Russell Napier Warns Of Global Monetary Breakdown

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By FS Staff

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FS Insider recently interviewed Russell Napier, well-known financial historian and co-founder of the Electronic Research Interchange (ERIC), to discuss a breakdown in the global monetary system, primarily with emerging markets linked to the US dollar, given the strains this is placing on large dollar-denominated debts held abroad.

Napier also discussed the nature of today's global monetary system and how this relates to his outlook for the US dollar, emerging markets, the US stock market, bonds, commodities, and more.

Here's what he told listeners...

Global Monetary Breakdown

Given the strength and stability of the United States, many emerging markets linked their currencies to the US dollar but are now in the process of breaking away.

Are they doing this because they fear a collapse of the US or some sort of hyperinflationary-style crash of the dollar itself? No. The dollar is too strong, Napier said, and the consequences are negative for everybody else, particularly for emerging markets that hold large amounts of dollar-denominated debts, he explained.

(Source: St. Louis Fed, Global Debt Is Rising, Especially in Emerging Economies)

US and Global Implications

We also have rising short-term US interest rates. More importantly, we're seeing a contraction in the Fed's balance sheet, which by September will be running at an annual pace of $360 billion. This represents the rapid destruction of high-powered liquidity with profound impacts on the world economy and emerging markets.

After outlining his investment outlook for a variety of global markets and the overall commodity space, Napier said that even though we could see a "melt-up scenario" in the US stock market over the next few years, current valuations suggest very low returns over the long term:

"Based on where we are today, if you were to hold US equities for the next 15 years, you could probably expect at best to receive a total inflation-adjusted return of about 2 percent per year," Napier said. "We could actually have a melt-up scenario where America imports inflation, interest rates stay lower than people think, and growth continues. So it's a difficult call for US equities, but I think it's already a pretty clear outlook for all the other financial markets."

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