Describing himself as a financial historian Russell Napier’s talk at the STA’s December meeting was thorough yet refreshing. Willing to cut through jargon, slice and dice received wisdom, hack through complacency, and generally challenge the status quo, he certainly got members to sit up and listen.
The topic: Technical Analysis in an Age of Repression which he describes as ‘stealing money from old people – slowly’. By keeping the yield curve below inflation, currently labelled Quantative Easing, it’s been around for a very long time yet too many have as yet not ‘got it’. He thinks financial markets will work differently as they labour under a mountain of debt.
The ratio of non-financial total (private and government) debt to GDP currently stands at about 250 per cent, which is a new all-time high. He warns though that historical data for private sector debt is poor, as is that for productivity growth. The distribution and totals vary by country, emerging markets generally issuing less sovereign debt but mainly in a foreign currency, which makes them more vulnerable. Germany has by far the lowest and declining total of the Eurozone countries, both private and public, which is at the heart of the current economic struggle in the area. And while they bang on about the key freedoms underpinning EU philosophy, currently Cyprus, Greece (and Iceland) operate capital controls; he wonders if Turkey will be next. Certainly President Erdogan has recently urged his citizens to sell foreign currency holdings and buy the lira.
He notes that deposit insurance creates a massive contingent liability, as Ireland learnt in 2008/2009, and Italy looks set to test the new rules for bank resolution recovery. He also believes that default is seen as an ‘ungentlemanly’ way of sorting out excessive debt, resorted to only by those who don’t own the money printing presses, so inflating one’s way out is preferable.
His investment strategy for the coming year involves selling bonds, buying gold, and preparing for a stronger US dollar. Above all, he concluded that ‘the current monetary system is past its sell-by date’. You have been warned.
PS: A similar speech after the annual dinner of the Association of Investment Companies bombed.