L2 Capital Podcast #03: Chat with Russell Napier – U.S., China and the risks for emerging markets

The L2 Capital Podcast focuses on potential opportunities in the market, and brings to you industry leaders and intelligent conversation about their respective areas of expertise.

 

In this episode, Marcelo talks to Russell Napier, co-founder of the ERIC (Electronic Research Interchange) and creator of the course “A Practical History of Financial Markets”. He was also considered the No. 1 strategist in the 1990s and wrote the very famous book “Anatomy of the Bear”.

 

After talking about ERIC, which is a website for institutional investors to buy independent market research, Russell rationalizes about his recent Financial Times article “Cracks are opening in the global monetary system” which has caused controversy by stating that the current economic situation is not the end of a cycle, but something much greater.

 

When Marcelo asks what will happen going forward, Russell Napier talks about the global monetary system and how emerging markets should pay attention to the relationship between China and the United States, not only with regard to the trade dispute but also with regard to the exchange rate and the impact that this could have on the world.

 

During the conversation, he also points out his views on transactions outside the US dollar system. According to him, this issue is much more related to geopolitics than economics. So the conversation goes on to another subject: deflation. Russell believes that the world is moving towards deflation and explains what needs to happen to prevent it from occurring, fearing that we have to face a worse situation than the one in 2008.

 

When asked about valuations of financial assets, Russell Napier talks about what happened from 2014 to today: assets in the United States have risen while those in the rest of the world have fallen. He also believes we are at the beginning of a bear market and draws attention to the changing supply and demand dynamics of US government bonds.

 

So what are the risks to emerging markets? The problem, according to Russell, is that there are emerging markets with vulnerable economies. He also explains how geopolitical changes can be negative for many countries. Other issues discussed in the podcast are Japanese assets and how China-US relations pose the greatest risk to markets. Napier also draws a parallel between Risk Parity, popularized by Ray Dalio and Bridgewater, and Portfolio Insurance.

 

While not optimistic about the setting, Russell Napier ends the conversation by suggesting some investment to our listeners.

 

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