As the introduction to this interview says, when Russell Napier speaks, investors across the world listen. We have featured his interviews with The Market since the pandemic here in the 3L&3S and he’s got his two big calls right – the rise in inflation and the capex boom globally. In this interview, he maintains his long-term view of financial repression as governments across the world try and inflate away their debt by suppressing interest rates. However, he does open the likelihood of a deflationary shock in the interim. The more interesting point he raises in this interview is that of “National Capitalism”, where governments across the world, direct or perhaps even coerce private capital to be invested for national interests, undermining free market capitalism. What makes him say that?
“On April 26th, President Emmanuel Macron of France held a speech at the Sorbonne, titled «Europe – It Can Die». Read it. It’s a sea change. In a telling bit of his speech, Macron says that every year, Europeans send 300 billion euros to the US to fund the American government and American corporations. In other words, he’s outlining a concept of national savings, and they should be used for the national good. Mario Draghi in his report to the EU Commission also outlines all the things that should be done with new money. The British, meanwhile, are talking about mandation, which posits that pension funds in Britain must invest a certain percentage of their funds domestically. That’s what lies ahead. Governments will tell investors how and where to invest their capital.
I say we are headed towards a system of national capitalism. Interestingly, the term ‹national capitalism› has been used before, by a man who used to live in Zurich for a while: his name was Lenin. In a system of national capitalism, governments direct national savings towards national purposes. And our purposes today are investments, as outlined by Macron or Draghi and also by industrial policy initiatives in the US: Investments in energy infrastructure, in defense, in new productive capacity in order to de-risk from China. If we get into a bad Cold War with China, this will have a high national priority.”
And this ties in with his point of reindustrialisation in the west:
“You may call it industrial policy, friendshoring, or de-risking. It adds up to the same thing: state-directed investment. Again, read the Macron speech . He says if we don’t learn to build stuff again, Europe can die. Of course, he’s prone to overdramatic statements, but he didn’t say Europe is a bit ill. He said Europe can die. This is a question of life and death. Building military equipment is life and death stuff. It has become an issue of national survival to invest. Governments all over the world find the need to direct investments to purposes they want to achieve.”
He then links this to his take on interest rates being suppressed leading to financial repression:
“Globally, total debt to GDP today is close to 200%. We’ve never seen that before. France is at 311%, the US at 255%, Japan at 400%. We are talking about at least a decade and a half to get this under control. For Japan and France it will take even longer.
…There are only five ways out of a debt problem: Austerity, default, high real growth, hyperinflation or financial repression. The best one for all of us would be high real growth. To have that, you need a productivity revolution, we’d need to lift real growth to 3 or 4% per annum. Will AI deliver that? I doubt it. Look at the internet revolution: It has transformed the entire world, but it didn’t boost productivity much. There’s an interesting book by my friend Alasdair Nairn, titled «Engines that Move Markets» . He goes back to the railway boom in the 19th century, and he shows a very consistent pattern: When a new technology appears, it attracts huge amounts of capital. There is physical investment on a massive scale. This inevitably leads to overinvestment, creating bad returns, and then the whole thing collapses. It’s usually in the ruins of the first investment bubble where you can identify the truly productive uses of the new technology. Think of Amazon: Today, it’s a clear winner of the internet age. But from 2000 to 2003, its share price fell by 90%. Will AI be different? I’m not smart enough to work that out. But I doubt it.”
The interview is worth a read in its entirety as he talks about the likely collapse of the global monetary system which is great for Gold as an asset class and why whilst inflation will be good for equities in general, the S&P500 given its over-owned state may not be a great place. Instead, he prefers small and mid-cap equities and those benefiting from the global capex boom.
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
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