Thursday, January 2, 2014

2014: A Deflationist's Perspective

CLSA strategist Russel Napier made the rounds in late November and early December 2013 with his pitch that deflation is in our future. I sympathize with many tenets of Napier's analysis (overcapacity, stock market valuation, emerging market debt issues, bank credit contraction) but disagree with his final conclusion -- a 70% correction in the S&P 500 -- given the fact that central banks are 'all-in' in terms of reflationary policies such as quantitative easing to prop up asset prices. A baseline scenario for me is continued stagnation given the dearth of effective demand. The most healthy dynamic in a market economy requires countervailing power from competing sectors however at present the aggregate power of labour (and by extension households) has been in steady decline for a generation and the waning of credit extension augers poorly for future growth prospects in advanced economies.