Russell Napier Warns of Impending Collapse

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Financial historian Russell Napier was interviewed by the Financial Times in May and provided a grim assessment for the economy, bonds and equities in the coming years. The last time we looked at Napier’s forecast was back in April 2009 when he predicted the markets would bottom in 2014 (link). In the video interview below he explains what went wrong with his forecast for interest rates and provided his revised outlook.

Napier claims the Fed hasn’t really printed any money, but has created bank reserves, which has pushed the dollar down. This has forced the emerging markets to print money.

He agrees with the popular notion that the Fed, through its low interest rate policy, has enticed investors into riskier assets. In essence, Bernanke “bribed investors to play.”

Napier says the Fed and other central banks have no power further out on the yield curve.

Napier believes the Fed will not tighten, but that creditors, who lend at longer term rates, will force a tightening. This will result in a surprise rise in real interest rates.

Napier insists there is one more deflationary shock to come, which he refers to as a “great re-set.” He said the collapse in 2008-2009 did not mark the bottom and stock markets only reached fair value. He claims the “death of equities” attitude was not present and the investor apathy typically seen at a market bottom was missing.

Napier predicts the S&P 500 will bottom in the vicinity of 400. Surprisingly, he prefers equities over fixed income, which indicates how much he hates bonds at current levels.

Investors need to protect themselves by investing in emerging market currencies, stated Napier.

SMA Comment: Napier predicting a low of 400 for the S&P 500 seems to be more of an attention getting effort than a reasonable prediction. Harry Dent has made a similar forecast recently.

However, it seems very unlikely the large caps will collapse to that extent since they are basically at the same level they were 12-13 years ago. Meanwhile earnings have expanded substantially during that timeframe.

A bear market could rear its ugly head, though, should real interest rates rise as Napier predicts. A drop of 30-40% from the recent peak would take the S&P 500 appreciably below 1,000, which would provide enough fear and panic selling to mark a long-term bottom.

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