The age of Inflation- Why I changed my view after 25 years- Russell Napier

Russell Napier had a concall today in which he outlined his views. He is the best known DEFLATIONIST in the world along with Albert Edwards . I have been following his work for almost a decade and when he wrote an article few days back that developed world inflation could touch 4% by 2021 I was intrigued.

Summary of his views below

  • Credit Guarantees offered by government over bank lending revolutionary because broad money growth will exceed 10% for foreseeable future.
  • Money created by Govts vs by Banks is the difference this time.
  • Developed world Inflation to exceed 4% by Next Year as velocity normalises to pre GFC level.
  •  QE did not lead to growth in GDP but only DEBT to GDP increased.
  • Central Bankers Don’t have control of money supply.
  • Government is now taking Contingent Liability and offering to bail out any default on principal thereby banks are now creating money.
  • Senior Bankers have told FT that these forced lending loans will result 50 % of them will likely go bad, also the average tenor of these loans are around 6 years.
  • Bank Credit guarantee solves problems of QE which did not lead in increase in lending to real sector.
  • The green loans and reconstruction loans are the real money magic tree and politicians will not relinquish this power, most severe in Europe as 19 countries printing money without any coordination.
  • Euro will thus cease to exist due to excess printing and capital controls.
  • US will be last holdout due to property rights, dollar will strengthen vs Euro
  • EM ‘s getting through this especially countries without foreign denominated currency loans, financial restrictions and debt to gdp does not go above 200% will attract capital.
  • US M2, China M2 and Eurozone M3 to go even higher backed by Credit guarantee schemes and can continue for some time.
  • China has limits to what it can do and will thereby have a flexible exchange rate.
  • Japanese equities can be a winner due to inflation emerging.
  • Non-Bank Credit will get capped by forcing institutions to buy more government bonds and ratchet up transaction tax etc and will thus have to sell their current holdings which can bode consequences for equity prices both ways.
  • Velocity was down due to QE, because if you exchange new money for an asset there is a high chance the next transaction will also be used to buy an asset rather than goods or services .
  • US broad money grows by above 10% and thereby velocity will go up.
  • All these events are bad for bonds although in near term they can sustain value as regime changes
  • Yield curve control because of higher inflation is like throwing fuel on fire, worked previously because early yield curve events were when there was deflation.
  • Federal Reserve will force savings institutions to buy bonds and use them for yield control and these institutions may thus have to sell equities.
  • US residential real estate is reasonably valued with respect to wages and thereby can gain.
  • Major Reallocation of wealth from lenders to borrowers will happen and will be enforced by financial repression.
  • Equities that were pilloried before will be good to buy for example Japan , because of higher real returns.
  • From a 10-year perspective prefer first Japanese equity ( high gearing with higher sales growth) and then EM equities. Very bullish on India
  • Prefer GOLD to GOLD miners
  • There were two forces of deflation 1. China and 2. Technology. In the new cold war china is now taken out of equation
  • Will not invest in Russia or china because you might be thinking of return on capital but my worry is return of capital
  • India is the biggest beneficiary of new cold war between US and china
  • Prefer mortgages to commercial real estate or private equity because govt guaranteed credit will favor voters to keep “American dream going”
  • Prefer chemical/petrochemical/cement/steel/supermarkets
  • Prefer banks in short term but in long term govt “running banks is not good”

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