-- Posted Wednesday, 11 December 2013 | | Disqus
By Peter Cooper
If anybody can spot the cause of the next bear market for global stocks it ought to be ‘Anatomy of the Bear’ author Russell Napier. In his Global Outlook for 2014 he warns: ‘We are on the eve of a deflationary shock that will likely reduce equity valuations from very high to very low levels’.
He is not shock-and-awe merchant. Mr. Napier is a sober analyst and longtime consultant to the CLSA. His book on bear market bottoms is considered an investment classic.
Deflation shock
‘Three times since 1997 inflation has fallen below one per cent with very negative impacts for equity investors,’ he explains. ‘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 11th September 2001; and the bankruptcy of Lehmans in September 2008′.
So what will it be this time? It is true that global inflationary pressures have recently not only eased but dropped to levels that alarm bankers. But what will be the black swan this time around?
Mr. Napier pins his flag on Asia. Here a toxic combination of high debts, rising interest rates and falling profit margins could provide a nasty seismic shock. That’s our interpretation of what Mr. Napier is saying. He is far less specific, prefering to cite mounting evidence of deflation, mainly in Asia.
His book highlighted the three indicators of deflation that occur before a collapse in equities: a falling copper price; falling TIPS-implied inflation; and rising corporate bond spreads. All factors are present now.
Pyrrhic triumph?
The critical insight he offers from his analysis of many bull and bear markets is that once inflation falls below one per cent a crash in equities always follows. Are we on the edge of that precipice now, at the very moment that stock market investors are congratulating themselves on a historic year?
Well one thing we know very well from stock market history is that when investors are this happy pride always cometh before fall. Mr. Napier’s genius is to spot the actual black swan event.
Let us spell out why deflation is a bad thing for stocks. Basically it undermines the whole credit system and quickly bankrupts over-leveraged financial institutions and companies. Without credit you get a spiral of decline in global trade and commerce. Remember 2009? Deflation really is public enemy number one.
http://www.arabianmoney.net/
-- Posted Wednesday, 11 December 2013 | Digg This Article
| Source: GoldSeek.com
