh on the rise in interest rates on government bonds. Already painful, the recession will then worsen and a new public debt crisis will unleash in France, then throughout the euro area, which will eventually weigh negatively on the equity markets.
The recent bet of many investors on the stock market rebound could therefore soon be undone. Even more so if the global recession persists and if inflation remains high. After rising 9% since January 2, 2023 and 24% since its low in September 2022, the CCA 40 it could then drop sharply.
In this regard, let’s not forget that the value of a share reflects discounted future dividends, i.e. divided by the interest rate. If the recession starts, the former will decrease while the latter will further increase, in particular due to the continued high inflation. However, if the numerator goes down while the denominator goes up, the result, in this case the stock price, automatically regresses.
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Furthermore, let us not forget that the Price Earning Ratio (PER) of the CAC 40 (i.e. the value of shares relative to earnings) is around 24, against an empirically considered normal level of 12. Some companies listed in Paris even show much higher values PER: 52 for Hermès, 34 for Safran, 33 for L’Oréal, 26 for LVMH and Vivendi… Enough to warrant fine corrections.
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Finally, the sharp rebound in the price of gold, to over $1,900 an ounce in recent days, clearly shows that investors remain concerned and that a mini-crash could soon be imposed on the stock market. Both on the pension reform front, which risks provoking a serious economic, political and social crisis in our “sweet France”, and also in terms of an excessive surge in the stock market, the respective poker maneuvers of the French government and many financial operators could therefore prove to be losers. Continues…
Marc Touati, economist, president of ACDEFI company, author of 8 economic best sellers, including “RESET II – Welcome to the world after”, leading economic essay sales on Amazon since its release on September 1, 2022
You can also find his video chronicles at his Youtube channel the latest of which: Pension Reform and the Stock Market Rebound: Dangerous Poker Maneuvers