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About this week’s guest:

Russell Napier
ERIC, Electronic Research Interchange

Professor Russell Napier is author of The Solid Ground investment report for institutional investors and co-founder of the investment research portal ERIC–a business he now co-owns with D.C. Thomson. Russell has worked in the investment business for 30 years and has been advising global institutional investors on asset allocation since 1995. He also is the author of the book Anatomy of The Bear: Lessons From Wall Street’s Four Great Bottoms (‘a cult classic’ according to the FT) and he is founder and course director of The Practical History of Financial Markets course that is part of the Edinburgh Business School MBA.

Russell is a director of the Mid Wynd International Investment Trust. He is a member of the investment advisory committees of two fund management companies, Cerno Capital and Kennox Asset Management.

In 2014 Russell founded the charitable venture The Library of Mistakes, a business and financial history library in Edinburgh that now has branches in India and Switzerland.

Russell has degrees in law from Queen’s University Belfast and Magdalene College Cambridge. He is a Fellow of The CFA Society of the UK and is an Honorary Professor at both Heriot-Watt University and The University of Stirling. When not engaged in the activities above Russell reads too much financial history, is a keen fly fisherman and grows his own organic vegetables.


The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

The Power of Politicized Credit: Russell Napier
May 4, 2021

The government elected to pursue the political targets in front of it. But when it co-opts the moneymaking into it—it has done that, not so much in America, but elsewhere by getting control of the commercial banking system—when you fuse monetary policy and fiscal policy together, that is when, in pursuit of what seems like social stability, you can create a hell of a mess. You don’t get less of social unrest because of this policy, you ultimately end up with more of it. Then you look across the developed world today for central bankers likely to stand up to this, you don’t see any.
— Russell Napier

Kevin: Welcome to the McAlvany Weekly commentary. I’m Kevin Orrick, along with David McAlvany. 

Our guest today: Russell Napier. I always look forward to this, Dave. Last week we were talking about how helicopter money, central bank money, is now being changed by the politicians to fire-hose money and far more directed, but the problem is it entails inflation and financial repression. I can’t think of two worst things to go together.

David: There’s a handful of people that I read on a routine basis. Jim Grant, Russell Napier, Bill King, and, I think, to ignore the solid ground is to do so at your peril. The research that Russell’s put together is in my view invaluable, and subscriptions are available at That’s 

Well, a number of years ago, I had the good fortune to read research that was done by an analyst at CLSA. It turns out that Russell Napier was writing for a number of organizations in Europe and in Asia, and decided to publish a book called The Anatomy of the Bear, loved reading the book. That led ultimately to a time abroad where practical history of financial markets was a course being taught at Edinburgh Business School under Russell’s direction, and got to participate in that, again, a number of years ago. 

Russell, I’ll never forget walking through downtown Edinburgh with you, visiting Adam Smith’s grave, and enjoying a delightful evening. Now, a lot of things have changed in the last year, not the least of which is Covid and the way we manage our lives. But I think also something significant has changed in your framework. The age of disinflation has ended and we’ve entered a new politicization of credit, even as financial engineering, as we’ve known it comes to an end. 

Those three things are a few of the conclusions you’ve come to in the last year—June of last year, to be precise. I’d love to begin with the first of those themes. Inflation has arrived. Disinflation is fading, and not for a short period of time, in your estimation. What has changed your thinking?

Russell: Yeah, I think the revolution is actually behind us rather than in front of us. Revolution is a change in the system. It’s not a change in those who run the system. That’s a rebellion, this is a revolution. 

Let me go straight into this. There’s many factors to this, but the one to me that is absolutely important is that governments across the world, at least in the developed world, are taking and getting control of commercial banking systems. That varies from country to country. There’s a very wide range here, and people will say, well, what on earth has that got to do with inflation? 

Well, what it’s going to do with inflation is this: Most of the money in the world is made by the commercial banks. It’s not made by the central banks. Historically the central banks have adjusted policy to try and control the rate at which commercial banks create money. Most notably from 2009 to 2019, they attempted to do that with this policy called quantitative easing, which was an abysmal failure. 

What happened by June last year is that the governments got involved, basically by offering credit guarantee schemes offering to fully back and fully recompense banks for loans made that were then subsequently facing losses. Finally, after over 10 years, banks started lending money and the growth and bank balance sheet started to go up—in a recession. The remarkable thing, in a recession, as I said. It varies a lot across the world as to how quickly these bank balance sheets have expanded, but they have expanded into recession. They have created money into recession and then across the world. We don’t have broad money growth, which has, well, at least doubled everywhere. In some countries it is tripled or more, and that’s the revolution. 

Obviously, if you [unclear] to continue. It wasn’t a one-off Covid intervention, credit guarantees, this is pervasive. It’s going to be with us for a generation. I’ll go into more detail on that, but there’ll be green lending. There’ll be social equality lending. There’ll be all sorts of lending flowing through the banking system at the influence, command of government—probably not nationalization by government. So there are many other things happening as well. 

I think a lot of people who focus on inflation perhaps focus on the fiscal situation, but I’m much more focused on the money situation. I believe this structural change in how banks lend and how money is created will be with us for a generation because it fits the bigger goal, and the bigger goal is inflating away our debts and a thing called financial repression.

David: Well in some respects we’re talking about an accidental discovery. Covid emerges. Central banks have been very involved in liquidity creation, balance sheet expansion, over the past 10 years. Are now on their heels. Governments around the world step in. It appears that fiscal policy will supplant monetary policy in this chapter of interventionism. While fiscal policy is alive and well, your point, I think, is that you see the migration of monetary policy also in effect where governments have taken the reins from the central bank community, and now are in the money creation business themselves. That’s a pretty critical difference, not just a contrast between monetary policy and fiscal policy, but a yanking of the reins away from the central bank community.

Russell: I think it’s key. The central banks, when they tried to create money, created something we call commercial bank reserves, high-powered money. That money was exchanged for bonds, effectively. The bonds were basically sold by savings institutions. Savings institutions find themselves with more liquidity and they had to apply that back into more savings assets. It didn’t get into the real economy. 

Now this is completely and totally different because this money is being lent it’s effectively going to individuals and small companies, very small companies, sometimes one-man bands. That’s a form of money which is spent, or it may not be spent if you’re locked down and can’t get out of your home. But eventually a high proportion of that is spent. Basically a 100% of the quantitative easing money was used by savings institutions to buy more savings assets. 

A high proportion of this amount of money, I would say, as high as 90% of it will ultimately find its way into consumption. That’s the stuff we measure as GDP. It will impact final demand of it. It’s going to impact final demand. It’s going to impact inflation. Very different from quantitative easing. The focus is on the QE, which didn’t work. The focus is, particularly in America, on this huge scale of this fiscal stimulus. 

Yet ultimately we’re forgetting something that we learned a long time ago, that inflation is everywhere at all times a monetary phenomenon. Now, that statement, which was once sort of, when I started in this business, sort of taken for granted, which was the coming out of the inflation of the ’70s, is now almost lampooned as nonsense, that this growth of money can really be important at all. But it will prove to be important, particularly because of where it is. It rests in the hands of those who are very likely to spend it. It’s very likely to affect final demand, and it’s very likely to affect inflation. 

That, to me, is the— Many, many things have changed during Covid. It’s almost as if we missed that one. We have kind of the [unclear] fiscal policy of quantitative easing. We kind of missed what I think will ultimately be the most important one, and politicians benefit from that. This is the thing. It’s not just that it’s money being created. It’s being created by politicians in the hands of people who spend it. That is very probably not going to stop because the politicians like it, and people who receive the money like it. That’s the new normal, and it will continue.

David: One of the things that you refer to is a contrast between printing press money and fountain pen money. Is that roughly the equivalent of what Keynes used to describe as state money versus bank money? Is that roughly the same categories, just different language?

Russell: Yeah. I think that’s roughly where you divide the line, just to be clear for everybody. Printing press money is what we think of in the Weimar Republic. We just instantly associate that with inflation. I think it’s one of the reasons why many people thought there’d be inflation during quantitative easing. They felt the government’s creating money, but it wasn’t. It was creating this unique form of money which could only be used by banks, and then the banks didn’t use it. 

The crucial money— there’s a fantastic link to this on the Bank of England website, actually. I think they explain maybe 96% of all the money in the world has been created by banks, commercial banks, and not the state. That balance is exorbitantly towards the creation of bank money, which is what Keynes was talking about. 

Then we went through a decade from ’09 to ’19 when we really didn’t create very much of that. Not a bad number in America, shockingly bad number in Europe. We’ve not been creating any of it in Japan for a very long period of time. That’s what changed in 2020. Suddenly we started creating that money, but the crucial thing is we only started creating it because we destroyed the commercial banking system, if you like, because the only way we could get those loans out was to add a government guarantee. The problem for all of us is we’re still analyzing the whole world, like a commercial system. Yet this fundamental change means that using commercial analysis is dangerous. Who would ever have forecast that we’d have one of the five fastest levels of bank credit growth ever in one of the worst recessions since the great depression, but that’s what just happened. It’s because we ended the commerciality of commercial banks. And we’ll come back five, 10, 15 years and realize what happened last year. At the moment, I think most people haven’t realized that it’s happened.

David: You’re saying this is not a new business cycle, but rather the beginning of an age of inflation and repression. How long is the trend likely to be with us again?

Russell: Yeah, it’s a great question. Of course we’ve been here before, so that gives us some sort of guides to this. Let’s take the American number, and America benefits from having a very long-term data set. I can tell you that leaving World War II, the total amount of debt in America, that is the government plus the household sector plus the nonfinancial corporates, was probably about 140% of the GDP and it’s now 290. 

Now one of the problems is when people look at all this data they tend to just focus on the government, but we need to focus on the whole system. I would argue very strongly that a reasonable number to have is certainly below 200% of GDP. Above 200% of GDP, we have seen constantly in recession and falling cash flows, real problems with the private sector defaulting on their debt. 

In answering your question, how long is this policy going to have to run? It’s going to have to run long enough to bring— America’s total debt to GDP is going to have to come from 290% to closer to 200%. The advanced world average is 311%, slightly higher. France is 374%. Japan is 411%. The magnitude is big. 

Therefore you’re talking about a decade to a decade and a half, and it does all depend upon the gap between inflation and interest rates, between nominal GDP growth and the interest rate. But it has kept at a level which is not dangerous. We might come back and discuss what dangerous means, but if [unclear] level, it isn’t dangerous. It’s probably a 15-year new structural system put in place. We end up with debt to GDP levels closer to 200%, but 250%? That’s when we may be able to move on to more reasonable policies, which aren’t based fundamentally on a wealth transfer from savers to debtors. Because that’s what they said to get money from the saver to the debtor, to create a more safer system of lower debt. I’ll go for 15 years as the best guess as to how long it will take.

David: Well, back to your question then, what does dangerous mean? Because we’re not talking about central banks who, with the presumption of control, believe that they can dial in a 2% rate, a two and a quarter percent rate, a 3% rate. There is a point at which— now we’re talking about politicians being involved in monetary machinations. Are they going to do any better of a job controlling the rate of inflation, getting you back to that question of what does dangerous mean when it comes to inflation?

Russell: Well, it’s a great way to put the question because I think we’re all still living with the illusion that central bankers control the supply of money, and so are the central bankers. Whether they’re choosing to do that, or they just plan to pretend that they control it. But actually if you go to the ECB, the ECB has made some speeches, not too long ago, pointing towards this new way of credit money in Europe. I think there’s a little bit of a head fake going on here and central bankers simply pretending that this isn’t happening because what else can they do? They’ve got an inflation target. They haven’t got a hope in hell of meeting that inflation target unless the banks increase the balance sheet. The governments came along and did it for them so they’re quite happy to take the credit for that. When inflation gets out of control, of course, they’ll not be taking any credit whatsoever. They’ll be blaming somebody else. 

What is dangerous? I would say, as a financial historian, a dangerous number for level of inflation is 6% or higher. We’re a long way from that, I think, quite a long way from that. Why do I go for that 6% number? Because historically it’s around that level where you can lose control of velocity. By controlling the supply of money, it’s possible, if politically onerous. Politicians love to get money out into their constituents. Once a politician controls it, there will be a temptation to have money supply growth above 6%. We’re way above 6% now just about everywhere in the world. But the problem is, if inflation gets to that level, historically that’s when velocity goes up. 

But controlling velocity is really incredibly difficult. Once that cat is out of the bag and, to put it in layman’s terms, it’s when you and I believe that physical goods are a better store of value than deposits. Therefore we’re actually prepared to go and buy those physical goods rather than have deposits. Historically, of course you think of the ’70s, you think of gold, but if you were in Germany during the Weimar, you probably bought grand pianos. To some extent you may have bought automobiles. I remember very well in 1998 in Indonesia, when this was happening, people were rushing out and buying automobiles. That’s what I would call dangerous. 

If this goes to the extent where we are suddenly getting inflation above 6%— Of course, the important thing is that interest rates are never allowed to reflect that, so interest rates may be three, three and a half, something like that. That is when velocity might pick up. And putting that cat back in the bag is incredibly difficult. That’s what I think is a dangerous level because when velocity goes up, anything can happen. 

If you and I were trying to engineer a financial engineering, we’d probably make up some lovely numbers like 10-year interest rates, two and a half, inflation at four and a half with 15 years. See what happens. The problem is you can’t engineer it with that degree of precision. At some stage of the process—it could be next year, or it could be seven years from now—you lose control of velocity, and something worse happens. That’s what I mean by dangerous. 

At some stage I think we will hit a level of inflation where there’s a dangerous spike in velocity, but I just don’t know where that will be. It’s very difficult to see any politician or central banker engineering the numbers necessary for that smooth, what Ray Daleo calls beautiful deleveraging. It’s beautiful if you’re a debtor, not beautiful if you’re a saver. I think some dangerous episodes along the way.

David: You know, you bring a certain aspect that I think is very important in the present and future as a financial markets historian. Looking back does shed some light on where we’re going. But I’ve encountered a very dismissive attitude towards monetarism. As you mentioned earlier, this notion that inflation is always and everywhere a monetary phenomenon, that’s been set aside, but so too is velocity. I’ve been told by central bankers and academics directly that velocity no longer matters. It seems to be sort of a convenient, maybe even lazy explanation for not knowing what to do with declining velocity, sort of at the tail end of a disinflationary period. How might velocity resurrect after barely showing a pulse in recent years?

Russell: Yeah, I think that’s a problem with modeling, isn’t it? In the modeling, if you look at a high academics model, economies and central bankers model economies, you need to have some fixed points in there, some priors, some assumptions. And a stable to falling velocity is not a prior and assumption. Why? Because it has been stable before. I’m afraid that’s it. I think that’s the extent of the rationale between assuming that is a constant or a prior, is that because it has fallen, it will fall. 

If you look at the statistics, you’ll see that it was actually velocity was in a reasonable cyclical pattern until the launch of quantitative easing. Only on the launch of quantitative easing did we get this prolonged structural decline of velocity. I think the academics look at that and say, this is a very good example of why we’ve got a long-term structural decline. They don’t say, could it be because of quantitative easing? Could it be because of that form of monetary policy that we saw a decline of velocity? 

Remember, we had this massive increase in state money, if you want to call it that, I call it printing press money, but it stuck in the savings system. It didn’t really get out into the real economy because it didn’t get beyond the savings institutions. Therefore velocity went down because you’re creating a form of money which just ricochet’s around the asset buckets. Now we’re creating a form of money which is way beyond the asset buckets. It’s in the population, it’s in the private sector, it’s in the households and it’s in the corporations. You should very much expect velocity to go up because it’s an entirely different type of money that we’re creating. 

I think one of the greatest fallacies I think of analysis today is that velocity is always stable to falling. It’s showing a long-term dying trend over the very long term, but the massive collapse in velocity we saw from 2009 to 2019 was an aberration based upon that massive creation of high-powered money, of printing press money. Now that we’re creating the other form of money, velocity is going to rise. It’s going to rise quickly. 

I think a lot of people will be scratching their heads and saying, why? How come this type of money suddenly started circulating? Well, it’s a different type of money. That’s why. I think it’ll easily go back to where it was before Covid. That would be a big enough problem, given how much it slumped during lockdown, but I would go further and say, there’s every reason to believe that velocity will go back to where it was before 2009. That is way above the current level. I don’t think any academic who would assume that that level of velocity was coming back would forecast low inflation, you’d have to forecast high inflation if we go back to that. This way of creating money is much more inflationary, it will show up in velocity. It will come as a surprise to academics. That one prior, that one fix, which makes the equation work is a very dangerous prior, a very dangerous fixed point in the equation.

David: Just to challenge that thesis a little bit, if bank balance sheets are now tool of government policy, what are your thoughts on the contraction and loans here in the U.S.? We had JP Morgan marginally off single digits year over year, the rest of the U.S. banking complex had deposits soaring while their loan book was shrinking at double digits. Does shrinkage in their loan growth run contrary to your thesis?

Russell: Yeah. As you said, there’s a big range across the world, about how banks are responding to this, and some banks are more captive than others—particularly European banks. Their bank balance sheets are growing quite nicely. Now skipping to America, you had the PPP, which went through very quickly through the bank balance sheets, but then the Trump administration also produced the main street lending program, which really was still born. The banks didn’t respond to that. Didn’t expand the balance sheets, which I think shows you and tells you something about the political power of the American banking system to resist government pressure. 

Having said that, year on year, total bank credit in America, still growing at 8%. My total bank credit is somewhat different from loans because it also includes their securities portfolio. Year on year 8% is slightly higher than it was pre-Covid, but it certainly nothing to be getting excited about or shouting about. As you say, if you look at more recent data, look at the first quarter data, it does appear that the banks loans are not growing. 

There are two ways you can look at that. You can say, this shows you that the U.S. banks are unable to lend or find good credits at the pertaining interest rates. I think that’s accurate. Then you can say, will that be the future, or will the government find ways of changing that so that they do find good credits at the prevailing interest rate? And the easy way to do that is through changing capital adequacy ratios for certain types of lending. Having credit guarantees for certain types of lending. 

There’s no doubt I think at this point, based on the first quarter data. We’ve had the authorities getting somewhat worried about recent trends in the U.S. banking system, but this could be fixed. I know an easy way to fix it is to forgive student debt, and that’s going to happen in some format. We don’t know what format. And at that stage, lots of students will be traipsing into the banks to borrow money. 

In the rest of the world, I think it’s much clearer that the governments have got control of the banking system. In New Zealand, there’s a striking example of the finance minister now wants direct say into the future for the balance sheets of the commercial banks. He wants to take that off the central bank and bring it straight into the finance ministry. In America, the system seems to have stalled a little bit, but I don’t doubt that ways will be found to stimulate credit growth, either through forgiving student debt or adding some guarantees to bank balance sheets. But I think it’s a really important point for America. 

One of the reasons why I’m actually quite positive on the dollar, unlike most people, is there will be significant resistance from U.S. commercial banks to these policies. They’re very politically powerful institutions. If I’m saying that this is coming to the whole world, one of the places that probably comes last to is the U.S. But I still think it gets to the U.S., but there’s clear evidence that U.S. banks are putting up more resistance to this, where there’s something of a command economy about it. That’s why American banks are being more resistant. But bottom line is total bank credit in America is growing 8% year on year, which is not unreasonable. It’s not a deflationary level, but very clearly it’s not as expansionary as some other places in the world.

David: The New Zealand finance minister being involved. It’s interesting. There’s something of a lag time between changes in policy in New Zealand and sort of the export to the rest of the world. Inflation targeting, if I recall correctly, came from New Zealand and is now being more universally accepted. I guess one of the things that is apparent is that we’re moving towards a bull market in control. That’s government at every level, a bull market in control. I’m wondering if there are geographies that might still offer free market dynamics. The crypto crowd obviously offer themselves as a safe domain. I think my preference is gold, but is there anywhere that offers real potential, first as an asset preservation tool, and secondly as a possible source of growth, in a radically repressive age?

Russell: Yeah, I think there is. We are beginning this whole process by saying, who’s going to repress people who’ve got too much debt. You asked me, when would it be over? I say it will be over when debt to GDP ratios are closer to 200%. Let’s look into the world today and say, well, is there anybody already where their debt to GDP levels are at that level or even lower than that level? The answer is yes, there are. 

If we look at emerging markets, ex China, total debt to GDP is 166%. That’s government plus nonfinancial corporate plus household, 166%. Radically different from everywhere else, and at a level where you wouldn’t have to repress at all. The levels of real growth in emerging markets, plus moderate inflation. I know higher than historical levels are easy enough for those countries to keep debt low, keep debt to GDP low, or even reduce it. They do not have to follow repressionary policies. It is a world turned upside down. 

When I say to you that actually you should look to the emerging markets. I think particularly Asia for countries that don’t have to be repressive, but they do exist. They are there. It’s interesting, if we go back to that last grid, financial repression from 1945— and I do it to ’79, really just because I’m in the UK and that’s when we lifted exchange controls. There was one place that didn’t do any repression at all, and went through a huge economic boom. That was Hong Kong. Few people invested there because they had capital controls. It’s difficult to get your money there, but it was obviously tiny, but it was also seen as highly risky because it had this huge communist [unclear] to the north, but it turned out, as a saver, it was actually not as risky as it had looked. 

The other great asset class post World War II was Swiss government bonds. Simply because Switzerland ended the war, for fairly obvious reasons, with very low levels of government debt to GDP, and one made some money on the bonds and one made quite a lot of money on the exchange rate. 

So yes, there are places where we can find low levels of debt to GDP. In fact, the only real emerging market with a high level of debt to GDP is China, which creates its own challenges, obviously for the world and for emerging markets themselves. But emerging markets are now looking at a better bet, long-term. I think they have done really for quite some time, because you attract capital when you do that. 

To be clear, a move to financial repression is to shift your economy along the continuum from market towards command economy, not to become a command economy, but just shifting along that continuum. If I run an emerging market and I can hold my place on that continuum, not budge up towards the command economy, and then I would be attracting very significant amounts of capital. I think that’s what happens. That’s a very circuitous, positive circle building up there as they attract more capital to the economy. 

I personally also believe in gold in this scenario. If we start with the link between inflation and interest rates, which is what repression is, but that is good for gold, but there are actually some economies that are better for this in emerging markets. I think there’ll be quite a lot of equities. A really good fund manager should appeal to select certain types of equities that benefit from severing that link between inflation of long-term interest rates.

David: Well, gold was a decent investment between ’45 and ’79, as were Swiss government bonds and exposure to Hong Kong. I’m not sure that Swiss government bonds or exposure to Hong Kong are exactly the same in this particular era going forward, but it does illustrate that there are places to go, but chosen selectively. 

On the issue of capital controls, they all a bit disappeared from Europe when the cold war came to an end and the EU project ramped up. But this idea that national governments are back in the money creation business seems to be at odds with the existence of the European monetary unit. What happens to the EU as a political and monetary contraption in the age of inflation?

Russell: Yeah. I agree with you by the way, just because it was Hong Kong and Swiss government debt last time doesn’t mean to say it is this time. I don’t want to give that impression. 

It’s a great question about Europe because we’ve moved to a single monetary authority and that single monetary authority is the European Central Bank—except it isn’t. And if we live in a world where governments can create money through manipulating the banking systems, there are 19 members of the euro, so there are 19 sources for money creation. This has already been recognized by the central bank. They talk about the government/bank/corporate nexus for creating money. Well, that’s what we’ve just been talking about. That’s that way of creating money, but there are 19 sources of that. 

Now how you actually run a single monetary policy with that, I just don’t think you can. At some stage, the European Central Bank would have to try and discipline governments. Maybe you can succeed in that. Maybe that’s how you keep a single currency together. 

But the fundamental problem is a bigger one than that. We don’t have these debt to GDP ratios, which we’ve been discussing, but the gaps in Europe are absolutely huge. Germany’s last number was 199% of GDP, one of the lowest numbers in the developed world. But France is just over 370% of GDP. When this currency was created, the gap between those two countries in terms of their debt to GDP level was just 12%. The gap, 12%, now it’s gone from 200 to 370. 

If you and I were running a monetary policy, how on earth could we pick the right monetary policy for both countries at the same time, because that’s what we have to do with the European Central Bank? We have to determine the price of money and the quantity of money which is appropriate for both. It’s not possible. It really isn’t possible. There’s a big political choice here. It’s very obvious which way this political choice is going, which has helped France inflate away its debts. But that will be at the price of the whole of Europe savers. 

But we know this is a problem, isn’t it? We do that in the United States. That is a problem. It’s a huge social fight between the savers and the debtors, but it’s a much bigger issue in Europe because that debtor versus saver fight is really between north and southern Europe. The policy you need to relieve France from its problems— it’s not just France, by the way. The Netherlands has got a very high level of debt. So does Denmark, so does Sweden. Those two aren’t in the euro, but they’re part of the European Union. How on earth are we going to square that politically in Europe? 

This is not a short-term problem because it needs to get going. Inflation needs to come. Another event that’s created this tension between north and south is the north begins to realize that as Northern savers, you are going to pay to relieve the debts of the south. But as that begins to unfold and that will take a year or two to unfold, I don’t see how we keep this going. 

My long-term solution to that is that they eventually stop the movement of euros cross-border and allow France to create as many euros as necessary to solve the debt problem, but stop them flowing to Germany. But once you’ve done that, you don’t have a single currency anyway. If you restrict the free movement of capital, you don’t really have a single currency. Of course, they’ve done it twice before in Europe, they did it in Greece and they did it in Cyprus, albeit temporarily. 

The conflict is there in Europe. It’s not very difficult to see how, in the longer term, to keep a single currency together and to save the European Union, we might have to stop this free flow of capital between the countries of the European Union or the eurozone. That is effectively, slowly backtracking on a single currency and jettisoning a single currency to the [unclear].

David: Foreign ownership of assets is high, that notion of cross border capital flows being limited or shrinking back. Is it harder to institute capital controls when you have such high levels of foreign ownership of assets?

Russell: It’s more painful. I wouldn’t say it’s more difficult because the difficulty depends upon the penalty. We’ve done it. I can think of three countries that have done it in recent time: Iceland, Greece, and Cyprus. Emerging markets do it all the time. The problem with it is this. The world has changed a lot since we last had capital controls. In fact, it’s because of the capital controls that we know that the world has changed. If you’re an American investor, you’ve probably got quite a lot of money in open-ended vehicles, and you expect basically overnight liquidity in those vehicles, but they may be invested in emerging market debt, for instance. Therefore, you have to assume that the underlying is as liquid as the overnight liquidity that you expect. 

The problem with the world of capital controls is that liquidity simply doesn’t exist. The last time I looked at the ICI report, there were 119,000 mutual funds in the world. Not all of them, but most of them are giving you same day liquidity. The problem with capital controls is you reduce that liquidity. It’s very dislocative for the global financial system, which has been built around a lot of liquidity. You have to build a financial system around liquidity. 

You could build a financial system, right, very little liquidity at all, but we happened to have built ours around hyper-liquidity effectively over the last 30 to 40 years. The real problem with capital controls is not just for those who are in that jurisdiction who can’t get their money out. It is for financial institutions who have perhaps fairly liquid liabilities and then find themselves with the liquid assets. 

I think the problem with stepping back into a world of capital controls, which will come as a shock to those who implement the policies, it will begin to create sort of huge financial problems. It’s an exaggeration to compare it to World War I, but in World War I, if you were a banker in the city of London, most of your assets suddenly became illiquid because they were short term paper, short-term loans to mainland European corporations. Because of warfare, suddenly they were not being paid, but you had all the liabilities. You had the same short-term liabilities. The banks were bankrupt and they had to be bailed out by some help from the government. 

So the problem with bringing capital controls into our modern system, which relied a lot on liquidity, is I think it does create huge dislocations for financial institutions, and not banks necessarily, per se, much more of the savings institutions that are pretending that they can offer you overnight liquidity on what are illiquid assets that will become dramatically more illiquid. That’s a big subject to talk about, David, the re-imposition of capital controls, but it’s very much more painful this time than it was last time. Because when we brought in capital controls in, say 1939 or 1914, we hadn’t got a financial system that was so based on the belief that such a proportion of the assets would be highly liquid.

David: It reminds me of a comment that my colleague Doug Noland has made describing the moneyness of credit, where we assume that credit is very money-like. In fact, financial assets have taken on that same characteristic. We assume liquidity. It is perceived as being highly liquid coming into the financial markets, when in fact it is an assumption, and those dynamics can shift pretty dramatically. In some instances, it’s easier to buy than it is to sell. We just haven’t tested the other side of the equation quite yet. 

Something strikes me about this notion of control and the politicization of credit, it seems that the model of Sesame credits in China might have an application globally. The right kind of citizen has access to government directed, as you described, commercial bank gated credit, if the government is providing a credit guarantee, is it that difficult to stipulate the kind of borrower to be on the receiving end of the guarantee for that guarantee to remain in place? Again, we’re coming towards this nexus of politics and credit, very political, it sounds like. Easy to weaponize, I would think.

Russell: Yeah, absolutely. That’s exactly what it is. Just a quick step back in terms about liquidity. LTCM springs to mind. That was an institution that may have been right on its forecasts for asset prices, but it was fundamentally wrong with the underlying liquidity, which disappeared. Arguably that’s where monetary policy went wrong because it was because of LTCM that monetary policy was changed. We had to create lots of liquidity, and every time there’s been a problem since then, the first order of the central bank seems to be to create liquidity in asset prices, which only leads you to creating more and more forms of financial institution that rely entirely on liquidity. So we’ve been going down this rabbit hole for a very long period of time, but capital controls would turn it around quite quickly. 

The answer to that question is very simply yes, and the place to go to see this live in action is the United Kingdom. In November last year, our central bank, our regulator, our treasury, Her Majesty’s revenue and customs, set up a committee which is deciding what is productive finance and what is unproductive finance. And finance is broad, so that can be debt and equity. It was broad enough to include banks and the city of London [unclear] bank financial institutions. 

Fascinating because there’s no broad remit for this committee. But the opening line is that the government, so it is the government and central bank who set the remit, currently defined productive as adding to capacity. Now you might say, well, there’s nothing wrong with that. Well, maybe there isn’t anything wrong with that. But if you look at all the credit has been clear over the past 30 years, a huge proportion of it has not been creating new capacity. Private equity is a good example of where it hasn’t necessarily added to capacity. It’s refinanced existing cash flows. Buying back your own equity is another example of that. Gearing up commercial property is another example of that. 

Then our Chancellor of the Exchequer spoke of and sent a whole new remit to our bank of England, saying here are some of the parameters we want you to consider when steering the financial system. And three or four of them are just highly politicized statements of where the bank should be acting to try and push credit. 

Now, the bank has an institution to do that. It’s called the FPC and the FPC can change capital adequacy rules to get involved in the distribution of credit, not just in the total amount of buying credit, total amount of money, but actually the distribution of credit by the banking system. As I mentioned, this particular working party is actually bigger than the banks and looking at the whole city of London. So it’s heavily progressed. 

I think one of the most amazing discussions I have with people these days is they ask me, when’s the revolution coming? And it’s over. It’s behind us. It’s evolving for sure. But the idea that these things are something that are in our distant future, that haven’t been dreamed of or thought of yet, they’re happening all around us. We prefer and pretend to ignore them, but the politicization of credit is key. To me, the crucial thing is when you define what is productive credit—and who could be against productive? It’s like motherhood and apple pie. It’s what you’re putting in the bucket is unproductive. What do they do for credit going forward? You don’t say they have to pay a higher price. What you’re saying is they don’t get credit, or they don’t get credit and the debt matures, where do they finance when they have to go for equity? That’s the line that’s been drawn. 

This is much more clear outside the U.S., I think, than it currently is in the United States. But you’re absolutely right to say that when we get into this business of providing guarantees and adjusting capital adequacy ratios, the state plays a huge role in directing credit. It will direct it to itself. It will direct it to voters, i.e., mortgages. It will direct it towards its political agenda, which is more highly, highly [unclear] toward green issues. It will direct it towards infrastructure and then there’ll be a whole set of other assets which will not be getting credit. And they will go through a prolonged period of reacquitization. That is probably unlikely to be positive for their total return from equities if they’re reacquitizing for the whole process. 

So, it’s a very simple question you ask, but the ramifications are huge. Once again, we’ve been here before, and many of the things that have happened in the last 30 years simply didn’t happen in the previous 30 years because it was impossible to get credit to do them. That is the world we’re heading back into.

David: Charles Calomiris wrote the book Fragile by Design, underscoring the political ends which are used to justify credit flows and how politicians have long set up systems which are not particularly robust. But, again, it checks the boxes in terms of political recipients of credit. What does that look like in terms of who gets access to credit and who is cut off? Is it merely a choosing of winners and losers? We see the definitions of lots of things beginning to change. The winners are going to be broadly defined as anyone here in the United States who is under the subcategory or broad category of infrastructure. Infrastructure means many things today, many more things than it did even a few months ago. Maybe that’s our latest iteration of who will receive money from government.

Russell: Yeah. I think there’s some easy things to put in the black category and easy things to put in the white category and then obviously there’s gray in the middle. In terms of the things that the white category, the guys who would be seen as the good guys in this whole thing. The government itself, banks running with the government will never be a bad thing. Banks lending for mortgages, the voters, will never be considered as a bad thing. Green issues are clearly going to be a huge thing. We do need a massive reinvestment in green infrastructure. That’s going to be a good thing, and infrastructure in generally is going to be a good thing. 

I think in terms of people who are listening to this, it may be easier to construct the portfolio, looking at the bad things and say who is going to be getting credit. I’ve mentioned a few of those, and those are people who basically find an existing cash flow and gear it up. That’s been a hugely profitable venture now for, really since Michael Milken, that’s when I was born. It’s only accelerated as interest rates have gone lower, lower, and lower and lower. You got to stay away from all of that stuff.

David: You’re talking about financial engineering.

Russell: Well, that is financial engineering, and financial engineering is not capitalism. I mean, what has gone on in financial engineering is not something that Adam Smith would necessarily have recognized nor said to you is actually capitalism. There’s been two bets to this. Capitalism is a response to supply and demand, creates capacity and seeks to build very strong future cash flows, which are to the benefit of its shareholders. But a lot of the financial engineering that’s going on is, yeah, has been to the benefit of shareholders, has been to the benefit of management, but it’s not been based upon investing to build strong, permanent sustainable cash flows. 

So there’s that bit of what’s been going on over the past 30 years, and that’s the bit that is not available. You’re probably aware that the OECD is working on a [unclear] solution profit sharing agreement. There’s lots of things in that, as you know, the U.S. is now pushing for a minimum corporation tax on that. But one of the things in that would be to massively reduce the ability of any corporation to use debt to reduce its tax bill. There are all sorts of ways you can do that. All sorts of clever arrangements to make sure you pay less tax. Those are sort of the bad issues that I think it’s quite easy to see clamping down. You do want to be involved in any company that’s been involved in that. 

Then we’ve got the stuff on the good side of the balance sheet. On the good side of the balance sheet, if you could access really cheap credit from the bank at a time of rising inflation, which hopefully would mean rising revenues, and hopefully your costs are under control, rising profits. That is an exceptionally good place to be, but the world where credit was allocated by price is over. That’s not the world we’re going to live in anymore. You do need to make these distinctions. As we’ve discussed, they are political distinctions and not distinctions based upon credit quality issues or other issues of that. 

I spent a lot of time talking to people about a wonderful new book called Controlling Credit by a chap called Eric Monnet, which is a rundown of the post-World War II French banking system. And the French banking— if you look at what the French banking system was funding between 1945 and 1979, you get a pretty good idea of the future. It’s very few of the things that the U.S. banking system has been funding for the U.S. credit system—I should broaden that well beyond banks—has been funding for the last 30 years. It’s back to the future and politics is politics as all, but there are layers in that because they’re getting credit far too cheaply.

David: The bad things, when you describe that, you’re talking about the companies that have actually benefited from this period of disinflation, financial engineering by Wall Street, corporate profitability, tied to leverage. These have been sort of defining market accelerants. So if financial engineering is receding as a driver of “value,” we’ve got to assume compression of multiples and extended bear market and those kinds of companies. That would be, again, a trend that plays out not over a six-month period, but really a gradual squeeze over a five- or 10- or 15-year period.

Russell: Yeah, absolutely agree with that. It’s a re-equitization. I’m actually surrounded by major bifurcation within the market itself because not all companies have pursued that route. Because it’s been this gripping trend, it’s been very hard to resist it, but there has been resistance. Many of the companies that resisted are companies that didn’t have the stability of cash flows, which you could [unclear]. A lot of those might fall into what we call the value bucket or the cyclical bucket or whatever. Of course, any world of higher inflation, their cash flows—as soon as we have fixed costs, a high level of fixed cost, which many of these companies do—their cash flows look less volatile than they have done in the past in a 30-, 40-year period of disinflation. If their balance sheets are in order and they benefit from inflation, then they’re using it, a couple of things going in their favor. 

The companies that are really in trouble are companies that have had unstable cash flow, which has allowed them to go into massive financial engineering. I think that the people who’ve managed to avoid the financial engineering are probably in the minority, but that’s what we need to learn. 

won’t come as a great surprise to anybody listening to us. But if you have a 40-year disinflation, the market capitalization is dominated by disinflationary winners. It may not look like that. You may look at a company and say, well, how on earth is that disinflationary? By definition it almost certainly has to be. The small market capitalization will be the disinflationary loser. You need to be looking down there to see if there are cleaner balance sheets, companies likely to be able to access cheap credit, who couldn’t be accused of using it for financial engineering, who benefit from higher inflation. So, good bifurcation in the stock market, which should create wonderful opportunities for active stock pickers. Personally, for my own money, I think the worst thing you can do now is give your money to an index fund.

David: Well, after 40 years of disinflation and professionals who’ve never had to operate with a sensitivity to real returns factoring in some inflation bogey. How long do you think it’ll take investment professionals to recognize that a generational shift in asset management style will be needed in this new age?

Russell: Well, it’s a generous thing isn’t it, because so much of the money now run is run by algorithms, run by ETFs, run by index funds. You might know better I know that it won’t be [unclear] where it’s actively managed. 

I spend my life talking to fund managers. They’re very bright people. They work out quite quickly actually, where the only game in town is. They have been really, really thumped by a very long term trend, which has been exacerbated by the move to ETFs, algorithms and indexing. It’s a good time to abandon all hope on active management. But I think the active managers will pick this up quite quickly. 

The problem is that they, I don’t think the algorithms can, it’s a long-term discussion of how the people build algorithms. I think there are some very notable and honorable exceptions to this, but many of them don’t have data that goes back more than 40 years. If you only have 40 years’ worth of data, what you’ve basically got is an algorithm that’s very good at picking disinflationary winners. I think the active fund managers— it’s been a long time, but I think we are at the cusp of where active is really going to start to outperform again, made all the easier by the fact that there’s so much money which is on autopilot. So when I say [unclear] within a year or two, but I don’t know how long it’s going to take an algorithm to work that out, or an index fund [unclear] into what is the large market capitalization. 

I’m going back to Adam Smith again, I don’t know what he called it. A form of capital allocation based upon the existing market capitalization. Certainly wouldn’t call it capitalism. It’s what we practice today. If you’re a saver, I strongly recommend that you do something about that and don’t commit capital to it, and have someone you trust actively managing that money in this great sea change. It is a sea change in the structure of the way the world works. It’s actually our outlook for the way the world works. That maybe if you can find an algorithm out there which has got 150 years of data in it, maybe that’s the algorithm that’s going to work. But otherwise, I think anything that has less than 40 years data in it is a dangerous situation.

David: Part of what we’ve talked about today is the corralling of investors and the implementation of financial repression. The object is to ease the pressure of debt and bring those debt to GDP ratios back in line. If people are familiar with financial repression, it’s typically low negative rates of interest, which signals redirection of capital, corralling of investors. Low rates and marginally high inflation is just one variety of repression. If we are in fact moving into a new age of repression, financial oppression already upon us, run through some of the other forms of repression where the benefits confer to the central planners.

Russell: Yeah, that’s really important because most people I speak to say, yeah, financial repression, I get that. Inflation above interest rates. Got it. Let’s move on. What’s next on the agenda. 

But actually it’s incredibly difficult to do that in a free society. In a free society, you couldn’t do it. In a free society, you just couldn’t do it. People would always demand interest rates that would compensate the future inflation. To some extent you have to end the free society, at least as it comes to savers. 

What I’m going to do now is I’m just going to run you through a smorgasbord of historic policies, which have been used to pull us off in the past. One of the key ways to do this is make other assets even less attractive than government bonds. You can just force people to buy government bonds. I think that’s probably and possibly going to happen. I mean regulated financial institutions. 

But here’s some of the things we’ve done in the past to make sure that other assets weren’t as attractive as government bonds. We have put dividend controls on so that we would just stop corporations from increasing the dividends. A dividend payer ratio control, which is also be used. Capital controls as I mentioned, also used. Rent controls also put in place to try and make sure that residential property doesn’t look as attractive. 

We have also historically— the Fed still has a part to play around with margin requirements on the stock market. A Tobin tax, which is a tax on securities transactions to try and slow and make it very expensive. So there will be no Tobin tax or transaction tax for instance, on government debt, but a high transaction tax on equities. That’s also been used in the past. 

I don’t say that we’re going to see all of those. I put them forward as the smorgasbord, which the government has to choose from in terms of trying to corral you with the fixed interest securities. But we do need to remember that a lot of that is about making other assets less attractive. Much higher short-term capital gains tax, but longer-term capital gains tax. I mean, the list goes on and on, and there’s no shortage of distortions that this can bring in the short run—I mean, even up to five years. For many people in society, this will seem very beneficial because we are alleviating debts. 

You and I are discussing this from the perspective of savers, and for savers it’s unadulterated bad news. But for debtors, it isn’t. But in the long run, of course it brings bad things for everybody because it gives you really atrocious asset allocation. Really bad capital allocation is not good for society in general. It’s not good for jobs, ultimately, it’s not good for employment. It’s not good for social stability, but that can take many years to develop or from that sort of bad capital allocation. 

We’ve run through all the smorgasbord of numbers of measures I’ve just given you. You can see how that would lead people to do remarkably stupid things with their money. That’s exactly what happens under financial repression until capital is starved of flowing to the places where we need it to create jobs and create profits and create prosperity. 

So that’s the smorgasbord. If I had another 20 minutes, we could run through even more ridiculous measures— it’s like whack-a-mole. The government needs your money in place A, so you suddenly appear in place B. So they close that down with capital controls. Then you appear in place C, so they close that down with rent controls. Then you appear in place D, so they close that down with very high transaction taxes, and that goes on and on and on through this horrible, horrible process. That is exactly the lesson of ’45 to ’79, much more so in Europe where we ended the war with much higher levels of debt to GDP. But to some extent in America, particularly after the breakdown of the Bretton Woods agreement. There was quite a lot of that running through the American policy as well.

David: In the age of disinflation, we’ve had confidence and trust in government, which has seemed to grow. People are comfortable with mandates, they rest easy with implicit or explicit government guarantees. We allocate assets according to the cheapness and availability of credit. It’s been an age that favors the risk-taker focused primarily on the reward side of the risk/reward equation. Of course, leverage just makes it even more beautiful. 

What about the age of inflation, and this is more of a social and political question as well. Does trust continue unabated? Does a government promise carry the same weight? You’ve got financial conditions tightening. I think it was the last age of repression where we came up with government bonds being referred to as certificates of confiscation. It’s not exactly how people feel about return-free risk—I mean, risk-free return in the government bond market today.

Russell: Yeah, it really is an important point. I would recommend it to anybody listening to this. Google Keynes on debasement of the currency. Lord Keynes was not known for his views on right-wing economics or politics. He’s the man who came up with the euthanasia of the rentier. But if you google those comments and hear what he has to say about debasement of the currency, it’s the randomness of that that matters. When you say debasement of the currency, I don’t mean hyperinflation necessarily. I just mean higher levels of inflation, as I said. Probably a dangerous level, getting out of control. 

Then what happens is a randomness of wealth redistribution. There are some very rich, smart people who actually benefit from that. There are people who can’t and don’t have the flexibility of the balance sheet, and they get killed, but I use it there as the middle classes. The problem is, if you pursue this policy, there’s a randomness of wealth allocation. People don’t like randomness. Maybe that’s the only thing we learn in markets, that people don’t like uncertainty and they don’t like randomness. 

When you set up a system, yes, it begins by moving wealth from savers to debtors, and debtors like that, but at a certain level begins to randomly reallocate wealth for a society. You begin to destroy trust, and trust is sort of based upon their rules. You play by rules, and you win or lose. Then it suddenly becomes a— a lottery is when trust starts to break down. That doesn’t happen in the early days of this. But as it progresses, we do get into that world where people say, well, I play by the rules, but actually this guy he’s just lucky, and he’s sort of making out like a bandit. And this guy, he’s a thief, and he’s doing particularly well. And this guy is in the black market, and he’s doing particularly well. 

That I think is the problem with pursuing a policy based upon inflation. There’s kind of 1% of the population which is so smart that they game the system, and the other 99% are just faced with random reallocations of wealth. It’s that uncertainty that undermines trust, not just in government, but more generally. I guess the point is it takes a while to get there. But when you get there, it’s incredibly difficult to come back.

David: I’ve argued that 1966 to 1982 is a reasonable template for thinking about asset class behavior and investor experience for the years ahead. I think we agree, Russell, that the real damage is likely to be in real and not nominal terms. It’s worth noting the global nature of the grass roots discontent, which is also quite similar to what we had in the 1960s. The question is, what in the financial and economic realm has impacted and continues to impact the social and political spheres?

Russell: I agree with you. I think the best template for the next period is 1966 to 1982. We went into that with a very high cyclically adjusted PE, which is an evaluation for equities which I’m sure most of your listeners are familiar with. It was about 25 times higher than that today. And then there was a period— actually there was a period of not-bad earnings drop. But we ended up in 1982 with a cyclically adjusted PE going towards 10 times. 

The killer, of course, was interest rates, and they went to exceptionally high levels. That’s what changed. Up until late ’66 into ’68, interest rates were within their historical range for peacetime. Then suddenly they just exploded to a level that nobody had seen before. Back to your point, I don’t think that’s going to happen again. I don’t think it can be allowed to happen again. That’s why more of your losses are in real terms rather than nominal terms. 

But society shifted dramatically in that period. It only changed really with the appointment to Paul Volcker, which was by Jimmy Carter, actually, not Ronald Reagan, and Ronald Reagan came after that. In other words, you have to let inflation do its damage. It’s very hard when the society demands such changes. Very few people can stand in its way until it’s done sufficient damage that there is a groundswell of opinion against it. 

I read a most remarkable article in the New York Times just a few days ago, lauding Jay Powell as the central banker for the ages, and criticizing Volcker as some sort of demon. It’s just a complete failure to recognize where inflation takes a country to and why it’s necessary to do away with it. But I think it said a lot about the zeitgeist, and Jay Powell will always— numerous targets he has in front of him today. Many of them are social targets. Just about all of them are political targets. He should be lauded for pursuing these, but they’re not really to be pursued by a central banker at all. They should be pursued by the government, and that’s the problem. 

The government is elected and should pursue the political targets in front of it, but when it co-opts money-making into it—that’s my point where we began this conversation—and has done that not so much in America, but elsewhere by getting control of the commercial banking system. When you fuse monetary policy and fiscal policy together, that is when, in pursuit of what seems like social stability, you can create a hell of a mess. What we need is a central banker to stand up to that, in my opinion. Let fiscal policy do what it does because that’s what people want. But if you accommodate it with too-easy monetary policy or even blend the two together, that’s when you talk about the debasement of the currency, that randomness. 

You don’t get less social unrest because of this policy, you ultimately end up with more of it. Then you look across the developed world today for central bankers likely to stand up to this. You don’t see any. There aren’t any. They have capitulated very rampantly. I think they should be standing up and saying, well, get on with fiscal policy. That’s what you’re elected for, and do whatever you do, but do not co-opt us into this, but frankly, it’s too late. The need to do this is obvious from a fiscal perspective, but the social unrest that we are trying to dampen the inequality or whatever you want to put it, that this policy is supposed to induce, well it can reduce it for awhile, because it will relieve some debts, but if it involves a monetary debasement then ultimately you spin out of control.

David: Well, it sounds like there’s a series of geographies which will be impacted first. Europe is obviously seeing much more the use of credit guarantees, and the commercial bank is already been harnessed for that purpose. The ECB has already acknowledged that, and those changes are afoot. That is likely to migrate on a global basis, but as that impacts the financial markets, for your money, if you had to take a long vacation, a 25-, 30-year vacation, and knew that we were at the front edge of a generational change, go ahead and situate your assets and then just take a break. How would you do that?

Russell: Well, I would own a fair chunk of gold. We’ll move on quickly from that. I would find a young value manager because he would have to be young because I want him to be around for 25 years. He would be good at picking value stocks. I don’t mean the whole value bucket, but just being flexible, focused more on value considerations and growth considerations. I would also put somebody into emerging market equities. I would also put some money into U.S. residential real estate, which I think is a major beneficiary of breaking this gap between inflation and interest rates. That’s probably about it. 

The crucial thing, and I think it’s back once again to that ’66 to ’82 period. Why I find it so fascinating is that many people by the end of the ’60s saw that inflation was coming, and some of them were bright enough to know that you should buy gold. That was a radical thing to do because gold was pegged at $35 to the ounce, so you couldn’t make any money out of gold and it didn’t give you a yield. But they were smart enough to see that. 

In many ways they were smart enough to see all of this, and even smart enough to buy the right assets. But the problem was they didn’t buy them in the right size. That was the fundamental problem because the right size of assets you needed to buy, the right weightings of the four or five assets I just mentioned, would have been so contrary to prevailing opinion, then you would have been considered a mad radical to have gone out and waited. 

The answers I’ve just mentioned to you, I don’t think are radical assets: emerging market equities, U.S. residential property, value stocks. These are not radical assets, but I think you need them in radical size so you don’t have any growth [unclear]. Not having growth stocks and having zero bonds, that’s already a radical [unclear] allocation decision. I think that’s what I would do if I had to go away for 25 years. But the radical figure is not the asset. It’s the weighting, and just shunning completely some assets, which, in particular, obviously, are government bonds or bonds in general, fixed interest securities, deposits, the whole lot.

David: Well, here we finish our annual conversation. It’s just about an annual conversation, always enjoyable and always more questions there to ask, but we’ll look forward to the next time we visit. Thank you for your contribution. Something shifted also this last year, which is very important. Your research is available to individuals as well as institutions, and The Solid Ground, a newsletter, which was for many years free, is available at a cost. 

If you go to, you can proceed with looking into the details of that. I would not be without Napier’s contribution. As we started the conversation, this goes way back for me—not only reading his research when he was with CLSA, but then a very fundamental book in my thinking, The Anatomy of the Bear. I benefited tremendously from your course, The Practical History Of Financial Markets, and on an ongoing basis, Solid Ground newsletter is must reading. I won’t do without it. So I would encourage those who enjoy having their thinking challenged and having the financial history woven into current events. Look at subscribing,

Russell: Thank you very much. Let me just finish by saying you need to read it because we’re definitely not in Kansas anymore.

David: We’re not. Well, thank you so much for your time. We look forward to the next conversation.

Russell: Thank you.

Kevin: You’ve been listening to the McAlvany weekly commentary. I’m Kevin Orrick, along with David McAlvany and our guest today, Russell Napier. You can find us at, You can call us at (800) 525-9556.

This has been the McAlvany weekly commentary. The views expressed should not be considered to be a solicitation or a recommendation for your investment portfolio. You should consult a professional financial advisor to assess your suitability for risk and investment. Join us again next week for a new edition of the McAlvany weekly commentary.

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