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Anatomy of abearRussell Napier in SingaporeAs markets are whipsawed by thesovereign debt crisis in Europe, bestsellingauthor Russell Napier (ofAnatomy of a Bear fame), spoke at <strong>CFA</strong>Singapore’s professional developmentworkshop in November 2011. Hereprised how history has always shownthat political action is what turns marketbottoms. Mr Napier’s discussioncarries insights from 70,000 articleson how stock markets have performedhistorically that he examined in a bid tofind out when a great buying opportunityemerges.Market bottoms happenwhen central banks step in tointervene. Therefore, analystsshould not only be looking atdemand and supply factors toforecast stock prices, accordingto Russell Napier. The authorof the best-selling Anatomy ofa Bear who was in town lastNovember foresees Europe andAmerica using capital controlsto solve their sovereign debtproblems.He advises investors to park theirmoney in Asian countries suchas Singapore and Hong Kong,where the absence of excessivegovernment debt allows freeflow of capital. But no, he wasn’tsaying it was time to invest inAsian equities: Aftershocks onworld stock markets were stillemanating from the west.MARKETS HAVECRASHED - IS IT TIMETO GO IN?According to Mr Napier, makingmoney in the market in the lastthree years had not been aboutforecasting supply and demand.Rather, it had been aboutforecasting what the governmentwants or can achieve.He pointed out that stockmarkets would not haverecovered from the globalfinancial crisis in March 2009without the Federal Reserve’squantitative easing. Pushingup the prices of assets hasalways been part of a powerfulpolicy to prevent deflationand governments don’t wantdeflation because bankruptcyrisks go up dramatically with afall in asset values.In American history, every timethere was deflation, equityvaluations became incrediblylow. Without governmentintervention, valuations wouldcome down. A second point tonote is what while the Americangovernment has propped up theprices of stocks like Citibankand General Motors, the priceof debt is what matters most togovernments. Investors shouldthen ask themselves, what aresome side effects of centralbanks stepping in to prop upasset values?Page 14www.cfasingapore.org
Popularized by Robert Shiller, the cyclically adjusted price earnings (CAPE) ratio avoids theproblems of volatile earnings in the P/E ratio by averaging the inflation-adjusted earnings of thelast 10 years. The price-earnings valuation of the S&P500 index would have been hovering around20, rather than in its low teens if cyclically adjusted for inflation. According to Russell Napier, P/Evaluations above 25 times have never been sustainable.NOT ONLY IS PROPPINGUP ASSET VALUESINFLATIONARY, ITLEADS ULTIMATELY TOCAPITAL CONTROLSWhen a government repeatedlyreturns to the market to issuebonds, presumably bondvigilantes are going to ask for apremium from the yield. In theevent of sustained inflation, thedebt would have to be constantlyrefinanced at higher and higheryields.Sustained inflation would createenormous risks to the longrunfiscal condition by drivinginterest costs to an intolerableshare of government revenues.To successfully inflate away itsdebt, according to Mr Napier, thegovernment has to force peopleto buy government debt.Page 1515
Page 2 and 3: oard member’s Messagepg 3CFA CHAR
Page 8 and 9: We must constantlyeducate ourselves
Page 10 and 11: (I) DEBT MATURITYThe lessons back i
Page 12: (III) Protect CapitalThe main lesso
Page 17: Russell Napier is an Edinburgh-base
Page 20 and 21: More eventsProfessional Development
Page 23 and 24: Upcoming CFA Singapore EventsDate T

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