Who is Russell Napier?
Russell Napier of CLSA wrote the Market Insight column that appeared on Wednesday in the Financial Times.
Mr. Napier is a highly skilled, very thorough financial analyst. He also has a bearish temperament. I started to write that he’s a “professional bear,” but that’s not right. Unlike doomsayers who are always available with a quote about how the world is about to go to hell in a handbasket–usually the same sentiment they have been furnishing to reporters for the past twenty-five years (think: Marc Faber or Andrew Smithers), Mr. Napier is not a publicity hound.
That makes his analysis of the future for the US and European economies, which I find eerie, even more disturbing.
1. The US and Europe have already saddled themselves with so much government debt that they are incapable of lowering it in any meaningful way. At the very least, there is no political leadership (Germany possibly excepted, and they’re stuck with the rest of Euroland) willing to address the problem. It may also be that there is no national political will among citizens to pay the money back.
2. Simply servicing the existing debt will end up with new government debt issues crowding out private capital-raising activities. To raise more funds, as well as to make government securities look more attractive, governments will levy new taxes that reduce the earning power of private securities.
3. Private capital will respond by trying to leave the country, but will be prevented from doing so by newly-legislated capital controls.
4. Mr. Napier concludes his article with the statement that “The ‘new normal” is not sub par economic growth. The new normal is the roll back of the free markets.”
I’d add a #5. Assuming #1-4 come to pass, our children will emigrate to countries that offer better economic prospects, much as Europeans came to the US after WWII or as high taxes and limited opportunities caused educated Australians and New Zealanders to seek foreign jobs a generation ago.
What caused our present sorry state?
–in Napier’s opinion, the “North Asian” economic growth model with its emphasis on overproduction in manufacturing made us the parasite to their host. (I don’t believe this, but that’s what he said. In any event, I’m not sure diagnosing the cause of our heavy indebtedness is that important.)
What a bleak outlook!
Is the “fall” of the West already written in stone? I don’t think so.
Certainly, many in the Pacific and Latin America already look at the US in the same way many Americans regard the UK–as a place that time has passed by, whose citizens console themselves in dreams of their past glory. But that’s just the inevitable consequence of their recent rise to world economic prominence.
One thing has changed, though, in my opinion. Sixty years ago, Wall Street figured that Republicans were good for business and Democrats were bad, but that perception has long since been relegated to the junk pile. It has been replaced by what my thirty+ years as an investor have taught me–that Washington is basically like Disneyworld, a collection of strange characters, an interesting and entertaining place to visit that’s largely irrelevant to the running of the economy, and therefore to the rise and fall of stock prices. Gridlock is the optimal political state, since that minimizes the possibility of bizarre government ideas messing up commerce.
We now know that picture isn’t right, either. Somehow, with the tacit approval of voters, professional politicians have succeeded in pretty much maxing out our national credit cards. And for what?–McMansions in Miami and Las Vegas, Vietnam-like wars in the Middle East, and entitlements. The lightbulb is just starting to come on about how deeply in debt–both through outstanding Treasury bond issues and promises of future retirement and medical benefits–we are.
Suddenly, what Washington does is important. The picture Mr. Napier paints is what happens if we stick with business as usual.
There are investment implications. The most obvious, and the most important for us today, are that diminishing economic growth prospects in the US and Europe imply emerging markets will do relatively well and that in developed markets multinationals will be better performers than their Europe- or US-centric peers. This is the strategy I see most investors following anyway.
The next thing to monitor is whether, as Mr. Bernanke has been calling for repeatedly, Washington is able to come up with a credible medium-term roadmap for reducing the government deficit. If not, as crazy as it sounds to an American, the beginnings of capital flight may not be far behind.