Russell Napier: deflationary bust coming – hold cash and buy at the bottom
Also see our recent interview with Russell Napier
0:00hi I’m arrogance that web and I am here today with Russell nhli via russia
0:09usually strategist at CLSA or should I say these tracks just say anything but
0:13he’s recently launched his own business so first we talked about that I’m gonna
0:16talk equipment markets so Russell tell me about your new business businesses
0:21continuation of the old which has me writing independent research and
0:25marketing out to institutional investors business three years almost a second
0:30business which is how that researchers distributed distributed through a
0:33platform called Eric so most of the people watching this one though the FCA
0:38is very keen that we own bundle research from commissions and explain what that
0:42means to her
0:43retailed you should so most of the institutions of your viewers how their
0:48money was received research for free but it’s not for free because in return they
0:53deal with her stockbroker and they’re paying a higher position because I
0:57researchers coming in and they would do if they weren’t getting any commission
1:00so have CA the stock brokers using his client’s money to get the research so
1:07thinking I’m still up
1:08future your fun National basic research not even directly through your
1:13commission so the website is there to offer unbundled individually priced
1:18research for summer shoes combine it with her own my clients money to think
1:25they buy things with our money while there are some good idea because they’re
1:32not enamored with the holding cell research which comes through the looking
1:36to do you think they’re paying for a huge bundle stuff and using a small
1:39percentage of it but of course the problems with the regular thinks that
1:44you have with their own
1:45and regular season still managed to keep going on this issue so they may not have
1:49a choice as a result of this be the week as a monkey get less research and
1:55research institutions will get less research for sure and they should get
2:02better research paper they can make sure that they get from the market
2:08poses meyerson is the kind of research before my 85% I think fifteen percent of
2:14its good anyway whether we can improve the quality of I think we could improve
2:18the independence of it for sure sure most people watching this will know
2:22there are certain conflict of interest for stock I was working with inside
2:25broking companies which should be significantly diminish four-star
2:28homeless what can I say booking company so independence is potentially at least
2:32a holiday I think we’re very clear to go up now
2:37jewellery said to be very keenly watched for yes your institutional clients
2:42you’re ordered usual kind can now get it on the area but I think the problem here
2:46is that read how does not married his way up as a platform for regular
2:54investors and of course any host who’s writing or something like it as well as
2:58unfortunate company open to members of the public
3:02from my readers we have you here today to tell us what you’re thinking about at
3:10the moment yes you are a firm belief as I understand it in in the idea that we
3:23live in a deflationary environment a little is nothing that you can do to
3:27change that a little bit about life in that is what why where to place where
3:32violent sure building blocks of this justify going to those two reasonably in
3:38recent time of deflation is not because supply is beginning to mind that’s not a
3:44dangerous deflation my life she said that maybe it’s because at some stage in
3:48that transition from station Dunbar’s we have a credit event which creates a
3:54shock to the financial system of course that’s famously what happened 2008 2009
3:58but what happened in 1998 with russia now don’t LPCM indictment in 1982 of
4:04Mexico into the banking system so we talk about deflation don’t want to go
4:08home prices in the answer is that usually somethings corporate cash flow
4:13somebody was my problem you get a credit event that’s the way it goes for the
4:17country very large financial institution but I can we turn in the country from we
4:23can you name a few
4:25so that’s why it’s important that’s why that’s what’s left it up to the big
4:29deflationary forces are there is a significant reduction in China right
4:33well documented
4:34I think that probably the biggest one is that the aging of the baby boom
4:38generation away from consumption to see if perhaps even more important detail
4:43what that means for the efficacy of monetary policy going forward and just a
4:48short run a strong dollar is strong dollars always been bad for people who
4:52like $2 forcing them to a tighter monetary policy I could go on all the
4:57forces of deflation technology we can talk about four or the deflation impact
5:02of technology on there are many many of them to demographics you partly blaming
5:08the deflation reimposing the global economy on baby boomers in america Gary
5:13yes look at america the beautiful moments as it is everywhere if you look
5:18at the balance sheet of the baby boomers something happens this Christmas house
5:24or 31st of December up midnight there will not be able to run the world is
5:28less than 50-50 so people always think they’re retiring they’re not retire at
5:34sixty 9259 they’re preparing to retire
5:38hoping to retire on the symbol of retirement is retired whatever don’t
5:41retire but turns out not only other demographic bulge they are being
5:46dominant customer Michael system to go back to my money is created by banks
5:53extending credit deposits and if the biggest customer is seeking for
6:00structural demographic reasons and is going to be pretty difficult for
6:03monetary policy to general is money that we need to consider my our debt so 56
6:08years ago general hugh was look at this monetary policy the central bank’s lots
6:12of money
6:13work why does the bank’s hot
6:15lent the money common diagnosis of you want to lend money but I think people
6:20are getting a very strong headwind want to repeat it does now we’ve been here
6:26before with demographics and deflation in Japan this week that explains what
6:31should I meet you gotta remember the defense but fifteen years and at times
6:33the demographics demographic December 1990 this is this could be one of the
6:38reasons why he’s not as powerful as it used to be I think the way you should
6:43look at which is a way of it looked up by the man who invented it is that it’s
6:48the only machine but not the accelerator so what Fisher said is there some time
6:53to the society has to be here is not sure I would say that’s wrong with the
6:56baby boom generation if you don’t create money later when you get in 1929 1932
7:02experience and Scioscia said the central bank has to be in there creating money
7:05as the credit comes down and that we do get these are high pressure and high
7:11dislocations that we had June 29 32 trip but not extend I think wanted a visa has
7:16succeeded to the extent that some private sectors not all of them but some
7:20particular American private sector those also goes smoothly 30 smoothly kiki is
7:26excessive quantity but it hasn’t anybody to hear it hasn’t shared growth is done
7:32Fisher said it has but it hasn’t done with the current which is pushing back
7:38into those of normal GDP growth to GDP ratio start to decline it certainly
7:43wasn’t hero
7:44disaster but it can’t improve the underlying
7:49inflation was designed to stop it that deflation and see who succeeded
7:55everything else is it doesn’t seem to be succeeding in that case it is there
8:00anything else that the central banks can do to create inflation are always did I
8:07get ten years on from the show inflation I’m sure we should know most people will
8:11be another growth with that democracies will be getting out of debt and they’re
8:15trying to Jewish law way I think they’ll attributable to the People’s Bank of
8:21China not to the Federal Reserve’s monetary policy which can generate
8:25central bank policy which can generate money and it says they obviously it’s
8:31like a Chinese are you having a generation who are that’s a proven some
8:36shoes like him as a player of his generation of China and if we could get
8:40consumer debt flowing to them and consume a lot and we very very easy for
8:46China tough 40% money supply growth within a year you’re not if they choose
8:51to do it i think thats why we China could potentially be fit to all but
8:55here’s the catch
8:56highly unlikely to do that but i bothering the currency in the process so
9:01that’s something we have to go through I believe evaluations the Chinese currency
9:05but the good news is that concept the field for true independent monetary
9:09policy in China an end to their lowest price export system a move towards
9:14consumerism but we can’t get that move until we change the monetary policy they
9:19will have to live through devaluation of the currency what do you mean what what
9:24what the impact
9:26old enough to live through the last one so I witnessed the last one man asked
9:30what happened john was a much smaller economy of the implications of that
9:33China can dramatically competitive undermine all competitors and was
9:38directly responsible for the asian crisis directly responsible for the 10
9:44Russian directly responsible for problems in Latin America while the
9:47initial drop in the change exchange with a huge deflation repulsed the world’s
9:53from all public goods price $2.00 the even in the end we gotta go either
10:01politically or economically I think we should try to do that because it’s gonna
10:06be very painful but if the repercussions of that are China which could use a
10:10genuine expansion is to the mound I’m not supplied does remember that the
10:15history of their last few business cycles has been creating more supply if
10:20we can shift to supply we’ve got a hold on and get through the difficult
10:23difficult very difficult to six years of quantitative easing get deflation anyway
10:28I get some people quite concerned we do then
10:33and apart from that would you put more quantitative easing from the Fed
10:37realizes at this point that it’s not like he’s done and I should point you
10:43have to keep doing it cuz you have to keep reminding growing necessary but not
10:47sufficient
10:48no you asked is there anything else that monetary policy on china doll things
10:53policy can do elsewhere so far depicting most likely thing to happen to reflect
10:58United States of America
11:00it would be the forgiveness of debt that is a monetary policy fiscal policy
11:05the Federal Reserve can do that they need the government to do that I want
11:08america has a government to find out
11:10can do that but I think the time is coming when given a simple choice do we
11:14extend this into my balance sheet by one trillion dollars worth of wealthy
11:19people’s assets or do they move one trillion dollars in student debt from
11:23student onto the state that will take the second decision not the first
11:27decision of the first things you will do you forget the trillion dollars of debt
11:31is part of a trillion dollars dotson cover when it becomes politically
11:36acceptable who knows but I suspect the time is not far away but the focus falls
11:40on battery for all investors believe that the only thing that could happen
11:45from here on in your policy more buying up their assets everybody says his
11:51welfare there are other ways but the fiscal the government policy fiscal
11:58policy anyway because it’ll aircraft as well
12:01well yeah I mean we all we have served in 2012 with a true independence and the
12:06bunkers us to question of the city’s you question their independence you question
12:10whether they’re part of fiscal policy but when this happens how does this
12:16happen what what makes China decide to briefly to save the world they’re trying
12:21to
12:22incredibly strange financial system and that they have retained the command
12:25economy banking system changed many things in China but held onto that
12:29they’ve had an economy which has grown women is a flight was going to double
12:33nominal GDP so it’s an economy with a command economy banking system just
12:37needed a huge amount of money to grow at this stage in the supply closet start a
12:41trend that suggests we’re seeing this historically that the financial system
12:45may begin to create the edges but maybe not that stable it may be unstable
12:49whether it’s the formal system of the internal systems things might start to
12:54grow as a very simple playbook for that we’ve seen it in 2008 2009 he said over
12:59and over again what are you doing the financial system starts to creep that
13:02looks like it might crack them on capitol might decline to print money to
13:07print money and other exchange rate target to massively increase the supply
13:11of currency it’s most likely that it’ll most likely to exchange rates will come
13:16down so I think they’ll go to america to attend I don’t harm in the trial but we
13:22do not attempt to promote ok let’s try that Americans occurrences you look we
13:29had that happen because we didn’t have that happen or financial system would be
13:32in trouble and that’s exactly what you did thats the PlayBook which I know when
13:37the time is necessary to come to value the currency since 1994 over so that it
13:42could be that a co-op a little bit older but we don’t like the currency the
13:47dollar lower level and just sit back forever and high x Boku forever
13:51it would be a wonderful policy but it doesn’t work that way because eventually
13:54you get internal investigation which makes you want to talk about it that’s
13:57what Chinese today so it is a matter of time to currency when you lose your cool
14:04that you talked about how the next great man like it would play out how does that
14:13translate into your view on the market but fortunately when the 2009 edition
14:19actually put in the preface actually gonna go up first so there were signs
14:27that the deflationary expectations were overdone that inflation is coming back
14:30from injury huge rally in the bond market well it’s been a better route for
14:35sure because I thought that was probably come to him by the middle of 2011
14:38deflation like that would inevitably bring the market gonna go but it is what
14:46it has come to market equities and commodity prices peak in September 2011
14:55so some things out in a bear market since 2011 but clearly not unlike what
15:01he’s so someone said to me once you get everything right except the market given
15:05them my job is to get the market right that’s not great consolation so then
15:08roll in the market for three years so what are some financial history is the
15:13thing that can be done quickly as deflation runaway inflation tends to
15:17bring them down more slowly just see so much evidence of the deflation either
15:21that I think that’s what brings them died and three years we’ve been one that
15:26will be right that makes it right
15:31says deflation around you expect more deflation said I am markets come down
15:37already this presumably is down
15:39printing keitel US dollar charge $2 my brain injury in the last three or four
15:48months so it’s really become strong and really become very strong broke up and
15:53the opposition that’s the kind of that factors but $1 dollar stores to go out
15:58thats what you say this this could get a time so that’s why what’s so important
16:02about the dollar but there’s so many people who link occurrences $2 so if
16:06you’re late response to a strong currency and you have to force your
16:09current job in line with a dollar that on the whole forces you to tighten
16:12monetary policy but what’s the highly bar on cross border so that was fun
16:18being bored I would take the money and invest it be invested in Indian currency
16:24competitive position reality use it to fund assets purchases into occurrences
16:30of undeveloped starts going up effectively short $2 there’s no prudent
16:35financial history from Daniel drew on the first quiz speculators it was like
16:39this it says he who sells what isn’t his goes to prison for $1 billion RMB on the
16:48dollar store is coming up your board is going to say don’t have a hundred
16:52percent of it back up a little bit of it so it is very reputable financial
16:56history for spying of the dollar as people seem to cover and if you look at
17:01the chart of the door locks
17:02forecast of currencies incredibly difficult until you get four spires is
17:08beginning to look like there’s nothing in the historical record it suggests
17:11emerging markets worldwide that this is always been the time and they got into
17:15trouble so the forecasters are three years ago
17:19deflation not inflation but the thing that might mean this is the time is the
17:24strong dollar so how do we have asked what you mean you’re right which I’m
17:27sure he was simply to do we have enough to deal with it thanks to realize that
17:33the beauty of being a private investor is that you can do nothing but I don’t
17:38believe you watching this would not agree with that but believe me your
17:40options are significantly stronger than the Ripley deliver professional investor
17:44but if there’s no such thing as nothing is nothing is holding cash this is not a
17:49nothing that’s what I mean by doing nothing in a period unless you them to
17:53completely wrong hands around the dissolution of course I could be in that
17:57that’s really not sure you don’t touch low-inflation I think most people would
18:02agree with a period of low inflation you’re losing something on cash perhaps
18:06a little cash it’s a cool and I’m trying to find out more read this but he wants
18:11it to the greatest cause of the stress I don’t remember this feeling that they
18:15have to do something differently when he said something very similar so what
18:20happens with what he thought was good as I think it remains good advice you have
18:24to wait for that opportunity and I look back to the in financial history started
18:29before or to the great financial success stories the great wealth accumulated
18:33people who count on the bottom to buy it when it was rockefeller
18:37JPMorgan melon that all ended post one or two because we never had deflation
18:42having all that money to buy assets cheap assets from distressed sellers
18:46hasn’t really been budgeted policy in the post-world war two it never live
18:50with the period of deflation if you’re like me you genuinely pleased about
18:53deflation is coming then you get from the playbook of melon rockefeller more
18:59than when you’re ready to buy so it’s not doing nothing that you saving cash
19:05but the insulation systems you get you wet tropical the pitch counts very very
19:14few fuck bitches are there were deflation will be quite a few dozen
19:20Japanese equities hedgecock into the dollar apart from that is pretty much
19:24cash rich Chinese equities the basis of this wonderful consumption boom coming
19:28I’ve never owned Chinese equities and probably never will I think my problem
19:36is I started I was not a stock market forecasters expect your order to be able
19:42to call me I no longer looks just like you a lawyer says is this
19:47and today that I told my benefit and the answer to Chinese equity in many cases
19:54but all is no I’m by putting my savings today which isn’t generating profits
20:03from my benefit why would a baller I’m sure I could someone pick the ones that
20:09there’s something clearly on the whole they don’t therefore I don’t want to be
20:14involved I’m guessing there’s not a day that goes by
20:18done is the correct answer is there anybody at all the UAW Department of
20:30people should be people should know that I still have money in all the markets
20:32because I might be wrong
20:34lights of a little waiting inside what it is a huge percentage that I is public
20:40knowledge beyond the borders to investment trust and they are global
20:42investment trusts because of a director of my channel to disclose about money
20:46invested across the globe stock market but it’s not a huge percentage I think
20:51even those berries person in the world would probably health twenty thirty
20:54percent of the money on equities because you might be long just a little bit was
21:01not very much because its decisions for three years now I’ve not been killed
21:05gold but it’s a big very big but some stage if monetary policy doesn’t work we
21:11get something else that’s gonna be government activism some form that’s
21:15what we discussed just got the context of forgiveness is dead but it could be
21:20something else I could be exchanged good product that’s right onto the water
21:23could be there when you needed government activism and I think that’s a
21:28potential chance about green figure it’s cool because obviously it’s a pompous
21:32skater issue of people believe that the state is in the business of confiscating
21:36the assets not meet people everyday you don’t have to see it in action for them
21:41to believe it becomes a prevalent view that even the word deflation is likely
21:46price will go up so people would say what you will about what you actually
21:52see this as a deflation is to shoot if it starts to treat up on bad news that
21:59it’s in a very long bull market because the tender and that the government does
22:03it and then the government finally gets us back to one filled with milk
22:07inflation is very good for so I think you know something to try to control
22:12interest all over you what you treat them bad news I’m not surprised but
22:17doesn’t look like the recently which is where you can set up your librarian at
22:23the library mistakes which is jammed full of books all financial disaster
22:28would imagine what the next group of cells will be filled with what’s going
22:33to be the subject of one thing I’ve learned in the lab mystics is that when
22:37I was dangerous times and financial history is when people began income and
22:40they choose yield a particular something magic about 5% you see this in the
22:44novels and oxygen Austin but it’s the people in interest rates cool well below
22:485% is the people who choose to 5% who end up with financial ruin
22:51I believe we have an exact modern equivalent of that which is pensioners
22:55here chasing yield and emerging market debt and they’ve been sold this is a
22:59thirty CAF low-risk investment or they can get the magical 5% that everybody
23:04needs to live on their many many reasons why that isn’t the case
23:08financial history is littered with examples of companies and corporations
23:11have more than one currency first another currency they get in get into
23:15trouble if I can Benjamin Graham’s postwar publication Intelligent Investor
23:19if you look at that this is the first rule is never lend money to foreign
23:24governments well this isn’t worse than foreign governments before foreign
23:27corporations so the strong dollar coming along as well as bringing that home to
23:32roost not particularly worrisome is the way we packaged it was that rests an
23:36open-ended funds the history of lending to emerging markets really by debt and
23:40if one company went bad we didn’t bankers did
23:43necessarily pull their money from the other countries but when you put this
23:46stuff into an open-ended funds and let’s pick a country like ukraine for instance
23:51that could possibly pay you back it may not be possible to liquidate the
23:55Ukrainian tyler Summitt may simply not be a market for that so the man who runs
24:00the fun of the woman who runs the fund when the redemption comes finds himself
24:03liquidating something else so the words contagious when you when you pop it
24:07something like this can be an inherently contagious as to how this spreads and I
24:12believe that’s what we don’t think that will clearly have a role to play in the
24:16in the state’s going forward which is how come the world’s developed world
24:20pensioners thought it was safe to lend money to some of the most dangerous and
24:28risky governments and corporates in the world and other dangerous and risky for
24:33one simple reason they borrowed one currency invested $10 it’s always been
24:37dangerous coming home to roost and maybe we should have it on your prize an
24:42inductee into the language mistakes
24:45jesus never have enough she’ll think you can summarize that I say there is
24:52division there will be more deflation for lots of cash in case your role and
24:56never take your eye off gold
24:58nothing wrong doing nothing thank you I think that we’re at the start of that
25:09kind of decline now as I think indeed very soon we will be there started out
25:14in the stock market
