Deflation In An Age of Fiat Currency: US Equities Will Have To Fall By More Than 60%. Now Is The Time To Own Cash. Everyone Will Worry About “Default”, Unfunded Liabilities, Tax Hikes and Austerity, Currency Wars in 2013.
December 5th, 2012
from Russell Napier:
Napier’s presentation, “Deflation in an Age of Fiat Currency,” is thought-provoking, and the precise polar opposite of investing as usual. A wry and picaresque speaker, he starts with some conclusions. Among them:
- To reach record lows [akin to those on offer in 1921, 1932, 1949 and 1982], US equities will have to fall by more than 60%.
- Central banks are straining to produce inflation, and developments in emerging markets (i.e. China) suggest a deflation shock is now likely.
- The capital exodus from China is disrupting the creation of inflation.
- In the search for yield, cash is trash ‚ so now is the time to own cash. (This is an example of his dry contrarianism.)
- US Treasuries could repeat their 83% price decline of 1946-1981.
US stock markets aren’t cheap, not by a long chalk. Napier, like us, favors the 10-year cyclically adjusted price / earnings ratio, or CAPE, as the best metric to assess the affordability of the market. Unlike the traditional P/E ratio, CAPE smooths the near-term volatility by taking a 10-year average.