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"U.S. And Them" - Russell Napier Asks If America Can Decouple From The Rest Of The World

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From Russell Napier of ERIC

No man is an island even when she's a woman

Can the US economy ignore or even benefit from the winds of deflation blowing from offshore? With a current CAPE (Cyclically Adjusted PE) in excess of 27X, the US market is clearly answering this question in the affirmative.

It is worth pausing to ponder just how much this optimism for a US de-coupling has already been reflected in prices. The Solid Ground was very bullish on global equities from 1Q 2009 to 1Q 2011, but then turned bearish, believing that QE was insufficient to prevent deflation. The failure of QE to generate ever higher inflation is now a matter of record, but very clearly US equities cheered this failure and the need for continual QE from 2011 to 2014.

U.S. AND THEM

However, this cheer in the face of lower inflation has been very much a US phenomenon. The table below shows the performance of various global equity classes, in US$ terms, from their peak levels in 1Q 2011

Performance of Global Equities From 1Q 2011 Peaks (US$)

  • FTSE All World Index (Capital) +17%
  • FTSE All World Index (Total Return) +29%
  • FTSE All World Index ex US (Capital) -7%
  • FTSE All World Index ex US (Total Return) +4%
  • FTSE North America Index (Capital) +47%
  • FTSE North America Index (Total Return) +60%

SOME EQUITIES ARE MORE UNEQUAL THAN OTHERS

In the past four years there has been no bull market in non-US equities. This is even more striking when we consider the massive expansion in the Bank of Japan’s balance sheet since 2011. This has lifted the Nikkei just 10% above its 2011 highs in US$ terms. Commodity prices peaked just a few months after equity prices in 2011. From the peak in April 2011 the CRB index has now fallen 38%. The gold price has fallen 37% from its peak in September 2011.

An investor buying a basket of US Treasuries (7-10 year maturities) when equity markets peaked in February 2011 has seen a total return in USD of 26%. The decline in inflation and the growing threat of deflation has been good for bonds compared to equities and commodities, as one might expect. There is, however, one major exception --- US equities.

THE GREATEST CAPE

So for those investors who believe that US equities can buck the deflationary trend, let’s make it clear that they already have. Of course, they can head higher still. The CAPE had reached its current level of 27X in 1996. This was a level of valuation only previously recorded in 1929. From 1996 to its peak in 2000 the S&P then doubled! The S&P sailed higher through the Asian economic crisis which began with the devaluation of the Thai Baht on July 1st 1997. Only in July 1998 did events outside the US create any major setback for US equities, as the bankruptcy of Russia and LTCM threatened the stability of the US banking system. The S&P500 fell 20% in the summer of 1998 but was soon heading to new highs as a rescue ensured creditors to LTCM were made whole and the Fed funds rate was cut from 5.5% to 4.75%.

CAPE FEAR?

For many the Asian crisis of 1997 and the deflationary crisis outside the US signals provides a playbook for today’s market. But it already had produced a major outperformance and, crucially, real interest rates are much more likely to spike today than they were in the late nineties. From its peak level of inflation, of 3.3% in December 1996, it then declined to a low of 1.4% in March 1998. In that period the Fed Funds rate started at 5.5% in early 1997 and was cut to 4.75% in the following year. Real rates of interest rose but, of course, the market was very aware that the Fed Funds rate was at 4.75% in 1998 and there was a long way to go to zero.

Things are very different today. The Fed Funds rate is at 0.25% and inflation is at 1.3% and likely to head lower as the full impact of the recent oil price decline works through the economic system. So real rates will rise but, even more importantly, the market will realise that the Fed’s ability to manage real rates is much weaker than it was in 1998.

CAPE ABILITY BLOWN?

With nominal rates basically at the zero bound, the Fed’s ability to control real rates is based on its ability to generate inflation. Inflation’s decline from 3.9% in September 2011 to just 1.3% today means that there must already be questions as to how effective QE can be at delivering on this part of the bargain.

Will the US economy and the US equity market behave in 2015 as it did during the deflationary scare generated by the Asian economic crisis and its fall out in Russia and elsewhere? Well, think of 2013 and 2014 as similar to that period from July 1997 to July 1998 when the US equity market ignored the deflationary threat being priced into other markets. Now ask what monetary policy options there are if we have a similar scare to that which brought the S&P500 lower in the summer of 1998.

CAPE CALM AND CARRY ON?

If you are happy that a return to QE will reassure the markets that the Fed is in control of real rates, then you should probably buy US equities. However, this analyst is much more concerned that the Fed’s failure to boost inflation and control real rates of interest after almost five years of QE will show up the inadequacy of monetary policy to reflate the world and inflate away debts.

In particular, if the key deflationary forces are seen to be generated far from US shores, investors may well ask how the Fed’s purchase of US assets can produce a major shift in the global supply and demand imbalance for goods. When investors last asked this question the CAPE was at 13X!

 

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Wed, 01/07/2015 - 10:21 | 5632244 Tsar Pointless
Tsar Pointless's picture

Maybe it will, maybe it won't.

I know one thing though. The Elite have decoupled from us 99.9%-ers. They'll continue to get their abortions. They'll continue to get married to same-sex partners. They'll continue to do all of the cocaine and pot that they deem necessary and appropriate. And they'll get more and more rich while we get more and more poor. Meanwhile, they'll rely upon the religious/stupid and less-advanced among us 99.9%-ers to keep the remainder of us in check.

Dividing and conquering was never so easy as it was here in the good ol' USofA.

Wed, 01/07/2015 - 10:24 | 5632263 Thomas
Wed, 01/07/2015 - 10:29 | 5632292 El Oregonian
El Oregonian's picture

Apparently we've "Decoupled" from the truth-reality-moral character...

Wed, 01/07/2015 - 10:42 | 5632352 Ignatius
Ignatius's picture

Nothing says "decoupled" like the issuance of the reserve currency.

And people actually get paid to mutter this nonsense.

Wed, 01/07/2015 - 11:47 | 5632706 Chupacabra-322
Chupacabra-322's picture

We should "decouple" from the Criminal Fraud UNITED STATES, CORP. INC.

Wed, 01/07/2015 - 11:57 | 5632743 pods
pods's picture

Sure, Amerika is a net importer of everything save debt and issues the world's reserve currency.

We might decouple alright, but in not such a positive manner as people think.

The only thing "coupling" us to the world is the thing that allows us to be a consistent debt exporter, the FRN.

Lose the reserve currency and people are going to be "decoupling" Long Pig to stay alive.

pods

 

Wed, 01/07/2015 - 12:17 | 5632837 Ignatius
Ignatius's picture

We're told that's what the 750+ military bases around the world are for, right?  Or maybe I meant to say they don't tell us any such thing.

Wed, 01/07/2015 - 12:58 | 5633001 pods
pods's picture

Those bases are just part of our exceptionalism.  

They come in handy for keeping the legions far away when the coin of the realm goes tits up.

pods

Wed, 01/07/2015 - 13:11 | 5633054 KnuckleDragger-X
KnuckleDragger-X's picture

I think the question should be can the rest of the world decouple from America?

Wed, 01/07/2015 - 10:28 | 5632285 Lewshine
Lewshine's picture

Anyone want to bet that the Dow gains at least 70% of all its losses in the last 7 trading days - TODAY? While oil remains flat and Greece is still in caos. 

Wed, 01/07/2015 - 10:39 | 5632342 ZH Snob
ZH Snob's picture

it's ideas like decoupling that have contributed greatly to the ugly american image around the world.  such exclusivity is laughable beyond words.

Wed, 01/07/2015 - 13:27 | 5633174 TrustbutVerify
TrustbutVerify's picture

Tsar...b..o...r...i...n...g. 

Wed, 01/07/2015 - 10:22 | 5632247 Random_Robert
Random_Robert's picture

Let me ask the obvious question:  Why would the US want to decouple from the rest of the world...?

I swear, this "gated community"  mentality in the US had better run its course, and fast... the gates are not insurpassable barriers.

 

 

Wed, 01/07/2015 - 10:41 | 5632298 Money Boo Boo
Money Boo Boo's picture

If the U.S de-couples and keeps printing its monopoly money at its current rate, it will Zimbabwify itself in less than a year

Wed, 01/07/2015 - 10:31 | 5632307 Headbanger
Headbanger's picture

"Decoupling" is just another bullshit propaganda term pushed by the lame stream media & government to keep the denial mentality going while we implode into the abyss

Wed, 01/07/2015 - 10:36 | 5632321 El Oregonian
El Oregonian's picture

How about Gates, moats filled with alligators, and high stone walls?

oh, castles... They already live in them.

Never mind...

Wed, 01/07/2015 - 12:14 | 5632820 stant
stant's picture

Are the visa goths hireing?

Wed, 01/07/2015 - 11:10 | 5632494 e_goldstein
e_goldstein's picture

 I swear, this "gated community"  mentality in the US had better run its course, and fast... the gates are not insurpassable barriers.

It's typical toddler/boomer behavior. Fuck something up until it is past the point of repair and then go hide.

Wed, 01/07/2015 - 13:29 | 5633181 TrustbutVerify
TrustbutVerify's picture

Random...If the U.S. decoupled from the rest of the world maybe we'd be buying more goods made here that actually gave people here real employment.  Just sayin'.  

Wed, 01/07/2015 - 20:33 | 5635163 Random_Robert
Random_Robert's picture

O'rly...?

So, tell me where you are planning to open your factory, and what you produce... I'll be sure to file an application.

 

 

 

Wed, 01/07/2015 - 10:22 | 5632249 LawsofPhysics
LawsofPhysics's picture

Sure, any country can.  It is never pretty however.

Wed, 01/07/2015 - 10:25 | 5632276 asteroids
asteroids's picture

He's got it backwards, can the world decouple from the US. Russia and China are giving it a shot.

Wed, 01/07/2015 - 10:30 | 5632302 Eagle Keeper
Eagle Keeper's picture

Decouple it can, but then there goes globalism. Globalism put ALL world economies on the same financial cycle. While this created an additive effect for the upside, it also created an additive effect to the downside, hence bigger gains but bigger downswings. The only solution has been to privatize the gains for the PTB and have the public eat the downswings. This has helped create the huge wealth gap we are seeing but it can only go on so long. Society will eventually dictate once the balance gets to uneven. Only problem is no one knows how long this will take.....

Wed, 01/07/2015 - 12:28 | 5632879 Livermore Legend
Livermore Legend's picture

"........Globalism put ALL world economies on the same financial cycle. While this created an additive effect for the upside, it also created an additive effect to the downside......."

"Nuff Said".

Wed, 01/07/2015 - 10:31 | 5632304 q99x2
q99x2's picture

"Now ask what monetary policy options there are if we have a similar scare"

Dude we have FRAUD. Now anything is possible. Bankers are above the law. Markets are Central Bank software applications. We're free. BTFD

Wed, 01/07/2015 - 10:55 | 5632410 Latitude25
Latitude25's picture

If a big bank does it it's call an "application".  If you or I do it it's called hacking.

Wed, 01/07/2015 - 10:32 | 5632314 NotApplicable
NotApplicable's picture

Decouple = Death of the petrodollar

Wed, 01/07/2015 - 10:37 | 5632327 Goldbugger
Wed, 01/07/2015 - 10:39 | 5632334 SheepDog-One
SheepDog-One's picture

Decoupling is very good news! Recouping, even better!
Fuck I give up.

Wed, 01/07/2015 - 10:46 | 5632367 panicearly
panicearly's picture

How much will a decoupled dollar buy ya when you have to pay for private military services? Maybe they'll kill i mean work for free(dom)?

Wed, 01/07/2015 - 11:50 | 5632715 Uchtdorf
Uchtdorf's picture

What's that saying about history and failing learn from it? Roman soldiers, tired of fighting and dying for the debased coin of their day, left their posts and sacked Rome.

Wed, 01/07/2015 - 10:59 | 5632438 Pullmyfinger
Pullmyfinger's picture

If someone were to strap a short pair of wings onto this author, he could be also used as an attack drone.

Wed, 01/07/2015 - 11:16 | 5632533 Latitude25
Latitude25's picture

I'll sum this up clearly.  No, America can not decouple from the rest of the world.

Wed, 01/07/2015 - 11:19 | 5632548 alangreedspank
alangreedspank's picture

To even ask the question is to admit it has to or SHTF.

Wed, 01/07/2015 - 11:35 | 5632635 Bangalore Torpedo
Bangalore Torpedo's picture

All aboard the Muppet Express!

This has all been done before. The only difference between now and 1928 is that after the Fed tightened, they allowed the market to take interest rates back to their natural levels. Bottom line: the Fed still has loose monetary policy.

It's all here:
BANKING AND THE
BUSINESS CYCLE
A Study of the Great Depression in
the United States

Available on Mises.org

Wed, 01/07/2015 - 11:38 | 5632654 rejected
rejected's picture

--However, this analyst is much more concerned that the Fed’s failure to boost inflation and control real rates of interest after almost five years of QE will show up the inadequacy of monetary policy to reflate the world and inflate away debts.--

Call himself an analyst! Wants Wall Street Banks and Government to continue the borrowing printed up money binge while bankster induced inflation robs people of there work and savings. Universities actually teach this crappola?

A bailout is someone else paying off anothers debt. So what is inflation again?

ZH,,, if your gonna post this tripe could you give us a warning,,, like "Caution- Reading this may be hazardous to your mental health"

 

Wed, 01/07/2015 - 12:12 | 5632813 22winmag
22winmag's picture

Build a moat around the country and line it with barbed wire. The Atlantic and Pacific aren't enough to keep the turd worlders out.

Wed, 01/07/2015 - 12:47 | 5632944 Ewtman
Ewtman's picture

Decouple?? The U.S. is the primary cause of the global debt problem that has created the biggest debt bubble in the history of the world. How do you decouple from yourself?

 

http://www.globaldeflationnews.com/anatomy-of-a-bubble-how-the-federal-r...

Wed, 01/07/2015 - 15:09 | 5633680 NuYawkFrankie
NuYawkFrankie's picture

Can the parasite de-couple from the host?

Wed, 01/07/2015 - 18:45 | 5634813 theyjustcantstop
theyjustcantstop's picture

another micro thinker, in a macro world.

where have you read the us was going to decouple, the us is the coupler.

or didn't the trillions going overseas in 2008-2009 teach you anything.

where did you read that america, or americans were going to avoid a global recesion, we're equal participants in this globalazation, there are no winners, or losers, until there are winners and losers.

this is always stated the qe's didn't create an inflation balance, were they supposed to, if so why did the govt's reporting agencies, the bls, rigg inflation numbers, inflation there it's just avoided by the same govt. that creates qe's.

if i didn't know better i'd have to say someones making money off qe's, or advancing an agenda, or both.

 

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