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"The Great Reset" is comingby Mark Hoskin, 24th May 2011Last week John Authers of the FT interviewed Russell Napier, Stock market historian and CLSA consultant, who is a bear on world stock markets. His view is that there is one more big deflationary shock to come, which he called " The Great Reset". This will be driven not by the US Fed, as the markets are expecting, but the People's Bank of China. Russell says that it is "the first time in history that the chairman of the Federal Reserve went onto Sixty Minutes to frighten people into risky assets. He seems to have succeeded." However Russell goes onto say that this stimulus has created degrees of inflation in emerging markets which is not acceptable to them. They will have to raise interest rates and strengthen their currencies. Emerging markets cannot cope with rising prices and the social problems this will cause without a revaluation. Russell points out that most portfolios around the world are based on the premise of continuing negative real interest rates as if this "is the new normal". It is not sustainable. He sees the fall out from the unwinding of the distortion in Treasuries being falls in equities to below the recent lows after the bankruptcy of Lehman brothers. Russell predicts the S&P to fall to 400. Today the S&P is at 1,317. He warns it will be worse for Treasuries, but with this you will see a major rise in emerging market exchange rates. See the FT interview
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