Russell Napier: "We Are On The Eve Of A Deflationary Shock "

Tyler Durden's picture

In the aftermath of Ray Dalio's conversion to an inflationista earlier this year (even if he has since once again been pushing a deflationary agenda when he once again went long Treasurys in late September as Zero Hedge reported previously), which promptly got such permanent deflationists as David Rosenberg to change their multi-year tune, it seemed as if there was nobody left in the deflationary camp. Which, implicitly meant Bernanke was winning as the world's expectations for a return to inflation were rising (remember: hyperinflation has nothing to do with inflation per se, and everything to do with loss of confidence in a currency, even if formerly a reserve), and also meant the Fed would need to do less to further its reflationary agenda.

Alas, as the Taper Tantrum and the shock upon its subsequent withdrawal showed, not to mention the recent outright disinflation in Europe, any rumors that the Fed was back in control were wildly exagerated, and here we find ourselves, entering the last month of 2013 with loud speculation that not only will the BOJ increase its own QE but the ECB itself will have no choice but to join the QE party (even as the Fed may or may not taper although it is increasingly looking likely that with an economy this late in the cycle, Yellen will simply forego tapering altogether, and may even navigate Bernanke's chopper) in order to stoke even more inflation as the current amount was, surprise, insufficient. We ignore all discussion of what such a reckless action would mean for the credibility of fiat, although we remind readers that right now both the US and Japan monetize 70% of their gross bond issuance, and thus deficit.

So with everyone expecting deflation to have been conquered early in 2013, only for events to once again show that neither is it conquered, nor are central banks in charge despite having a collective balance sheet of over $10 trillion, we have once again gotten a demonstration of Bob Farrell's rule #9: " When all the experts and forecasts agree – something else is going to happen." And yet, that is not exactly true: not all "experts" think the Fed has won the fight, and the deflation has been conquered (what the Fed's response to even more deflation will be is a separate topic altogether, but it is not rocket surgery to assume "more of the same" until one day the Fed breaks the dollar itself). CLSA's Russell Napier has just written perhaps the most vocal pro-deflation piece we have read in a long time. It is titled, appropriately enough, "An ill wind."

Selected extracts from CLSA's Russell Napier:

Inflation has fallen to 1.10/0 in the USA and 0.7% in the Eurozone and we are now perilously close to deflation. Reflation is needed to relieve debt burdens throughout society and in doing so to bolster corporate equity. Investors are cheering the direct impact of QE on their equity valuations, but ignoring its failure to produce sufficient nominal-GDP growth to reduce debt. In a market where such bad news has been seen as good news (as it leads to more QE.), the reality of QE's failure will become bad news as we head towards deflation.


When US inflation fell below 1% in 1998, 2001-02 and 2008-09, equity investors saw major losses. If a similar deflation shock hits us now, those losses will be exacerbated, since the available monetary responses are much more limited than they were in the past.


For investors who cannot take the risk of leaving the bull-market party too early, this report focuses on three leading indicators of imminent deflation: copper prices; inflation expectations, as implied by the difference in yield between five-year Treasuries and Treasury inflation-protected securities (TIPS); and the spread on BAA corporate bonds.


With US inflation already dangerously low, a significant decline in copper prices would signal a major deflation shock. Investors should sell equities if the five-year TIPS-implied inflation rate falls from the current 1.86% to 1.50% or below, or if the spread on BAA corporate bonds rises from the current 262bps to 300bps or higher.


Deflationary winds are strengthening Japanese corporations continue to cut their US-dollar selling prices, forcing Chinese and Korean exporters to follow suit, A further major fall in the yen would ratchet up the pressure. Meanwhile, broad-money growth remains anaemic across the developed world. In the USA, the Fed's failure to create normal broad-money growth is intensifying as bank credit growth slows rapidly, while in the Eurozone, bank credit to the private sector is now contracting more rapidly than it did in 2009. The failure of monetary policy to defeat deflation is about to become apparent, with dire consequences for equity prices.




We are on the eve of a deflationary shock which will likely reduce equity valuations from very high to very low levels. This research seeks to provide investors with some lead indicators as to when the current disinflationary forces erupt into a destructive deflation. Each investor must decide for themselves just how close to midnight they want to leave this particular party. The advice of Solid Ground is leave now as it is increasingly likely that one event will be the catalyst to very rapidly change inflationary into deflationary expectations. Indeed, when key prices are already falling across the globe, one should expect one key major credit event to occur.


Three times since 1997 inflation has fallen below 1% with very negative impacts for equity investors. On all three occasions an existing low level of inflation was forced lower by dramatic events: the bankruptcy of Russia and collapse of LTCM in 1998; the terrorist attacks of 11 September 2001; and the bankruptcy of Lehman Brothers in September 2008. While nobody would attribute the 11 September atrocity with extant global deflationary forces, the other two episodes can clearly be associated with such forces. So perhaps it is global deflationary forces creating a bankruptcy event, somewhere in the world, that is the catalyst for a sudden change in inflationary expectations in the developed world. It can all happen very quickly; and it is dangerous to stay at an equity party driven by disinflation when it can spill so rapidly into deflation.


In 1998 falling export prices triggered a Russian default, and in 2008 falling US house prices triggered the Lehman bankruptcy. Going back further, deflation in the oil price in 1982 produced a Mexican default and a credit event which threatened to bring down the US banking system. Deflation in these key prices produced a credit event which rapidly produced a major reassessment of the outlook for the general price level. Across the world today we see falling commodity prices and, primarily due to the weak yen, falling manufactured-goods prices. When there is plenty of leverage in the system and any key price starts to decline then a credit event and a sudden change in inflationary expectations are much more possible than the consensus believes. So watch the TIPS, BAA bond spreads and copper if you must, but this analyst prefers to observe the party from outside.

* * *

We wonder how long before the lack of controlled (that being the key word) inflation will the recent inflationary converts throw in the towel again and once again start pounding the deflationary drum. Actually, in retrospect, we couldn't care less. The bigger question, as has been the case from Day 1 of QE, is how long until the disproportionate response to even more deflation will the Fed react, as it always does, with even moar stimulus, until it finally does just enough to force consensus to finally begin doubting the viability of the current reserve currency under the mentorship of the Marriner Eccles monetary mandarins. Because as we never tire, no monetary system (or nation, or civilization for that matter) has ever ceased to exist due to hyperdeflation - the cause has always been the response of the ruling class to said deflation.

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the 300000000th percent's picture


"Inflation has fallen to 1.10/0 in the USA and 0.7% in the Eurozone and we are now perilously close to deflation. Reflation is needed to relieve debt burdens throughout society and in doing so to bolster corporate equity." Wow, I guess my natural feel of the inflation I HAVE BEEN EXPERIENCING IN THE THINGS I CONSUME is running more like 3-6% yoy. Also NO THANKS on the "reflation"!!!!!! I welcome deflation , I welcome a rising dollar. I don't need your stinking inflation. 

nuinut's picture

Russell Napier: "…one should expect one key major credit event to occur."


Here's a feasible one that meets Russell's definition: the ECB defending the stability of the euro, their single and only mandate, and moving to prevent outright monetary deflation in the Eurozone with the last remaining tool at their disposal: printing euros to bid for open market gold.

The value of everything outside the HICP is beyond the ECB's mandate, but gold distinguishes itself by being the very furthest item due to its absence of utility, thus the one used in extremis. The ECB has a single priority: stability. When they run out of other tools, this is what they'll do.

CB gold reserves are Chekhov's Gun.

Anton Chekhov: "If it's not going to be fired, it shouldn't be hanging there."

max2205's picture

JC Penney is sure to bring down the world. ....

max2205's picture

Oh and bankruptcies aren't allowed for the next few years

nope-1004's picture

No nation has ever crumbled from deflation - EVER.  Those targets Napier refers to are indications of credit weakness and debt systems failing, not monetary deflation.  Prices are not falling because money supply is shrinking.  In a debt based economy, you can call the above events he refers to as both inflationary and deflationary for the simple reason that an insolvent entity kept alive and not allowed to go bankrupt has not been accurately defined in economics, so the economy is both deflationary (threatening bankruptcy) and inflationary (ficticiously kept alive).

Laws of economics are horribly violated when bankruptcies are forbidden, therefore the definitions are all outta whack.


pauhana's picture

"Here, Schrodinger.  Here, kitty-kitty."

LawyerScum's picture

I say we modify that experiment, put bankers in the steel box and make it so the poison gas is released 100% of the time.

Captain Benny's picture

But, you won't know the banker is dead unless you open the box!  I say that each time, we have the next banker open the box.  Remove whatever contents is left inside, then push the fucker in.  Who's next?

IPA's picture

I hear there are places where many bankers work side by side, presumably with centralized air conditioning and lockable front doors. 

NidStyles's picture

Oh what horrible conditions, I pity them for their suffering. I bet their misery is rather extreme and putting them out of it would be the best.

GetZeeGold's picture



Russell Napier needs to visit a Walmart......where electronics are going down in price.....but everything else you actually need to live on is going up in price.

Richard Chesler's picture

The only thing that's deflating is the living standard of America. Yes we can!

"This year, 65 percent of Americans said they were living paycheck to paycheck, up from 61 percent last year, in part because their purchasing power has been eroded."

markmotive's picture
Marc Faber: "One day this asset inflation will lead to a deflationary collapse one way or the other"

LawsofPhysics's picture

Correct.  The "flation" debate is pointless as deflation is a fucking myth.  7+ billion ( and growing) all competing for a better standard of living and no society/currency has ever collapsed/died because their purchasing power became too strong.

Controlling the language to control the sheep, nothing more...

Hedge accordingly.

All Risk No Reward's picture


It depends on one's perspective.  Argentina, Weimar, Zimbabwe were all deflations - from the perspective of the international banking cartel's main debt based currency...  the US dollar.

Perhaps the better question is whether the international banking cartel has every hyperinflated the currency they hold when they are the majjority holders of the currency.

Surely, they used hyperinflation to economically attack and subjugate varios nation states, but they've never done it to themselves.

Be careful to not apply the rules of apples to oranges.

Governments are NOT in control, nor are they sovereign. 

The international banking cartel is the sovereign and all nation states are subjugated to them via their debt money tyranny.

A nation state that depends on private interests for money is no more sovereign than a small child dependent on their parents for money.

Napoleon understood this insight...

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
? Napoleon Bonaparte

You are betting against the self interest of the international banking cartel when you claim they will hyperinflate while they control trillions in money and trillion in debt paper.

They are the decision makers, NOT governments.

I believe they may well choose to bust the bond market they use as a societal yoke, but they will make sure they are divested of trillions of dollars and trillions of debt holding BEFORE they do so.

That is what a rational actor would do.  You can pretend the people who run the world are stupid, but I'd argue you've simply fallen victim to a Sun Tzu, Art of War tactic...

"PRETEND inferiority and encourage his arrogance."
~Sun Tzu, Art of War


Nehweh Gahnin's picture

I can't imagine why anyone, EVER, would need to visit a Walmart.

stocktivity's picture

...and the packaging is getting smaller but the prices stay the same. That's not inflation?

fxrxexexdxoxmx's picture

Why in the hell did he choose a cat. 


Run with that for awhile.

sunnyside's picture

He wanted to test the theory that us men have to live with, namely, that pussy is and always will be undefeated.

ebear's picture

I dunno.  Pussy Riot were pretty soundly defeated.  I don't think we'll be hearing from them anymore.

zaphod's picture

We are currently living with significant inflation in food, land, services, healthcare, education, etc, and the government has the gall to describe this as a deflationary environment. Just what will 'stable inflation' look like? 100% YOY food price increases?

Tippoo Sultan's picture

"Who do you believe - me, or your eyes ?"

- BSB, Ph.D

0b1knob's picture

Current inflation rate by any honest measure is nearly 10% per year in the USSA.

Oldwood's picture

There is only inflation in what we must buy. There is deflation in what we have to sell.

MontgomeryScott's picture


"We are on the eve of a deflationary shock which will likely reduce equity valuations from very high to very low levels...."


WTF are 'equity valuations', anyway?



The whore waits, as the man she was 'with' begins to lose his erection, and withdraws his softening penis. After placing his money on the dresser, she smiles, and says 'you were the best.'. He puts another bill on top, and says, "You were a loose little slut, but because you said that, I will give you a tip."

She turns to him, laughing, as she looks at his small cock, withering and shrinking.

"Next time, I want DOUBLE, you little-cocked man!"

She starts to masturbate as he replies, "Well, I have a credit card..."

cynicalskeptic's picture

We are seeing massive (but lied about) INFLATION in the price of the things we NEED to buy - food, energy, etc.  I am shocked at food prices when I go shopping - a roast at over $50, OJ at $7.99 a half gallon and even bacon over $7. Heating oil is well over $4 a gallon and gasoline remains over $4 as well.  But government manipulates statistics regularly (see to show lower CPI, Unemplyment and higher GDP.

We are seeing DEFLATION in the things we do NOT 'need' - electronics,  cars, etc.


As another pointed out we are also seeing the effects of inflation in the 'tangible assets' used by the very wealthy to preserve wealth - expensive artwork is setting new records, high end real estate (places in Manhattan for example) and other high end 'collectibles'.  Of course the stock market is also reflecting massive inflation as the billions given to banks are finding a home there instead of going back to Main Street.


jerry_theking_lawler's picture

I may be wrong here....but eventually Hedonics will reach the lowest possible denominator and it can't be adjusted any more, right? Like hedonic adjustments on inflation from Steak to Hamburger to Chicken to Hotdogs then ultimately to dogfood. This has to be the lowest form of food, right? So why not just measure the inflation in the dogfood then?

Libertarian777's picture

because you could replace dogfood with squirrel and tree bark, both of which are free.

there's no inflation here, move along, nothing to see.

Jlasoon's picture

And eventually "Soylent Green".

LawsofPhysics's picture

Stop thinking in terms of "prices" (they are all made up anyway), think in terms of calories.  At this point, the paper-pushers will continue to push on a string until essential commodities can no longer be delivered at any "price".  Then and only then will shit get real, not before.

Same as it ever was (apparently humanity never really learns).

ToNYC's picture

But they measure Inflation by what you have to sell, and Deflation by what you must buy less of, so they balance out in the parallel universe of AdvertAmerica.

LawsofPhysics's picture

"There is deflation in what we have to sell."  -  Bullshit.  I grow and sell soybeans, corn, sorghum, pecans, peachs, etc.

What?  Are you stupid enough to really think there isn't someone else on the other side of those sales?

Ignore "prices" think in term of calories.  The cost of energy for me has also been going up.   Things won't get interesting until the providers of essential commodities can no longer deliver those commodities at any price.  Then, and only then will shit get real, not before.

Same as it ever was.

ZH Snob's picture

the current deflation is a crying, dying plea from the markets to put the beast out of EVERYONE'S misery; and the inflation is the perverse life support that continues to deny a natural death, thus creating a zombie economy.

logicalman's picture

There are no laws of economics, only theories.


MontgomeryScott's picture

If your outgo exeeds your income, your upkeep will be your downfall.

One plus one (minus one point one)...

Keyser's picture

Meh, more like some bullshit artists quoting theory to support their conjecture as to WTF is going on with the economy. All the time manipulating the data to support their belief system. In the mean time, we are the guinea pigs. 


DaddyO's picture

How about MATH?

Any laws there?


LawsofPhysics's picture

Maybe, depends on the scale/dimension.  In the world of quantum mechanics, it would seem all bets are off.

icanhasbailout's picture

"The market always seeks The Greatest Fool" appears to rise to the level of an economic law.

AngelEyes00's picture

Nope-1004, maybe you're right, that's why I'm so confused whether we are suffering inflation or deflation.  After reading 50 billion articles claiming one or the other, it's actually the collapse artificially being held at bay by an opposing force, QE.  Without QE it's deflation, and with it deflation is counter-balanced with minimal inflation.  Stop all the QE antics - let it fall!

Pareto's picture

Price delfation was always a silver lining in a correction that comes as a result of the FED interfering in the market in the first place.  To clear the monetary malfeasance prices have to fall because propping them up at $85B/month only delays the inevitable.  When prices fall, collateral based on speculation falls to zero and real assets exchange hands (from the dumber to the smarter - or from the speculator to the producer).  This is the mechanism by which markets fetter out crap and start anew.  Inflating reduces the value of collateral since the level of collateral (real stuff) hasn't increased much as this site has demonstrated y/y.  So as inflating rises, the collateral is spread thinner and thinner until there is no collateral left at all.


There's no free lunch.  That much I know and may be all I know.  

edwardo1's picture

We agree. Revaluation of phsyical gold is the least painful and destructive option and therefore the one that will be employed.

AGuy's picture

Napier: "When US inflation fell below 1% in 1998, 2001-02 and 2008-09, equity investors saw major losses."

Ugh! You forgor the most important issue Russ, No QE in 1998,2001, and 2008!  The Rally is all about QE, its the one any only thing that is causing the meltup. Everytime the market is about to correct, the Fed trumps by annoucing more QE!.  Duh!



garypaul's picture

Where the fu** is Napier et al seeing falling prices???

Skateboarder's picture

Certainly not at the grocery store. That is the stuff of the plebs.