Download - Russell Napier Sept09
-
8/20/2019 Russell Napier Sept09
1/15
Russell Napier
The Two Year Rally & Final Collapse
Anatomy ofthe Bear
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 2IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Conclusions
To reach record lows (1921, 1932, 1949, 1982)equities will have to fall 50% - not yet.
Deflation produces record-low valuations but prolongeddeflation remains unlikely.
Deposit insurance, Freddie & Fannie, Fiat money andthe lessons of history mean deflation is unlikely.
A significant rally is likely and investors need to look atcorporate bonds, commodities (copper) and TIPs.
The final leg of the equity bear market will be drivenby a bear market in treasuries.
-
8/20/2019 Russell Napier Sept09
2/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 3IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
How cheap are equities?
Source: CLSA Asia-Pacific Markets
0.0
0.5
1.0
1.5
2.0
2.5
1900 1909 1918 1927 1936 1945 1954 1963 1972 1981 1990 1999 2008
Q ratio for US equities with S&P 500 at 800
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 4IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
How cheap are equities?
Source: CLSA Asia-Pacific Markets
Cyclically adjusted PE with S&P 500 at 1000
0
5
10
15
20
25
30
35
40
45
50
1 8 8 1
1 8 8 4
1 8 8 7
1 8 9 1
1 8 9 4
1 8 9 7
1 9 0 1
1 9 0 4
1 9 0 7
1 9 1 1
1 9 1 4
1 9 1 7
1 9 2 1
1 9 2 4
1 9 2 7
1 9 3 1
1 9 3 4
1 9 3 7
1 9 4 1
1 9 4 4
1 9 4 7
1 9 5 1
1 9 5 4
1 9 5 7
1 9 6 1
1 9 6 4
1 9 6 7
1 9 7 1
1 9 7 4
1 9 7 7
1 9 8 1
1 9 8 4
1 9 8 7
1 9 9 1
1 9 9 4
1 9 9 7
2 0 0 1
2 0 0 4
2 0 0 7
2 0 1 1
(X)
-
8/20/2019 Russell Napier Sept09
3/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 5IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Hindsight value
Source: Smithers & Co., CLSA Asia-Pacific Markets
0.0
0.5
1.0
1.5
2.0
2.5
3.0
1900 1910 1920 1930 1940 1950 1960 1970
Hindsight value over 1-40 year horizon
Q versus average
(x)
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 6IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Long bear markets are normal
40
50
60
70
80
90
100
110
120
1900 1902 1904 1906 1908 1910 1912 1914 1916 1918 1920
(DJI)
Dow Jones Industrial Index, 1900-1921
-
8/20/2019 Russell Napier Sept09
4/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 7IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Long bear markets are normal
90
110
130
150
170
190
210
230
250
1936 1938 1940 1942 1944 1946 1948 1950
(DJI)
Dow Jones Industrial Index, 1936-1950
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 8IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Long bear markets are normal
500
600
700
800
900
1,000
1,100
1964 1966 1968 1970 1972 1974 1976 1978 1980 1982
(DJI)
Dow Jones Industrial Index, 1964-1982
-
8/20/2019 Russell Napier Sept09
5/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 9IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
History shows how deflation is one of the few times when
bonds outperform equities.In periods when deflation has been probable, equities yieldmore than bonds.
Deflation kills equity, as assets decline faster than liabilities.
Deflation kills equity if cashflow declines, forcing debt defaultsby corporations and individuals.
All the great bear-market bottoms coincide with the deathof deflation.
Deflation drives low valuations
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 10IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Key inflation indicators - TIPs
2003 2004 2005 2006 2007 20080.0
0.5
1.0
1.5
2.0
2.5
3.0 (%)
2003 2004 2005 2006 2007 20080.0
0.5
1.0
1.5
2.0
2.5
3.0 (%)
Yield on 10-year Treasury securities minus yield on 10-year TIPs
-
8/20/2019 Russell Napier Sept09
6/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 11IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Key inflation indicators - BAA bonds
Aug 1982Feb 1982
Jun 1949Jan 1948
Jul 1932May 1932
Aug 1921Jun 1921Equities bottomCorporate-bonds bottom
Timing of corporate-bondS and equity-market bottoms
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 12IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Key inflation indicators - BAA bonds 2008
N D J F M A M J J A S O N D J F M A M J J A S O N80
85
90
95
100
105
110
N D J F M A M J J A S O N D J F M A M J J A S O N80
85
90
95
100
105
110
Lehman Brothers BAA Corporate Bond Index
-
8/20/2019 Russell Napier Sept09
7/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 13IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
High Yield US Corporate Bond ETF (Price)
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 14IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Key inflation indicators - Commodities
3W Oct 20012W Oct 20022W Oct 2002
2W Aug 19912W Oct 19903W Jan 1991
1W Oct 19822W Aug 19823W Jul 1982
1W April 19804W Mar 19803W Dec 1980
1W Mar 19731W Dec 19734W Jan 1974
CRB indexDJ IndustrialCopper
-
8/20/2019 Russell Napier Sept09
8/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 15IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
March Copper Futures
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 16IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Command economy & inflation
1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 20080
10
20
30
40
50
60 (%)
1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 20080
10
20
30
40
50
60 (%)
US home mortgages owned or ensured by US government agencies
-
8/20/2019 Russell Napier Sept09
9/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 17IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
‘Let the slump liquidate itself. Liquidate labour, liquidate
stocks, liquidate the farmers, liquidate real estate . . .It will purge the rottenness out of the system. High costsof living and high living will come down. People will workharder, live a more moral life. Values will be adjusted, andenterprising people will pick up the wrecks from lesscompetent people.’
Words of the Secretary of the Treasury AndrewMellon, attributed to him by Herbert Hoover
Inflation & the political dynamic
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 18IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
‘Of course, the US government is not going to print moneyand distribute it willy-nilly (although as we will see later, thereare practical policies that approximate this behavior). Normally,money is injected into the economy through asset purchases bythe Federal Reserve. To stimulate aggregate spending whenshort-term interest rates have reached zero, the Fed mustexpand the scale of its asset purchases or, possibly, expand themenu of assets that it buys. Alternatively, the Fed could findother ways of injecting money into the system - for example, bymaking low-interest-rate loans to banks or cooperating with the
fiscal authorities.’
Ben Bernanke, November 2002
Inflation & the political dynamic
-
8/20/2019 Russell Napier Sept09
10/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 19IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
TIPS indicated inflation
1/6/09
M J J A S O N D J F M A M J J A S O N D J F M A M
0
0.50
1.00
1.50
2.00
2.50
3.00
FRTCM10-USTCI10
HIGH 2.57 3/7/08,LOW 0.04 20/11/08,LAST 1.60 29/5/09Source: DATASTREAM
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 20IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
What stops the rally
Inflation rising from 0% to 4% is good for equities.
Deflation risk premium declines.
Corporate share of GDP can rise.
Central bank reaction is muted.
Everything changes with inflation near 4%.
-
8/20/2019 Russell Napier Sept09
11/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 21IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
But beware inflation near 4%
US inflation and Dow Jones Industrial Average, 1966-1978
Source: Datastream
66 67 68 69 70 71 72 73 74 75 76 77 780
2
4
6
8
10
12
14
550
600
650
700
750
800
850
900
950
1,000
1,050
CPI (LHS)Dow Jones Industrials - Price Index
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 22IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
But beware inflation near 4%
US inflation and Dow Jones Industrial Average, 1985-1988
Source: Datastream
1985 1986 1987 19881.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
1,000
1,200
1,400
1,600
1,800
2,000
2,200
2,400
2,600
2,800
CPI (LHS)Dow Jones Industrials - Price Index
-
8/20/2019 Russell Napier Sept09
12/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 23IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
But beware inflation near 4%
US inflation and Dow Jones Industrial Average, 1989-2003
Source: Datastream
1998 1999 2000 2001 2002 20031.0
1.5
2.0
2.5
3.0
3.5
4.0('000)
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.0
11.5
12.0
CPI F(LHS)Dow Jones Industrials - Price Index
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 24IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
But beware inflation near 4%
US inflation and Dow Jones Industrial Average, 2002-2009
Source: Datastream
(1)
2002 2003 2004 2005 2006 2007 2008 2009
0
1
2
3
4
5
6 ('000)
7
8
9
10
11
12
13
14
15
CPI (LHS)Dow Jones Industrials - Price Index
Source: DATASTREAM
-
8/20/2019 Russell Napier Sept09
13/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 25IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
US public debt % of GDP, 1792-2019
0
20
40
60
80
100
120
140
1792 1807 1822 1837 1852 1867 1882 1897 1912 1927 1942 1957 1972 1987 2002 2017
(%)
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 26IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
S&P at 400 by 2014
The CAPE and Q ratio lows of 1921, 1932, 1949 and1982 suggest the S&P will bottom at around 400.
A loss of faith in US Treasuries and the dollar will drivethe final leg of the bear market.
Treasury market likely to exceed US$12tn by 2011,when babyboom-medicare entitlement begins.
Demand for Treasuries falls as emerging world goesfor consumption-driven growth.
-
8/20/2019 Russell Napier Sept09
14/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 27IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
S&P at 400 by 2014
Share of total US Treasury market owned by foreigners
(%)
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 20070
10
20
30
40
50
60 (%)
1952 1957 1962 1967 1972 1977 1982 1987 1992 1997 2002 20070
10
20
30
40
50
60
Source: Datastream
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 28IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
S&P at 400 by 2014
Growth in US population over the age of 62
(m)
5.92029-33
8.12024-28
9.62019-23
8.72014-18
3.02009-13
4.22004-08
-
8/20/2019 Russell Napier Sept09
15/15
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 29IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.
Conclusions
US Treasuries could repeat their 83% price decline
of 1946-81.
The supply/demand imbalance for Treasuries can be metwith higher rates, higher savings and deflation.
The supply/demand imbalance for Treasuries can be metwith Fed reaction to cap yields and produce inflation.
The negative economic/political ramifications from foreignselling of Treasuries could prompt capital controls.
©2008 CLSA Asia-Pacific Markets (“CLSA”).
Page 30IMPORTANT: The content of this report is subject to CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which maybe obtained on request from CLSA Publications or CLSA ComplianceGroup, 18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone (852) 2600 8888.