Sobering Stuff

Tyler Durden's picture

Via Tim Price of Sovereign Man blog,

If you want to send a roomful of 100 wealth managers into an icy chill, have Russell Napier address them. This is exactly what happened at Citywire’s Smart Beta retreat at the Four Seasons Hotel in Hampshire recently.

Napier’s presentation, “Deflation in an Age of Fiat Currency,” is thought-provoking, and the precise polar opposite of investing as usual. A wry and picaresque speaker, he starts with some conclusions. Among them:

  • To reach record lows [akin to those on offer in 1921, 1932, 1949 and 1982], US equities will have to fall by more than 60%.
  • Central banks are straining to produce inflation, and developments in emerging markets (i.e. China) suggest a deflation shock is now likely.
  • The capital exodus from China is disrupting the creation of inflation.
  • In the search for yield, cash is trash ‚ so now is the time to own cash. (This is an example of his dry contrarianism.)
  • US Treasuries could repeat their 83% price decline of 1946-1981.

US stock markets aren’t cheap, not by a long chalk. Napier, like us, favors the 10-year cyclically adjusted price / earnings ratio, or CAPE, as the best metric to assess the affordability of the market. Unlike the traditional P/E ratio, CAPE smooths the near-term volatility by taking a 10-year average.

20121204 Chart 12 Sobering Stuff

At around 21, the US market’s CAPE is near the top end of its historic range. There is better news, at least for non-Americans. Other markets, of course, have different
valuations. Current CAPEs include:

  • UK: 12.5x
  • Italy: 7.8x
  • Spain: 8.5x
  • Greece: 1.8x
  • Ireland: 6.0x
  • Portugal: 9.2x
  • Germany: 16.0x
  • China: 18.0x
  • Japan: 21.3x

The S&P 500 stock index currently trades at a level of around 1400. Napier believes it will reach its bear market nadir at around 450, driven by a loss of faith in US Treasury bonds, and in the dollar, by foreigners.

The growth of the Treasury bond market coincided with Baby-Boomers, Medicare and Social Security. Its death will be triggered by falling demand for Treasuries from emerging economies.

And it seems this rollover in the US Treasury market is already under way. Foreign central bank purchases of US treasuries have been in decline since 2009:

20121204 Chart 21 Sobering Stuff

As Napier points out, this coincides with a disturbing decline in the growth rate of China’s foreign reserves.

20121204 Chart 31 Sobering Stuff

In our view, investors’ fortunes will depend on how they survive the bear markets to come. I use the term ‘bear markets’ in the plural because it strikes us as almost a certainty that a grotesque bear market in western government debt is approaching. (If we knew the precise timing we’d already be on the beach.)

And if western government debt craters (pick your poison: US, UK, euro zone, Japan…they all look appalling), stock markets will not be far behind. It is inconceivable to us that equity markets could simply ignore a savage sell-off in the <cough, cough> risk-free markets of the world.

Remember, though, bear markets are not necessarily to be feared. Provided one can survive them, they bring opportunities to create significant wealth. But this is not automatically a rapid process.

As Marc Faber writes in his introduction to Napier’s excellent book, Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms:

“Conventional wisdom has it that great market bottoms, which offer lifetime buying opportunities, occur quite soon after devastating market crashes. But . . . great bear markets have long life-spans. . . At its 1921 low, the Dow Jones Industrial Average was no higher than it had been in 1899, 22 years earlier…”

Sobering stuff indeed.

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DoChenRollingBearing's picture

I used to HATE sobering stuff.  Now not so much.

Pinto Currency's picture


So if stocks are no good, bonds are no good, and cash is no good (due to central bank currency debasement), that leaves commodities and monetary metals.

Or do you buy shares in prison operators and firearms manufacturers.

Cdad's picture

I would hazard a guess that what you have said is EXACTLY why precious metals, specifically, are getting clobbered.  They are the only long that makes any sense in the INTERMEDIATE term.  And so the HFT is going to work on create its perceived CORRECT entry point by pressuring whoever is out there PERMA BULLISH gold....forcing liquidation.  And buy extreme weakness there.


Pinto Currency's picture


Or perhaps the digital price market for gold and silver never moves up according to true supply/demand fundamentals and there is a parallel physical market price for gold/silver purchase in size until the big dislocation hits.

After that it's all physical.

Stuck on Zero's picture

Gold is like a beautiful woman.  Very expensive, but you really want to get physical.


CPL's picture


Be JPM and create an investment scheme closed to the public on the MDAX, offer zero secondary offerings and bet on the destruction of both the Euro and the USD.


Google e49158_fwp.pdf and read it.


Observation Date:
January 17, 2013†
Maturity Date:
January 23, 2013†



The MDAX® Index (the “Index”), converted into U.S. dollars

Payment at Maturity:

Payment at maturity will reflect the performance of the Index, converted into U.S. dollars, subject to the Index Adjustment Factor. Accordingly, at maturity, you will receive an amount per $1,000 principal amount note calculated as follows:

$1,000 × (1 + Index Return) × Index Adjustment Factor

Because the Index Adjustment Factor is 99.75%, you will lose some or all of your investment at maturity if the Index Return is less than approximately 0.25%. For more information on how the Index Adjustment Factor can affect your payment at maturity, please see “What Is the Total Return on the Notes at Maturity, Assuming a Range of Performances for the Index?” in this term sheet.

If the value of the U.S. dollar appreciates against the European Union euro, you may lose some or all of your investment in the notes, even if the Index closing level has increased during the term of the notes. The performance of the Index, converted into U.S. dollars, from the Initial Index Level to the Ending Index Level,

CPL's picture

Weirdest financial thing I've seen in a month.

Global Hunter's picture

you should have seen the look on the teller's faces when I cashed in mine in for cash a few weeks after expiration. 

CPL's picture

Take payment in anything shiny and metal.  Then invest some of that into long term food storage to hedge pricing and inflation a little.

VulpisVulpis's picture

I, for one, welcome our new deflationary overlords.

otto skorzeny's picture

I wish the shit that I actually use would get in a deflationary cycle. Thanks The Bernank.

kaiserhoff's picture

Was talking to a friend about this today at the local cow college.  Bonds get monkey-hammered either way.., massive defaults or value destroyed by inflation/rising rates.  In the very short run, that's great for equities.  Their debt goes away.  The one quarter is my life crowd will love it, but once the downdraft starts, I don't see what stops it.  The Bernanke can't buy everything, although gawd knows he will try.

AGuy's picture

Not sure why the Author believes Bonds will tank:

1. If the world fears deflation, investors will sell equities and buy bonds. Even if the Bond have Negative interest rates because they will believe Equities will sell off with bigger losses than negative yeilds on Bonds. As Marx put it, "Its not the return on my money that concerns me, but the return of my money!"  Also See the Bond inversion when Recessions are beginning

2. Central banks will suppress any meaning full rise in bond yields. Even if that means the Fed purchase $1 Trillion USD in financial assets per month.

What is likely to happen is that investors and consumers will start losing faith in currency, when the CB's buy up 10s of Trillions in Financial assets and the cash is used to buy commodities, land, and AK's. Another probable outcome is a big war to "stimulate" the economy as will as culling off the excess workforces. Of course in the nuclear era, TPTB are likely to cause a massive overshoot in the culling quotas.




michiganmaven's picture

The race to crash is on... Fake Forex, Fake Equities, Fake Gov Rates..... taking all bets !

dynomutt's picture

Silver, bitchez?

otto skorzeny's picture

Is Jack Napier Russell's brother?

A Nanny Moose's picture

He made that pencil dissappear...

Perhaps he was adopted by the Corzine "clan?"

barliman's picture


Great Market Bottoms ARE great lifetime buying opportunites ... but only when markets are allowed to clear through normal creative destruction.

While 2009 should have been such an opportunity, the Federal Reserve stepped in to prevent the Great Market Bottom follow though ...

... now it will take a far greater SET of events to form the next Great MarketS Bottom. Time it right and be very lucky & ruthless, and you could be the next Rothschild.

spankthebernank's picture

The next 'bottom' will look a lot different than anything in the past.  Brokerage, bank and all other forms of money will vanish because of immense amounts of systemic leverage.  There will be a cattle herding of all the weak and penniless to do, or sign, or vote for something that will look like a soft worldwide concentration camp.  I believe something unbelievable is on the way.  That is why this administration is getting america warmed up to the teet and Goldman Sachs has people at every European outpost.  Scary, scary times.

Pairadimes's picture

I disagree. This is definitely not a time to stop drinking.

Winston Churchill's picture

Don't know about drinking,it feels like I've been on a bad acid trip

since 2009.Good is bad.Crooked is better.Nothing makes sense.

kaiserhoff's picture

I have taken more from alcohol than alcohol has taken out of me.

                                                  Winston Churchill

Temporalist's picture

It takes only one drink to get me drunk. The trouble is, I can't remember if it's the thirteenth or the fourteenth.

-George Burns

DoChenRollingBearing's picture

@ Pairadimes

Actually NOW and any hard times are a great time to stop drinking (and sniffing glue for that matter), as you save so much money...

Does that mean (o gawd): Sobriety, bitchez?

BraveSirRobin's picture

You can grow grapes, wheat, hops and barley on arable land.

Super Broccoli's picture

All this speach to explain what everyone already knows ...

q99x2's picture

The Bernank don't need no stinkin Chinaman to be buying US Treasuries. He's going to buy them all fo himself.

I like Greece at 1.8x and TVIX at 75 cent.

Cdad's picture

You know what is so damn refreshing about market bears?  They actually make their cases...and provide good context for them.  Compare them to today's modern market bulls...who simply float thoughts that they have had, general thoughts about a sector, and then tie a long trade to those thoughts.  From there, they simply expect algorithms to grab onto their f'n jibberish and prove them out.

Or even worse, simply parrot the same 10 bullish phrases ever single day [ie stocks are historically cheap, buying opportunity, etc]

There is no comparison between modern day bears and bulls.  And perhaps, even more so than just the absolutely moronic BlowHorn [CNBC] programming that goes on and on, it is this distinction that feeds into the implosion of credibility in the bull camp.  I cannot tell you, even just today, how many patently stupid things I heard today from the perma bulls.

The gem today, and in relation to this particular post, was a raging BlowHorn idiot who said, "Stocks are the new bonds."

Apparently, market bulls think ALL AMERICANS consume mass quantities of fluoride paste, eaten on crackers as a dietary mainstay.  Good grief!  

Bay of Pigs's picture

Speaking of bawnds, UK bond market is now at a 300 year high and the UST market at a 240 year high.

And people talk about a gold "bubble"? Yeah, okay....roger that.


Mr Lennon Hendrix's picture

And they talk about another bubble in stocks.  So the DJ is at 13k?  So what?  It is denominated in dollars and those dollars have no intrinsic value. 

So the crux of the system is bullshit and people want to start talking about how everything is overpriced.  It doesn't make any sense.

Muppet Pimp's picture

And all of the stock certificates at the dtcc have been destroyed....Good Luck with that...reset is virtually assured now, no reason not to get the new system designed...weimar it up so people learn to rely on one another again, and then rebuild communities with the values we know are required to stay free.  We have two years methinks. The drumbeats will get so loud by the year and a half mark (prepper shows, talk of economic calamity, etc.) every average joe will own silver by then.  Then we set sail again like the founders intended.  

Pinto Currency's picture


It doesn't make sense Mr. LH. And I wished it could be reset without a proper mess.

Muppet's scenario is a dislocation and that may well be what is coming.

IllusionOfChoice's picture

These bulls sound like politicians.

tenpanhandle's picture

Sobering stuff?  Why the hell do I want to be sober.  In this monkey mad world where everything is antithetic to common law and common sense and therefore an altered reality, I must keep myself in an altered state so I don't go mad.  Oops, too late for that. 

Ookspay's picture

Lol... Reality is way over rated anyhow. Our society and it's inhabitants much prefer fantasy, distraction and distortion. You gotta give the people what they want, legalize everything!

realtick's picture

"It seems that I have just compared many of the users/members of this site to adolescent girls. This was not my intention but, now that I've done it, I think I'll stick with it. Though it's never a good career move to insult your audience, in this case, a cold slap across the face and some tough love may be cathartic."

Shithead Ferguson

Bay of Pigs's picture

What exactly is your problem anyway?

You have your own blog, so why do you care what Turd does, says or thinks?

Maybe just let it go?

DoChenRollingBearing's picture

+ 1

Yes, Bay.  Bloggers have no need to insult each other.  TF has a gold site that attracts lots of people.  Don`t like his site?  There`s a big world out there, go somewhere else!

CPL's picture

What are you five?


Grow up.

stant's picture

obama said america is poised to take off. where to?

SheepDog-One's picture

FEMA forced labor camp.