“Stock market boom and pension reform are two high-risk bets”

The launch of the CAC 40 and the pension reform in France: these are two hot topics of the moment. And as crazy as it may seem, there is a significant connection between these two events: one, like the other, is a particularly dangerous poker move. Indeed, continued blockages in the French economy and failed pension reform could lead to an economic, social and political crisis with serious lasting consequences for businesses and individuals in France. And this, especially with the morale of the French people remaining at an almost historic low (source Insee, see graph below) and the middle class greatly impoverished in 2022 with inflation.

In other words, the magnitude of the mobilization against the pension reform has less to do with the latter than with the general disillusionment of citizens after several quarters of declining purchasing power. In addition, in a country with a very poor economic culture and often biased in favor of “class struggle”, the French find it difficult to understand why it is necessary to fill a pension deficit of around 12 billion euros a year. At the beginning of 2020, France’s public debt increased by 581.9 billion euros.


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Evolution of the INSEE confidence index ACDEFI (Sources: INSEE, ACDEFI)

As we have been constantly condemning for two years, French leaders are simply overdoing it “at all costs” and end up handing out checks at the slightest provocation. Short-term options that make people believe that “magic money” really exists and that it “falls out of the sky”. Inevitably, using the strategy of “reality denial” and a constant “head-to-head rush,” it’s time to pay the bills.

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Moreover, as we explained in the same columns last week, the economic cost of a heavy holiday (that is, with traffic and national economy congestion) in wealth creation (or GDP) varies between 1, 5 and 2 billion euros. ) is less. But beware, if social conflicts multiply and become bogged down, the economic costs could rise rapidly, worsening France’s ongoing recession since the fourth quarter of 2022. This obviously cannot be attributed to the increase in business failures. , then about unemployment.

And why all this? For a reform that, even if passed, would not allow the French to definitively save their pay-as-you-go pension. Indeed, like all the pension “reforms” implemented in France for more than 20 years, what we are being offered 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 best 0.9%, and the unemployment rate is around 7.3% according to the International Labor Office.

More seriously, it rises to 12.6% if we include the unemployment halo (that is, people without a job but not available and/or not actively looking), and 16.5% if the underemployed are included. This shows the extent of damage to pension savings, current and future pensions…


Full pension for employees

In other words, the reform gamble could cost the French economy as a whole. Furthermore, if the latter collapses due to congestion and faces the scale of the damage, the pension reform is canceled or its meager substance is drained, the French government’s confidence in its ability to modernize the national economy will be diminished. is still strongly weakened, which will affect the increase in interest rates on government bonds. The already painful recession will then worsen and a new sovereign debt crisis will begin in France and then throughout the eurozone, which will have a negative impact on stock markets.

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Many investors’ recent bets on a rebound in the stock market could quickly be thwarted. And more if the global recession continues and inflation remains high. After rising 9% since January 2, 2023 and 24% since September 2022, the CAC 40 could fall sharply.

CAC 40: price evolution ACDEFI (Sources: Euronext, ACDEFI)

In this regard, let’s not forget that the value of a share reflects future dividends discounted, that is, divided by the interest rate. If a recession begins, the former will decrease and the latter will increase, especially due to continued high inflation. But if the numerator falls while the denominator rises, the result, in this case the stock price, automatically falls.


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Also, let’s not forget that the CAC 40’s Price Earnings Ratio (PER) (i.e. the stock’s value relative to earnings) is close to 24 versus the empirically normal level of 12. Some companies listed in Paris even show higher figures. PERs: 52 for Hermès, 34 for Safran, 33 for L’Oréal, 26 for LVMH and Vivendi… Enough to justify subtle adjustments.


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Finally, the strong jump in gold prices over $1,900 per ounce in recent days clearly indicates that investors remain concerned and that a small market crash may soon be in store. Whether on the pension reform front, which could lead to a major economic, political and social crisis in our “sweet France”, or in terms of excessive growth in the stock market, the corresponding poker moves of the French government and many financial operators may therefore be. to prove themselves defeated. To be continued…

Marc Touati, economist, president of the ACDEFI firm, author of 8 economic bestsellers, including “RESET II – Welcome to the Next World”, leading sales of economic essays on Amazon as of September 1, 2022

Mark Touati

You can also find his video chronicles his Youtube channel the latest of which is: Pension reform and the stock market revival: dangerous poker moves

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