Russell Napier: «We Are Entering a Time of Financial Repression»

Otroligt intressant intervju med Russel Napier, som varit i deflationscampet i många år och “bytte sida” under förra året.

Några utdrag

But mind you: The most important part of my forecast is not the inflation rate per se. It’s that interest rates will not be allowed to reflect that rate of inflation. That is what changes the entire structure of finance. This is the key question: Will interest rates, short and long, be allowed to reflect 4% inflation? My answer is No. This is because we will be entering a period of financial repression, where governments keep interest rates below the rate of inflation, just like after World War II.

Centralbankerna blir allt mer oviktiga i skapandet av pengar

And central banks will have no say in the management of broad money growth?

No, they won’t. This is exactly what happened after World War II. Central banks were impotent during that time. The supply of money was dictated by governments controlling the commercial banking system. I strongly believe that we’re going back to that system. The government can never tell you that, because the whole point of financial repression is to steal money from savers slowly. But this is a fantastic thing for politicians: It isn’t fiscal spending, it isn’t higher taxation, it’s a contingent liability on the government’s balance sheet but not an actual liability. It creates politically directed growth, and it creates inflation. For politicians, it’s the magic money tree.

Vidare

I think central banks are irrelevant, because they don’t control the growth of money anymore. Of course, when you have a regime change, people will keep looking at the old regime. Investors still take their leads from central bankers. But look at the British Covid bounce-back loans: The government has dictated the quantity, the interest rate, the duration, and the credit risk. What role does the Bank of England have to stop that? None. All the tools central banks have are fairly meaningless should governments continue to dictate the extension of bank credit on the terms they deem necessary. The power is gone from central banks. The most important call I’m making is that the institutions investors thought were important are in fact irrelevant.

Om hans “sidbyte” (:slight_smile: )

Why are yields not just signalling that they are not convinced that inflation is going to stick?

As you know, I was on the deflation side of the argument for 25 years. The reason I changed is because the structure has changed. Banks didn’t lend up until 2019, broad money was stagnant, velocity fell, so you had to be on the deflation side. But now banks do lend, because they are compelled to by the government, broad money is growing, and, as we will find out, the velocity of money will be rising. That’s why I’m in the inflation camp now.

Om att regeringar kommer tvinga institutioner att köpa statsobligationer för att hålla nere räntenivåerna och inte genom Yield Curve Control -

So you say it’s the governments that will put a cap on bond yields, not central banks through a policy of yield curve control?

Yes, and that’s important. It comes in two stages. In the first stage, the one we are living through now, bond yields are largely driven by the central banks. But there will come a time when they don’t want to continue QE as it is a pledge to add unlimited liquidity which is dangerous when market participants believe in higher inflation. Many people think yields will shoot up once central banks stop buying bonds.

Won’t they?

No, because then the government will force savings institutions to buy bonds. That’s stage two of bond yield control. Mind you, the transition from stage one to stage two won’t be smooth. Legislation will have to be passed to allow governments to in effect allocate private sector savings through greater control over regulated financial institutions. So there could be a period where bond yields rise too quickly and markets will panic. But ultimately governments will cap interest rates by using the savings system. Just like they did after World War II. In basically all our economies, our total government and private sector debt to GDP is above 1945 levels. Why should we not expect governments to use the same mechanisms they used after the war to get those debt levels down? It is a transfer of wealth from savers, forced to own fixed interest securities on low yields, to debtors who see their revenue rise with inflation while their interest payments remain low.

Era tankar? :slight_smile:

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Hur ska portföljen se ut för att hedga om denna gosse har rätt eller delvis rätt?

Jag hade nog inte agerat på någon specifik persons synsätt men i artikeln nämner han detta -

What will cause velocity to take off?

When people decide their savings can’t be sustained and do something with it. This will happen when the government starts to cap bond yields at a level permanently below inflation.

Won’t this just provoke another leg up in real assets, like equities?

Yes. That’s why I’m bullish on equities and real estate. As the experience during the three decades after World War II has shown, in the early stages of financial repression, equities and real estate are beneficiaries.

So let’s take the playbook after the war: For about twenty years, we saw high nominal growth, followed by a long period of stagflation. What are we looking at today?

For the average guy in the street, financial repression can look quite good. Let’s say your wage is going up at 5%, and your mortgage rate is 3%. This is not a bad world to be in at all, arguably for the majority of the population even if their wages only grow in line with inflation. The person who pays the price for this is the saver.

It was a fantastic time for equities, though.

Absolutely, if you had been in equities during that time, you did very well. That’s why I’m bullish for equities today. However, there is one crucial difference: At the end of the war, the yield on ten year Treasuries was 2,5%, and the dividend yield for equities was 10%. Equities started the period of financial repression at dirt cheap valuations. From 1945 to 1966, you had this catch-up where the cyclically-adjusted P/E went from 9x to 25x. Today, equities enter this period at an already very rich valuation.

Do you expect a repeat of this pattern, first a boom, and then stagflation?

Yes, but I wouldn’t expect the boom phase to last that long. So even though I’m bullish for equities at the moment, the difference this time is they start at an overvaluation, rather than at an undervaluation. A repeat of the long boom from 1945 to 1966 for equities is unlikely.

How long can the good times last?

The first stage can go on for three or four years. That’s short compared to after World War II, but it’s long for many people. The time to sell equities is when governments formally force savings institutions to buy more bonds. Because in order to buy, they will have to sell equities.

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