This page has been archived and commenting is disabled.
Russell Napier: This Has Never Happened Before Without A Drop In Stock Prices
From Russell Napier, of The Solid Ground via ERIC
It Can't Happen Here, Can It?
The Solid Ground has long flagged the importance of falling inflation expectations when nominal interest rates are so low. The Fed cannot lower nominal rates, so its control over real rates of interest rests entirely with its ability to create actual inflation or manage inflation. After five and a half years of QE, inflation expectations are very near their lows. The chart below shows the break-even inflation rate of the five-year Treasury Inflation Protected security. Over the next five years investors now expect inflation to average just below 1.3%. This level of expected inflation has always previously been associated with a decline in US equity prices. There have been no exceptions until today.
* * *
THE PROWLER
Which force is currently depressing the corporations share of GDP? It is a question worth asking, because if such suppression lifts then the corporates share of GDP can go higher and, the likelihood is, share prices will go with it. While most questions in finance are difficult to answer this one is really easy because nobody and nothing is depressing the corporations share of GDP. The usual suspects for depriving the corporation of higher profits --- labour, creditors and the state --- are all "quiescent", to use a word favoured by the man formerly known as ‘The Maestro’. Indeed, these forces are so quiescent that most equity investors consider them to be demons which have been slain.
THE SLEEPING TIGER
There is nothing in the historical record to equate dormancy with death when it comes to the future path of wages, interest rates or corporate taxation. For the equity bulls who choose to believe in the prolonged dormancy of labour, creditors and the state, all at the same time, history has a very clear warning that there is another potent force which can drive mean reversion of corporate profits and equity valuations --- deflation.
THE DAMNED
In 1919-1921, 1929-1932, 2000-2003, 2007-2009 it was not a resurgence in wages, Fed-controlled interest rates or corporate taxes which produced a collapse in corporate profits and a bear market in equities. On those four occasions equity investors suffered losses of 32%, 85%, 41% and 51% respectively despite the continued dormancy of labour, creditors and the state. It was deflation, or the fear of deflation, which cost equity investors so much. There is a simple reason why deflation has always been so damaging to corporate profits and equity valuations: it brings a credit crisis.
TIME WITHOUT PITY
Investors forget at their peril what can happen to the credit system in a highly leveraged world when cash-flows, whether of the corporate, the household or the state variety, decline. In a deflationary world credit is much more difficult to access, economic activity slows and often one very large institution or country fails and creates a systemic risk to the whole system. The collapse in commodity prices and EM currencies in conjunction with the general rise of the US$ suggests another credit crisis cannot be far away. With nominal interest rates already so low, monetary remedies to a credit seizure today would be much less effective. Such a shock, after five and a half years of QE, might suggest that the patient does not respond to this type of medicine. Investors would doubt whether monetary policy in general has the power to sustain corporate profits and with them near record-high equity valuations.
FIGURES IN A LANDSCAPE
In 2009, 2010 and 2011 US equity prices fell sharply as the five year TIPS break-even inflation rate fell below 150bp. The 2009 episode was associated with the collapse of Lehmans, resulting in massive losses for equity investors. In 2010 and 2011 the end of QE1 and then QE2 was sufficient to produce a rapid decline in inflation expectations and led to major losses for equity investors. In 2010 the S&P500 fell 16%, as the expected rate of inflation declined from 2.1% in April to 1.1% in August.
In 2011 inflation expectations fell from 2.5% in April to 1.4% in September and the S&P500 fell by 19%. In 2014 inflation expectations have fallen from 2.1% in June to 1.3% in December and the S&P500 index has risen by 6%! Prior to this year the minimum loss equity investors would have experienced given a decline in inflation expectations to 1.4% was 16%, but on this occasion they have made a profit of 6%! So, as Marvin Gaye was wont to ask, what’s going on?
ACCIDENT?
Investors are ignoring the deflation threat, as this is supposed to be the ‘good’ deflation in which prices fall boosting consumption as a consequence. This analyst doubts whether even that dynamic will be as powerful as normal given the ageing of the baby-boom generation. However, even assuming that this is exactly how consumers behave, it still ignores the major associated negative from deflation in the form of a credit shock. This analyst has long thought that the shock would come from EM, either from a commodity-exporting nation with large foreign currency debts (such as South Africa) or from a country with a large current-account deficit which is heavily reliant on short-term capital inflows (Turkey).
BOOM!
Ultimately, just such a shock would come to many places if China tired of the monetary tightening implicit in its link to the world’s strongest currency, the USD. At some stage China will need to relax the monetary reins and this will be virtually impossible if it is tethered to a rising USD. The 1994 devaluation of the RMB wreaked havoc with the finances of China’s competitors and a similar, in fact even more powerful, dynamic is evident today. A devaluation of the RMB would thus be another trigger for a credit crisis. The consensus, it would seem, views this deflationary move as one without tears. With US equities trading at 27X CAPE , that’s one hell of a bet!!

- 29235 reads
- Printer-friendly version
- Send to friend
- advertisements -



Add it to the heap of failed technical calls "guaranteeing" a market downturn.
I've been around ZH too long. I'm so fucking jaded it's not even funny any more.
This. Techinal analysis of pretty much anything related to the stock market, or any numbers generated by the BLS (or any other Federal Agency) mean exactly jack shit anymore.
I was looking at the 1.3% inflation number and thinking....come on.... WTF?
Everything is exceptional today. We must be living in a Lake Wobegone economy.
tyler...can we have some moar on the russian prostitutes? there's a market i can wrap my head around.
Inflation means printing money, rising prices is only a result of inflation but not the cause.
That's what I thought, until I took 101. The Masters of the Universe can describe any economic event in the most complicated of ways. Google Demand-pull Inflation if you want an insight to the madness! "But but but Sir isn't this caused by printing money." "This has nothing to do with printing money" I think the brainwashing might of worked I feel groggy. 6.06
I got steamrolled 7 std derviations ago ... tired of this manipulated mkt
Double post
"failed technical calls "guaranteeing" a market downturn". Yep. But one of these times it will go to hell in hand basket. When? WTFK's. Just keep Buying until .....
BTW, is "Double post" inflationary or deflationary?
Maybe GS has not distributed enough inventory yet.
but, but, but, this time it's different!
Russell should realize by now that even the Inflation Expectations number is fudged and manipulated....if he really thinks real inflation is running @ 1.5%, then hes an idiot.
Btw, maybe the only SHORTS left in the entire world are the people who read ZH....and were the dumbasses that gets our asses handed to us in those short covering rallies like today.
Anyhow, the markets are back to their old ways of Levitation....the Dow is just clinging on to the Up 200pt line like a desperate insecure girlfriend.
'The shorts' are the Fed itself.
Regarding stock values the inflation rate is only interesting in comparison to interest rates (alternatives). If bonds yield nothing (or get negative) then any possible return will suck in the "investors" reaching for yield. So yes, stocks can go up in a low inflation environment. If interest rates go up, then it is a different story.
So, this time it really is different. But why? Easy. It is because the rules no longer apply. The crooks are having free reign.
They win, we lose...no matter what comes.
I just love deflation. If for no other reason than it being the enemy of the fed, and the enemy of my enemy is my friend.
If this is what it takes to upset these guys, I'm all for it.
Here here! I'm hoping for deflation (or the overwhelming fear thereof) so the Fed starts doing real helicopter drops and we all end up with a $5k tax refund to go spend the economy back to health. We (ZHers) can invest that in gold while everyone else buys better iCrap cases and 'stuff' (inflation).
What if Zerohedge were the impetus for the 2009-present equity rally? What if it's a structural skepticism propaganda machine that keeps the shorts piling in, and money "on the sidelines?"
What if it were setup and funded for the specific reason as to create a giant equity rally (via behavioral mechanisms)? Site started really taking off in 2009 if I remember correctly. Probably owned by bulge brackets and Fidelity.
Ya know, I'll believe damned near anything as this point. Except technical analysis. And fundamental analysis. And market behavior. And facts. And reality (if there even is such a thing).
Never trust anybody 100%, even the Tylers.....
Why should we believe you about that?
Because 87% of all statictical nuymbers are made up on the fly.
Ignore the ugly women behind the Green Curtain...with a printing press. I yellen you! To ignore her!
I didn't take it to be just-another-downturn-call... I took it to mean exactly what it says... "This hasn't happened before."... which would seem to confirm most people's already jaded thinking about no real markets existing anymore.
Proof that is really is different this time.
Finally, the bear capitulation I've been waiting for. This shits going down now...
Now we know why the .gov is sending out survival packets. And you thought 9-11 was a big event, you aint seen nothing yet.
The government knows that the people given those survival packs are dead meat. Why otherwise would they give them just one lousy bar of chocolate unless it was meant to be their last meal before they get hanged.
The Centrally Planned Economy proves its exceptionalism every f**king day!
Dear Russell Napier,
We never had QE before 2008, so there is that....
Let's see whether you are right ......or the QE induced fraud laced centrally planned utopian stock markets are right where NO MATTER what data is released, the stock prices ALWAYS go up! (and usually from 3.30pm onwards ;))
what’s going on?
Fed intervention and manipulation to levitate US markets. Even Ray Charles can see that and he's been dead 10 years.
Manipulated markets never make sense.
+10k.
Ray Charles is dead? damn.
Long live Ray Charles!
BTW,does the Pinapple Express mean the drought in CA is over?
Good Question... More Importantly though, Colorado dispensaries will be harvesting some great crops.
Delicious Crop, Stock market @ all time highs & Free lunches around
Trifecta FTW
Well, we're just waiting for the fat lady to fart, or whatever.
Good one!
You wait. I'm slowly backing out of the fat lady's room...no offense to her, of course.
ZIRP, QE, PPT, CB intervention, stock buybacks, front running, and algo driven short squeezes have propped things up forever and a day.
We have never seen anything like this charade before... And it continues on like a bad soap opera.
The past is no guide to the future in terms of timing, given the amount of tinkering, manipulation and misreporting taking place.
The blow up will of course happen but not when we expect it.
You sure seem convinced.
What if they (TPTB) are just doing this so they can keep printing and buying until the printing is meaningless and there is nothing of any value left to buy? At that point all the fiat would become worthless and they would have all the assets.
Kings, we (they) will be kings!
They will have to take my land from my cold, lifeless hands. I will defend my property with the full extent of my firepower.
Thankfully, my farm is in a country with no standing military (Costa Rica). Don't think that there would ever be the will or firepower to physically seize property. Plus, they have a much more benign "live and let live" philosophy. Biggest threat would be a military invasion from Nicaragua, in my opinion.... and that's a real stretch.
Come on down, folks.... the water is warm and the government stays the fuck out of your life (with the exception of the US .gov poking their nose around via FATCA regulations... but there are ways to evade that for now).
Ohh so tempting. I'm in Canada and it's pretty much the exact opposite of your description :o(
we never had HFT liquidity before
How many times do these various old-school analysts have to be told? The reason it's different this time is that there's an unprecedented willingness to lie cheat and steal far beyond anything ever seen in Government, the FED and Wall Street's sordid history.
Wait till the sentiment players get a hold of this one.. Because it's never happened before is exactly why it will happen this time. No sell off.
Not until after year end anyway.Wall street has bonuses to protect.
December 10, 2008. It all changed.
On December 10, 2008, Madoff's sons told authorities that their father had confessed to them that the asset management unit of his firm was a massive Ponzi scheme, and quoted him as describing it as "one big lie".[
http://en.wikipedia.org/wiki/Bernard_Madoff
It's all one big lie
Aah yes. Doing god's work. God is great. Praise the Lord Blankfein
Wow, it seems like we are always making "all time Highs", "all time lows", and "this never happened before with out a __________". Is this market really that extreme on a daily basis? Holy shit.
chicken bones and goat entrails. there is no market there is only old yeller.
I was in the Angolan jungle just after the 30 year civil war and the local medicine man was using those exact tools ( chicken bones and goat entrails ). Thank god Mr Yellers has caught up with the times.
Words that are losing or have lost all meaning: investor, policy, inflation, bank, insurance, savings, history.
Rose colored google glasses, unicorn shit dropping from the sky, and rainbows.
/sarc
Oh come now!
Your trying to invent any excuse to suggest why the market should correct.
Get a CLUE! Sheesh! You can't continue with this US$ bull market
without equities correcting in sync with the rising US$.
That simple.
15 week, four day upchuck. Good luck cunt..
Well, it will this time. It's called FED intervention.
The only "investors" pushing that 1.3% meme work for tavistock
There have been no exceptions until today.
True enough. But then there no longer exists the market conditions of the past. The past is the past, we are in a new era where The Fed has assumed a Communist Style Central Planning Role. Their role is to generate "wealth effect" via manging directly the equity share prices. That is what money printing is all about, the green electrons are managed via several conduits into Equities. More juice when needed, less juice when not, net effect is the Fed is committed to not letting market corrections or bear markets happen, as this would screw up "wealth effect" economics, in which the US economy is managed in a way that transfers productivity gains and money printing wealth BOTH, into the hands of the 1%. I suggest the numbers on income growth are proof enough of what I say.
What we really wonder is what can blow up this neat little system? What event can knock the Fed out of it's power position as Commissar of "Wealth Effect" market action. Since the dollar is running out of real wealth to dollarize, derivatives were invented as a way to absorb the trillions of printed dollars. What might start the snowball is the action by other nations to de dollarize their wealth, and return it to local currency valuations or gold. As long as the dollar is the basis for all the planets wealth being created, the Fed can keep it's role as Commissar of "Wealth Effect" and Supreme Soviet of "King Dollar".
Damn derivatives, damn FED. De-dollarize already World! End the Kommisar!
https://www.youtube.com/watch?v=rNHkWrUcLvU
Japan will likely break these markets, by pushing the yen a step to far.
Man, all these CBs are acting like the old USSR central planning scheme.
The top 1% are the "Party Members," the rest of the West's peoples are the proletariat.
All they have to do now is let the race to the bottom continue, collapse, and they have a world-wide Soviet whose owners are interestingly, fascists, the other side of the Oligarchs' coin.
If this is the Plan, then they will issue perhaps not a world currency, but a world EBT card...
Forward!
+1000 Jack. You have a better way to explain, I’ve become desensitized. Keep up the good posts.
Well put, I would like to repost this with credit every time I see chart porn. We have a central planned economy. The dems and repubs just approved $1.1 trillion. The FED's official numbers show low inflation and GDP sucks giving them free future reign to print more money. Just wait until the oil industry slow down in all of the basins hits the GDP tape. And the decrease in revenue from the drop in price of oil. And the lack of new loans in the financial sector from the drop in oil. All points to more government spending and more FED printing, to infinity and beyond.
How many Fed banks are there? I think 12-13 nukes would suffice to stop this show. Everyone is already programmed to accept "collateral damage" so the fact they are in metro areas shouldn't be a problem.
What could end the party? A major currency could blow up. Central banks have the unlimited power to print, but if the markets totally lose confidence in a major currency, printing won't help them. The Fed could try to help by buying the endangered foreign currency, but they have to think of themselves first. So, the question is: which major currency will blow up first?
True.... we may be able to kick the can down the road for quite a while with the CB's concertedly going all-in (entirely new and unique dynamic)....
BUT.... when she does blow, it's going to be epic!!! Something's gonna give. We just have no way of knowing what it will be yet.
Tick tock, tick tock....
You see then? It makes so much sense now. This time really=different.
There truly is a first time for everything.
We first-timed some folks.
Expect unexpected - with money that is the only way!
dont u just love it when a chart overlaps within a specific range 3 days in a row....
http://www.kitco.com/charts/livesilver.html
while the Dow is down 250 on day and up 250 the day afterwards.....
I kinda like it, actually. I'm beginning to think Silver has put in it's bottom for the year. the year, '14-'15.
They should run a permanent ticker on CNBC: "THIS TIME IS DIFFERENT! THIS TIME I..."
I have to listen to this shit on CNBC all day at work. I want to bludgeon myself to death. Clinical depression has officially set in.
These motherfucking yaps on CNBC are the biggest fucking cheerleaders... it's utterly nauseating. And if THIS doesn't feel just like 1999-2000 / 2006-2008 all over again, I don't know what will....
Time to prepare for the suffering that will justify QE4. Maybe they'll throw in a communist bailout "put America's oilfield back to work" program in there too. That way the Mexicans can be put to work building the last of the oil infrastructure for the two oil companies that are left who can't make shale profitable even with no fucking interest rates.
It's like Ground Hog Day. Every time the market is supposed to do something, it doesn't. It might as well be controlled with a small dial by the Decision Makers.
These kotex sniffing dirtbags are still pushing for a Venus Project Society. Shoot first, ask questions later.....winks
You're missing it here.
The Canary In The Coalmine is The Euro.
Euro is dead, unless the IMF prepares a emergency stimulus package. You're missing the magic show props.
HUGE buy signal.
"Investors are ignoring the deflation threat"
I'm not so sure about that. I think investors are confident in Central Banks members' determination to keep inflation alive at any cost including printing beyond anything currently considered reasonable, escalation of global war, etc.
If deflation is tied to the price of oil, then this call doeen't make a lot of sense. A decline in oil prices which leads to lower unleaded and nat gas prices is virtually an unadulterated good for the US economy.
One has to distinguish between good and bad deflation...
What difference does it make at this point anyhow?!?!?
William Dudley of the NY Fed is back again at the NYSE trading desk doing some buying and calling his buddies at Goldman Sachs.
Before long James Bullard will be back with his QE 4 announcement.
So much Federal Reserve intervention it smells.
The only way the Fed loses contriol is is the US dollar free-falls. When that occurs it's panic time at the Federal Reserve.
there is no meaningful info that good investments can be made--we cannot trust the macro data (GDP, CPI) nor can we trust financial statemnets (NON GAAP and Buybacks and channel stuffing and mark to bs accounting for banks to name a few) .
this used to be easier--you found companies what were growing their revenues and margins or you studied and found companies with interesting products that you saw potential early on.
now we get companies like pandora where private equity buys in and hypes thecompany when taking it public and then we find out thses is no substance and peopl eare surprised. Of King Enterprises (candy cane).
today you want to know how much more non gaap accounting will help, when buy backs wil be announced.
suddenly, Mrs. Pareto has been talking about accumulating stockpiles of survival stuff - out of the blue - we weren't talking about anything and then suddenly out of nowhere she has this list of things we ought to be thinking about. I asked her what motivated all this? She said, "I don't know - just got this feeling". Well, call it what you want, a woman's intuition - but - its something that i have learned over the years - that you don't ever fuck with.
Just one more reason this time is different, just throw it on the pile and BTFD bitchez!
Are you kidding me? A graph of expected inflation? I expect angelina jolie to visit me naked christmas eve. Wouldn't bet on it happening though. Jeez what crap
As American GDP rises and oil prices plunge, oil consumption should be soaring. It isn't.
http://investmentwatchblog.com/as-american-gdp-rises-and-oil-prices-plunge-oil-consumption-should-be-soaring-it-isnt/
I don't know about soaring, but I would expect it up some. Vehicles have become pretty fuel efficient these days, and summer would be a more likely time that people would up their driving due to cheaper gas, no?
LOL http://news.yahoo.com/why-elizabeth-warren-going-war-160002446.html
Yeah, right.
It amazes me that after 5 and a half years into ZIRP we are still being inundated with market indicators that are expected to work as they did in the past. Haven’t we learned yet that the scam ridden fraud laced centrally socialistic planned QE induced utopian stock market is right no matter what the market indicators say?
I'm starting to think Chinese government data is less manipulated than our own..
when everyone knows it is coming it isn't coming. that is the lesson for all crashes. the only ones that happen are the ones where there are voices crying in the wind to save yourself and you call them stupid people even after they are proven correct.
things aren't good but things aren't bad. the only places it might be considered bad because the chart has confirmed a downward bias is the west, all the way to the ukraine and on to the mid east. asia is experiencing a congressional definition of a budget cutback. india and china and pacific asia are all still growing but at a slower pace. aren't things better in china growing at 6-7% on a 6-7 trillion dollar economy or a 16 trillion dollar economy contracting if money were counted the way it is supposed to be.
asia is the key to the world economy(and brazil and s africa) now. if china and india grow asia will grow and that growth may not be reflected in the west as it becomes much more asia centric. that means asia flourishes and the west languishes. merkel is begging putin to whip her good.
oh, yea. btfdyfa
"when everyone knows it is coming it isn't coming"
If everyone knew it was coming, equities would not be pushing all time highs. The MSM certainly sees no end in sight for the bull market. Rainbows and unicorns. So no, not everyone "knows" it's coming.
I suppose we should all work on the basis that one of these days Napier will call something right......
This time it's different...