The Economic Times daily newspaper is available online now.

    Is licence raj coming to the west? Russell Napier thinks so

    Synopsis

    Over the long term, higher inflation in the developed world is good for the emerging markets

    Russell Napier-1200ETMarkets.com
    Russell Napier, Co-Founder, ERIC (Electronic Research Interchange) speaking on financial repression by governments, rising inflation and why Emerging Markets and India in particular are standing to benefit and will be at a tipping point sometime next year.


    On Low Interest Regime

    Unlock Leadership Excellence with a Range of CXO Courses

    Offering CollegeCourseWebsite
    IIM KozhikodeIIMK Chief Product Officer ProgrammeVisit
    Indian School of BusinessISB Chief Technology OfficerVisit
    Indian School of BusinessISB Chief Digital OfficerVisit
    The low interest regime is part of a wider government policy of financial repression, I would say it is a bit like a licence raaj. At this time it is definitely coming to the west. The fascinating thing about India and some other key emerging markets is you may not have to do it because your debt to GDP levels are remarkably low by global standards and you know it is half the level of debt in GDP in a country like the United States or United Kingdom. One of the most fascinating things over the next 10 years is what will happen in countries like India and maybe people will get away with this. It will be tremendously positive for any country that can avoid this.

    As we head into the zero interest rate scenario, it drives out savings as savings will try to escape a situation where inflation is high and interest rates are down.

    There is a wonderful opportunity for some countries such as India to attract a lot of capital. The crucial thing is capital will try to exit anywhere that pulls off the ability to keep inflation. But where is it going to go? Gold is an obvious place but if India and other countries can avoid the same licence raaj policies, they can attract capital.

    The wonderful thing about India is that it had the licence raaj not too long ago and can still remember the downsides. It has been 40 odd years since western world left its own version of that system and the memories have faded and some people are back on it with great favour. Since it is still recent in India, I do not see policy makers wanting to go back to that.

    On the possibility of critical bankruptcies globally, and even in key EMs
    No, I do not think so. One of the most powerful things that has gone on in this crisis which is not really commented upon was swap lines that go out from the American Federal Reserve to other central bankers. Now if we look back at any emerging market crisis, which I really think is the same crisis it has been because they have borrowed too much in dollars and when the local economy contracted, their asset prices declined and they could not pay back dollars. That is exactly what would have happened in 2020 except that we now live in a world where the Federal Reserve balance sheets seem to extend to infinity and those Fed swap lines, credit lines go into the entire system. They go to central banks, the central banks lend them to the people who are struggling to pay back their US dollars.

    You might say it is not a permanent solution but if it is like the world of Covid where as we slowly normalise, it holds the world together. I am in the process of writing a book about the Asian Financial Crisis and the contrast is really marked because when those companies and countries run out of dollars, then there is no way to turn to and they go bankrupt but at this time, there is a surprising solidity in emerging markets. It is not really like the power of the swap line from the Fed to hold everything together. Ultimately, the economies have to come back and it depends on how quickly they can come back. One of the first to do that will be China. We almost got to a stage where we stopped doing business with China and that is going to be a lot of good news for other Emerging Markets.

    So, I do not foresee those mass bankruptcies that are talked about and generally speaking, over the long term, higher inflation in the developed world is good for the Emerging Markets because the emerging world were selling lot of stuff through the developed world and they get slightly higher prices, that is a good thing so I do not see it is going in that direction.

    On signposts for increasingly higher fund flows into EMs and India in specific
    It will come in stages. In the long run it is not that necessarily anything is going to be in the markets in the next 12 months.What will happen in the market in the next 12 months is this early-stage reflation. I think it will happen. Clearly I am in a minority. The consensus does not think it is going to happen.

    But the history of early-stage reflation is that it has always been positive for equities -- and that would be American, British and European equities -- if we get that early-stage reflation. So at that stage, you do not see a lot of money necessarily coming to the emerging markets. The stage at which we see money going to the emerging markets is as inflation comes back and interest rates go up.

    The really telling sign of this repression is they move to cap long-term interest rates. I would argue strongly that there is a huge buy signal for most Emerging Markets. Assuming that all are doing the same thing, assuming that they are refraining from similar policies and that is the key trigger point when savers in the developed world say this system is rigged against me. It is not that the yield is rigged against you, the whole system is rigged against savers and that is what a financial repression is. So when will that be? I am just about to write a report on that for my clients actually. I do not think it is going to be in the next 12 months.

    For the next 12 months, we can see developed world equities doing quite well but the real trigger for Emerging Markets will be when they decide to aggressively get into a yield cap. Some people think that is happening but actually capping yields when there is a no expected inflation is not that difficult. What I am concerned about is what happens when globally inflation returns and there’s a high cap on yields. Then do bonds produce positive real returns? No they are pretty negative but they can produce exceedingly negative real returns if we cap yields as inflation rises. That is when the money spills out and looks for other opportunities. I hope that other emerging markets are not doing what we are doing and therefore they would benefit from it.

    "We are in a new monetory regime where governments. not central banks, are printing money and the markets are entirely unequipped to deal with it"

    — Russell Napier


    On governments printing money & why this time is different
    I will run through the reasons why it is different this time. This is not being printed by the central bankers. This is about governments printing money. So the crucial thing is where it is going now? We have got 35 billion pounds in small businesses in the United Kingdom. The maximum value you can take on that loan is 50,000 sterling. That is not going to the massive companies. It is going to the smaller companies of this world and these companies are not multinationals. They do not sit with 500 million on the balance sheet in cash. They give it to their employees. So this is money that circulates quite quickly so that is the first thing.

    Second, the governments are printing money but they are getting it to the people who spend which did not happen with quantitative easing.

    The third thing and the important thing is that they are increasingly programmed for instance to sustain 100 days in programme. As soon as it ran out, they increased it by 40 billion. So the direction of travel is also clear. We will have more and more of this and finally it really helps to get elected. The reason we took the ability to create money away from governments in the first place is that they find it very useful coming up to elections to hand out lots of it and here we are again seeing that.

    Those are the reasons why I think this is different this time. We do not see this every five, 10, 15, 20 or even 30 years. This is a new monetary regime and we can use the old monetary regime for central bankers to make money. We are in a new one and the markets are entirely unequipped to deal with that new one. This time it is different. We change monetary regimes very infrequently but we just changed it and I think basically nobody knows.

    On merit of gold, silver and Bitcoin as asset classes & a bull run in commodities
    I know nothing about Bitcon so I will leave that to the Bitcoin experts. I personally do not buy nor would I buy when there is gold available. Gold has got something which is slightly easier to explain. As a financial historian, I can look at the long history of gold and this tells me something about how gold might respond to inflation, deflation and repression.

    Gold is the asset for financial repression. Financial repression is trying to get your savings and put them somewhere where the government wants them to be.



    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more


    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
    The Economic Times

    Stories you might be interested in