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Russell Napier

lines on the record: 105
first: 2022-01-30
most recent: 2022-01-30
sittings or episodes: 1
sources: podcast

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“They could see the mess, they could see the problem was the same. But right up until the day Thailand devalues, they couldn't accept that the same trigger would be there to unwind it. So people went to the right over the edge of the cliff with this outside of Thailand. They may have got some of their capital out of Thailand, but on the whole with a few exceptions didn't really retreat from the other markets. And so they all went down at the same time on the same day. And for those who are knowledgeable about history, you will know that that is the day that Hong Kong was handed back to the People's Republic of China on the 1st of July, which was a public holiday. We all woke up on the 2nd of July to define out that we were now in not a Thai economic crisis, but an Asian economic crisis.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Well, what you could show for the rest of Asia as Thailand was getting into trouble is they had many of the same excesses. You couldn't show that it was going to end the same way, but you could show the same excesses. So once again, this started to raise questions. Malaysia in particular, if it has the same excesses, could it end up going the same way? But the startling thing is that really nobody did very much about it until Thailand actually devalued their exchange rates. And that was on the 2nd of July 1997. And then there was that road runner moment where the roadrunner looks down and people saw that capital was leaving and saw that the mechanism for unveiling the excess was the same for everybody. And the excess, certainly in Malaysia, more than anywhere, a little bit in Indonesia, not so much in the Philippines, but the excess was there and was to be unwound. So it's really quite a shocking story for those who believe that markets can discount because the markets didn't discount that what was happening in Thailand could happen.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Was that Benjamin Franklin who said we must all hang together or surely we shall hang individually? After a long time commercial bankers tend to hang together. But that was just one part of it. There were lots of other things going on to stabilize these external accounts. But I think as an investor, that was the most difficult thing to pick up because this is done in private. You know, we work in silos. So the portfolio investors didn't necessarily pick up that the commercial bankers had come to this agreement, which turned out to be so important for the direction of capital and the stability of exchange rates and the future of Asia.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“The Fed did a very good job. I mean, all the big central bankers were involved in this, but they pulled in all the commercial banks and said, look, you can keep pulling all the credit, but if you keep pulling all the credit, you're all going to get nothing. And this is particularly true for Korea, which was a big economy, and they lent a lot of money to Korea. And, you know, if you guys want to keep pulling all this credit, go ahead. But it means you're all going to get nothing. Now, you're going to spend years in the bankruptcy courts of Korea trying to wrestle productive assets from Koreans. Good luck with that. And so it was staunch. That flow of capital was staunched by the actions of the central bankers persuading foreign commercial bankers that there was really no upside to this. And that's happened many times before. And we all get a great deal of thanks really to some of the central bankers who orchestrated that. I mean, it wasn't the central bank bailout. This was persuading the commercial bankers to act in their joint interests.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“As well, so it wasn't really clear who owned what, so it wasn't anywhere near as clear how it ended was a whole myriad of things, which would take a long time to go through. But I think the one thing that surprised me”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Sensor here. So never forget the liabilities. And of course, the old thing was we couldn't really value the liabilities anymore because they were in foreign currencies. And we didn't really know the tenors of those very well nor the interest rates on those very well. So I've always been suspicious of the sort of the simple thing that says it's so cheap it has to be a buy. There's no excuse. That's just using an excuse for not doing proper analysis and kind of pretending there were no liabilities. And remember also this is not the developed world. There were lots of crooks running these businesses and we obviously Jack will mention no names. So it wasn't clear that it may be clear that some equity would survive. It wasn't clear that you as a minority would actually get any of it, that it could easily be transferred out to somebody else. There could be inter-company transactions between non-listed and enlisted. So the fact that there was no trust in management and often very poor bankruptcy law.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Okay, well, the worst one was Indonesia, and we'll just do it in dollar terms. So in dollar terms, 90% of your money. Now, that is basically 1929, 32 in the US. That's how much money you lost. And others, I'm doing it from memory. It is in the book. It's got a 70% in some of the others. That's how much you lost. That's a lot of money. That's an awful lot of money to lose. And that's the scale of what was going on here. And these, remember, there were a lot of big pension funds in this thing that were trying to get out of the system. So that's important. And it's important to remember every single time because you'll hear it over and over again that this thing is so cheap it has to be a buy. The steel inside the buildings is worth more than the market capitalization by the building. And people just kind of forget the liability. And that happened all the time in this crisis. It has to be a buy because they asked.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“So, some of your colleagues were saying it's undervalued, it's undervalued, these assets can't be worth so little. I forget the statistic, but at some point the entire market capitalization of Thailand was smaller than that of a single company in the UK. But I think you've noted that actually the assets are worth a lot more, of course, but they also have liabilities. And equity is just the line, but the very thin line of hope between assets and liabilities. So it's talked about that. And also, how did it play out?”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Really difficult, if not impossible to work it out in a highly leveraged system, they could have fallen to 20. So the problem was that people just couldn't cope with that uncertainty. So they kind of used the old earnings and said, well, look, we think they're going to fall 30%. And even if they fall 30%, the thing is cheap. Now it turns out some of the companies, they fell 100% and they went bankrupt. And so there was no anchor, if you like. The anchor of the old monetary regime, which gave you an earnings anchor, was gone and there was nothing else. So when I did finally get to calling the bottom in 1998, it was kind of on things other than value because it was very difficult to assess what the value actually was.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“The earnings have been spectacularly good. So the problem was, what were the earnings going to be in the new monetary system? And it was very difficult to tell anybody that that would make much of a difference to what they had been. So the history of earnings, the fundamentals would be there and there would be this kind of shock in the financial system. But ultimately, equities would be valued on the fundamentals. And as the fundamentals wouldn't be changed by the system, then everything would be fine. Now, what I was pointing out was that when you give up this policy, you get exceptionally high nominal interest rates and they give you a big hit to earnings. And the problem was not that people couldn't see that because they could see that, but they had no idea of the scope of it. Would earnings that we thought, let's say we thought earnings were at their cyclical low at 100 million? Would they fall to 80 in this new system? Would they fall to 70? Would they fall to 20? Nobody knew. And it was really...”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Yes, so the number one way that stocks are valued is by looking at their recent earnings. That's what people do. People say, well, you know, it made $100 million last year. It's valued at $500 million. This is incredibly cheap. And if you live in a market or developed world economy with a reasonably rational monetary policy, the volatility of earnings is kind of like this. And that's why in developed world markets we have a thing called the cyclically adjusted PE because we think that we can smooth this out and it gives you a good underlooking valuation. Now I didn't have a cyclically adjusted PE for Asia at the time but had I had one it would have shown they were really cheap Because”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so is that rising cost of capital that really led to that deterioration? On page 176, you write that the markets are only fair value if terminal dividend growth rates are significantly higher than they are. And you write that all four markets of Malaysia, Indonesia, Philippines, and Thailand have negative capital spreads in that the cost of capital has risen so much that it's now higher than the return on that capital. So you were doing some valuation work and you were saying these are undervalued. However, I'm sure some of your peers, colleagues were saying, we're still saying that as the market was going down, that it was a great bargain. Can you talk about your analysis and why it differed from some of your peers?”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Get too much debt involved in it, so it can actually infect something broader than just the asset class. And this was a classic example of how this declining asset class was affecting broader levels of GDP. It doesn't happen all the time. I mean, absolutely. I mean, 2000-2003, the collapse of the dot-com bubble had an effect on US economic growth, but you didn't necessarily bring down the whole system the way it did in Thailand and the way it did with the collapse of residential property in America from 2007-2009. So not all popping asset bubbles kind of destroy the economy. But this one was so big and so pervasive that it fed through into GDP.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“For the banks, for the companies that were in the kind of industrial sector, it probably wasn't going to be too bad if it didn't infect GDP growth and demand and consumption. And if you're an exporter, it wouldn't have made any difference whatsoever. You may actually have benefited from it in the long run. But this did feed into domestic consumption because so much of the domestics were also based on punting various asset classes, the stock market and the property market. So there was a negative wealth effect that began to feed through. And Thailand's not a rich country. There are very, very, very rich people in it, but it's not a rich country. But you find it quite deep into society. There was some form of speculation going on. So the higher interest rates then did have a negative wealth effect, which did lead to lower levels of lower levels of consumption. And so that's how it became kind of systemic. But it's the nature of any bull market that by the time it reaches the top, you've got too many people involved in it.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“instance even corporates who were using debt and use commercial property the cost of their cost would have to go up for banks themselves that's not good for business when interest rates start to go up particularly remember these banks didn't have a long bond market to invest in they were just this was the cost of deposits they were having to pay more”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“So it didn't help that the market was completely dominated by finance, banks and property, the three most interest rate sensitive bits of the whole economic system absolutely dominated stock market capitalization. I don't have the number off the top of my head, but I'm going to say it was probably 60% of entire market cap were in those three businesses. Well, if you're in the business of property and suddenly, so there's a capital outflow, the central bank defends the exchange rate. Foreign exchange reserves come down. domestic commercial bank reserves come down there's a shortage of liquidity for the banks so they do what we all do if you're borrowing short and lending long you have to get into the market and just bid up the cost of funds because you have to have your funds so interest rates start to go up you're shrinking the supply of reserves so interest rates start to go up now that has a direct impact on property you and i the cost that you and i would have to pay for borrowing to buy a home would go up”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Second half of 96, people started asking different questions. To me, the questions they should have been asking all along. And once those difficult questions were asked, some of the answers were pretty uncomfortable about where this journey could end. But, you know, as I said, it didn't actually end until the 2nd of July 1997.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“The so-called Fundamental Mountains, but wait a minute, the fundamentals may indeed be related to this perverse monetary policy. And, you know, to be clear, that did not infect the rest of Asia for a very long time. The other markets, I can't remember exactly when they peaked, but they kept going up and up. And this was a tie problem, but at least it was beginning to show that if you ran that sort of monetary policy, there was a downside. And then when the time came, you could look around Malaysia, Indonesia, the Philippines, and say, well, they are running the same policies, and they do have a lot of foreign currency debt, maybe the fundamentals are also a picture of that. So I'm not going to tell you that the market stood up and started screaming in the summer of 96 that it was all over. Not quite the reverse, but questions started to get asked, the proper questions started to get asked. As you say, Jack, I'm a great fan of financial history, not because it necessarily gives us the right answers, but I think it gives us the right questions. So I would say...”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“To realize that the two were linked, that actually the interest rate at the Bank of Thailand would have to charge was linked to the condition of the external accounts. And then some of the locals who'd been borrowing lots of dollars began to get a little bit nervous saying maybe the Taibat isn't always going to be pegged to the dollar. And if they start going the other way, then they exacerbate the capital outflow. They exacerbate the rising. So we were now on the other side of this. Now, just because we'd started the ball rolling didn't mean to say it was going to reach this great kind of avalanche which it was to do when Thailand didn't devalue until the 2nd of July 1997. But you could see that the thing was running in the wrong way. Now for investors, I think the crucial thing was as it started going, you could see the impact on the so-called fundamentals. Suddenly corporate earnings were being downgraded because this was not working to corporates favor anymore. Interest rates were going up, for instance. So suddenly you can sort of look at...”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“So the first crack in the dam comes in the summer of nineteen ninety six, and it's only in Thailand. So this is called the Asian economic crisis because it affected the whole of Asia, but it didn't start in the whole of Asia. It started in Thailand. And what with the benefit of hindsight? Was that indicator? It was a decline in the foreign exchanges hours of Thailand. So Thailand had spent its life, well, many, many years trying to stop the exchange rate to go up and its reserves went up. And then suddenly, when the reserves started to come down, you thought, you said, well, wait a minute, they're actually having to defend the exchange rate now. So that was the first thing. So that dynamic we talked about where everybody wanted to put money in was turning about June, July, August, September of 1996. And then when that happens, obviously if the foreign exchange reserves are coming down the reserves are coming down, the local domestic commercial bank reserve, then suddenly interest rates started to go up. And that is when people's focus started to turn to Thailand because they didn't expect it. They didn't know what was going on. And then they began...”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“And so you're at the party. When did you start to hear that the music was slowing? What were the cracks in the dam that you saw specifically with regard? Where this ends is countries like Thailand had to either deflate by raising interest rates or devalue their currencies because raising interest rates will cause capital to flow back into the country. That's where it ends. So we know where it begins. That's where it ends. Tell us about the journey sort of there. What were the first warning signs that you saw?”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“I mean, there were things central bankers could have done to stop it, particularly by allowing much more volatility in the exchange rates themselves, but they didn't. And you've got to remember that the final leg of this is the politicians. They loved it as well because this was getting new capital inflow, it was getting you more money, it was getting you more investment, and what was not to like. So who didn't benefit from this? Everybody benefited from this until the party ended. And that's probably the greatest parties of all, where there's nobody who doesn't benefit from the party. And then one day it all goes the other direction. And those are the really big ones. So the politicians, the lenders, the borrowers all thought this was just going to keep going.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so this was helping on so many levels, kind of the more amusing level was just the guy in the street who would borrow Yen and put it on deposit in Indonesian repair. I mean, thinking what could possibly go wrong? I can borrow it too. I can deposit at 13. The pressure on the repaye is upwards. So the carry trade, we kind of think there must be hedge funds, but actually the average guy in the street was doing this sort of thing. Imagine if you and I were in competition in Thailand and let's just say we are in the cement business and you are funding your cement plant by borrowing dollars. And I think in those days maybe 5 or 6 percent. And I am borrowing Thai Bat at 15%. Well, I've got a bit of a problem, haven't I? I mean, you've got a much more competitive situation than I have because your cost of capital is so much lower. So it's easy to look in and say, what an idiot Jack was borrowing in dollars when all the revenues from selling cement in Thailand are in BAT. But maybe you did it because I did it.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“United States, and the like, what advantages did they see in lending to those companies? And perhaps more importantly, what advantages did Thai real estate developer, why do they want to borrow in dollars?”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“And so that's the tenor issue, the fact that it was very short-term meant that these Asian emerging markets had to constantly rely on financing. It's not like they locked it in with a 20-year bond. Then there's also the issue of the fact that it was denominated in the dollar. If I'm a Brazilian entrepreneur and I borrow in dollars, if the Brazil depreciates a tremendous amount against the dollar, I have to pay back in dollars. So I have to, you know, if it depreciates five times, I have to generate five times as much money as I thought. Whereas if my loan were to nominated in real, I would be fine because it stays there. And that brings up the issue of the carry trade where investors borrow low yielding currency and use it to lend to high-yielding currencies. Can you talk about the role of that? How did the foreign developed banks?”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“And then the Korean had the liquidity at the one. So we hadn't really dug underneath it enough and just thought that debt flows are kind of long-term debt. And it turned out they weren't long-term debt. But we didn't have a bond market in those days to really invest and they were absolutely tiny.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Currencies can't really fall against the US dollar, and the bond market was interesting because there wasn't really a bond market. There wasn't really a domestic currency bond market. Asia really hadn't got to that stage. So the form of debt that was coming in was banks, lending dollars, and foreign portfolio investors didn't look in any detail at this. And they kind of thought, without even bothering to ask, that these would all be five-year loans. They sort of knew that they were funding cement factories and they were funding fairly long-term assets and they never allowed to look to see what the tenor of the dollar loans were and then they discovered to their horror that they were very short. So when the foreign banks wanted out, they actually had an exit. It wasn't liquidating a commercial piece of commercial paper denominated in Korean won, selling the won and bringing it out. It was simply not rolling over her a three-month commercial loan to a Korean.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“So the various flows, there were people just putting money in to buy existing equity. So the stock market was going up. There was also issuance of equity. So that was going on as well. That's why the stock broking community was doing so well. So both things were going on, purchase of existing issuings of new. In terms of the debt, these were foreign banks. So these were Japanese banks, these were American banks, and these were US banks who had discovered that GDP growth in Asia was good. The problem was they decided to lend in dollars because they really couldn't access domestic currency. I mean, they didn't have branches. They weren't taking Indonesian repair deposits, so they had to lend dollars. But they considered that the Asian currencies were linked to the dollar, and not only that, you can show statistically that all the pressure on the currencies was to appreciate. They may have had a whopping rate current account deficits, but the reserves were going up, they were struggling to keep them down. So the rationale for foreign banks was, well, let's lend them lots of dollars.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“If you link your currency to a strong currency, you tend to get tighter monetary policy as you try to force your currency up in line with that strong currency. So the strong dollar was another catalyst, which I was writing about at the time and saying, look, I don't really know if this is going to continue, but if this is going to continue, all these structural issues that Asia has. This is the very thing that's going to unveil them.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Nature of the balance sheet really, the funding and the balance sheet, not the P&L. This is the problem. The P&L looked fantastic. As I said, people said the fundamentals are brilliant. How can you like the fundamentals? And I think in a situation like this, you do have to spend a lot more time on the balance sheet. Look, I was looking at the balance sheet of countries, but if you'd been able to look properly at the balance sheet of companies, you'd have seen this as well. I mean, all that foreign currency debt was being borrowed by listed companies. Now, they were doing everything they could to hide the fact that it was foreign currency debt. So I would say the thing that made me think this is the time was a deteriorating in the balance sheet. And one other thing was the dollar, the dollar exchange rate. Now, I don't think any of us can forecast the dollar exchange rate. It might be the most difficult thing in the world to forecast, given how many people buy and sell it every day. But the dollar had finally turned into a strong currency. And it was going up all the time. And I knew that if it kept going up, I couldn't forecast it. It would keep going up. But if it did keep going up, it was going to result in tighter monetary policy.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Well, when everybody wants to buy something and you're in the business of selling it, it is hard to try and tell them to stop. We mustn't forget that. So it was that composition of capital flows that so much of it was short term, so much of it was debt, which we've only kind of touched on at the minute, but also the tenor of the debt became very important. They were borrowing dollars, but it turns out they were borrowing an incredibly short term. There wasn't a lot of good data around at that time. But if you did a little bit of digging, you could find some data to find out that a lot of this paper was like three months. So if the banks, if let's say they were American banks lending dollars, suddenly decided they weren't lending to Korea, suddenly that capital was going the other way. The Koreans would have to sell Korean won to buy US dollars to pay back Americans. And I think people didn't pick up just how short-term the debt was and how quickly that could turn around. So that was the kind of fundamental reason why it looked more and more dangerous.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Was true, we'd all be running that monetary policy, so people had kind of forgotten the mechanism of how you get a bust in a fixed exchange or a managed exchange rate regime. And, you know, I found it very difficult to explain to people how it would happen. In fact, probably that's how I gained a reputation, not for calling it, but explaining it. And when you consider that the first person to explain it did it in the middle of the 18th century, it wasn't, you didn't have to be a rocket science to explain it, but people were very unfamiliar with it because they hadn't really invested in this type of regime before. Remember, most people would not have invested, most people even then had not been investing money during the Bretton Woods system. They'd have been investing during flexible exchange rates. So the mechanism was unfamiliar to people. And I think to some extent still unfamiliar to people when they, you know, I always say when you go to emerging markets, don't buy cheap equities, buy cheap currencies. If you buy a cheap managed currency, you'll probably get asset inflation and make some money.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“As inflation goes up in a managed exchange rate regime, then what's supposed to happen is your current account surplus will come down. And this is all a regulating system. And David Hume writing in the 18th century pointed out that it would be kind of self-regulating like that. And nobody would ever amass a great pile of reserves and it would never just keep growing to the sky because by creating the reserves you create domestic liquidity, you create inflation and you undermine your own competitiveness. Now the system we've lived in for the last 25 years post this crisis has been really quite different from that. But that's the theory behind it. And that is what is happening was happening in Asia. The scale of the current account deficits was clearly showing they were becoming more uncompetitive and some of that was inflation. Some of it was the competitiveness with China. But the market chose to ignore the downside of this particular monetary cycle. It was if this was a monetary policy that could only ever produce a boom. It was a monetary policy that could never produce a bust.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so this is something we all need to be very familiar with. People were writing about back in the 18th century how this mechanism worked, but we just kind of forgot about it after Bretton Woods. And I think post-Bretton Woods, most people came from developed markets and they were used to flexible exchange rates and they forgot this. But anyway, here's the way it used to work in the gold standard. And that's a pretty good model to start with as to how this works. So when there's a, the way it used to work is if everybody was in the same system and everybody linked their currency to everybody else, what would happen is follow. Somebody would be more competitive than somebody else. They would run a current account surplus. There were capital flows, so maybe capital would flow in as well to take advantage of the growth prospects that were there. Now, as you did that, your foreign exchange reserves went up, but also your central bank balance sheet expanded. Let's call it a form of quantitative easing. And in that system, normally, but not always, if your central bank balance sheet expands, growth expands, and inflation goes up.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Russell, can we zoom in a little bit on the mechanics of the currency peg? You had foreign capitalists take Thailand, for example. Foreign capital was flowing in via the capital account via the trade channel, the current account. What does the role of a currency peg play in that scenario? Because more capital was flowing in, and if there were no currency peg, the Thai bot would appreciate relative to the dollar. But what was the effect of the fact that the currency was picked? What effect did that have, that the fact that the currency couldn't appreciate it to sort of balance out that macro variable?”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Most of them are gone anyway. So that's many luck on that bit. But it's not a pleasant scenario to debate. It's a very unpleasant scenario to be in. It has to be, it has to be said, over many years, I've got quite used to it now. And it's more to do with character than intelligence. It's luck in character and nothing to do with intelligence, I would say.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“I think it's particularly difficult when you're a stockbroker because you have to go to a morning meeting every morning. And the morning meeting every morning is looking for ideas and the morning meeting is full of people who have to sell ideas. And they want ideas. And every time they pick up a phone, this is what salespeople do. They can tell instantly whether the guy at the end of the phone is more likely to be a buyer or a seller. That's the trick of being a salesman. You can tell it from the intonation of voice, etc. So to have a strategist who's constantly saying sell all the time doesn't go down very well. So I think on the buy side, it's probably easier, but it's just a matter of trying to survive, really. I mean, that's all. It's just a matter of trying to be there when it bursts. And many, many bears don't obviously make it that far. I mean, it's mainly, I think, down to luck whether you make it that far. So that's the nature of it. We all know that's the nature of a bull market. On the way up, the bears have to get squeezed, killed, reduced. And by the time it actually rolls over.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Can you speak a little bit, Russell, to what it's like to become bearish at a time when everyone is raging in their fervor of being bullish? You arrived having some thoughts and gradually became more and more skeptical. What was it like having these thoughts, having this analysis that was skeptical of the boom, while at the same time having to write research reports, the goal of which you were being paid for sort of facilitate transactions, which meant buying, you know? A buy report will always generate more transactions than a sell report, because as you say, a sell report, you have to already buy it. Whereas a buy report, you can buy.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“To the export boom comes, the current account deficits close and everything's sustainable and they never did until Asia itself was forced into crisis and devaluation.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Domestic property speculation, but the second thing was in January 1994, China had devalued. Now, China was so incredibly competitive and then began to mobilize hundreds of millions of workers and capital of its own. And the whole story began to fade, the story that this could all be sustainable because it would eventually lead to very high exports. And the current account deficit would disappear because we were building these great export assets. As 95 became 96 became 97, there was absolutely no evidence that this was happening. In fact, the evidence was pretty strong that China was undermining this whole theoretical export boom. So that's why I believe it's important to read contemporaneous history, things that you look back and say, well, wasn't it stupid that anybody believed that? You know, really bright people believed it. And there was a good case to be made for it, but it proved to be wrong. So that's why people stuck with it, saying it's only a matter of time.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, so I'm delighted you brought that up because actually it's probably the most important thing about timing, which is the most difficult bit, maybe the impossible bit. But the thing that seemed to me that this was getting to a dangerous time was the composition of the capital inflows. And they were coming much shorter term. So if we went back into the early 1990s, they were dominated by foreign direct investment, which kind of wasn't going to wash it and wash out. And now it was short-term. The other interesting thing about the short return capital is the narrative. I mean, obviously, there are a lot of bright people making up a narrative why a very large current account deficit is sustainable. The narrative was that these guys were borrowing lots of money offshore. We knew that. But they were going to invest it in productive assets and there was going to be an export boom. So there would be this period where you'd run a large current account deficit. There'd be a period where you'd suck in a lot of capital, but it was all going to be used to build productive capacity for export purposes. And two problems. One, it wasn't, so that was a pretty big problem. A lot of it was used for...”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“I mean, it's kind of incredible to even talk about it. So, what I knew is they probably couldn't invest a lot more. And also, if they started to go the other way, these are the big beasts of the investment jungle, then capital wouldn't be just trickling out. Capital would be flooding out. So it was a combination of all of that, but that's all not what people call the fundamental. So I would sit in the room and talk about that. And people say, well, that's nothing to do with the fundamentals. The fundamentals are high earnings, high earnings growth, high GDP growth. So there was a bit like America from 2007 to 2009. There was kind of a real economy here and a financial economy here. And in some people's minds, they were entirely unconnected until one day they realized that they weren't entirely unconnected, which is, I mean, a lesson from this crisis at all crises is that you can't disconnect it. And that's the kind of the instability, the structural instability that I saw and saw again in America in 2007 and in a bull market. Nobody wants to connect these.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Just step away from it. Let it find its own level. But the problem is, you get so much foreign currency debt that that in itself was taking you to bankruptcy. So there was a trap here for policymakers. So you can see the trap was sprung. You didn't know when the capital would stop coming. And you didn't know how severe it would get. But with valuations already pretty high, I think it was a good bet to be pretty wary about all of this. And just one final thing which helped with this. Fund managers have become excruciatingly overweight in these particular assets. So it wasn't impossible that they could keep buying more. But the one I mentioned in the book is the British Pension Fund industry. And the British Pension Fund industry had much more money invested in Asia X Japan than they had in America.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“To leave that interest rates would have to go to astronomical levels, and it wouldn't be an economic slowdown you'd be worried about, it would be mass bankruptcy. That is where it ended up. So I could see the beginning of the mechanism, and I wouldn't know for sure that it would get to bankruptcy. And then the other thing lurking behind that was the foreign currency debt. If you and I were running a country like this and capital stopped coming with a current account deficit, we'd be pretty tempted to let the exchange rate go and say, well, we're just going to stop targeting the exchange rate.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Up and the liabilities of the central bank was what we call high powered money or commercial bank reserves in the domestic currency. But none of this was within their control. It was entirely and totally out of their control. Once they'd chosen to manage the exchange rate, they just accepted this. And it was creating a great big party. But you could say categorically that if the capital stopped coming, you would get a tight monetary policy. I mean, you didn't have to be a genius to say that. The problem was it was a kind of circular argument to make as a stockbroker because you're saying if the capital stops coming, the prices are going to go down and people will go, yeah, that's right, dummy. If the capital starts coming, the prices are going to go down. My point was kind of a bigger one, though, which was that monetary policy would tighten and it would begin to undermine the actual earnings themselves. It wasn't just at the price of the equities would necessarily go down if there's less money around. And of course, it could be. And I can't say that I forecast this, that there could be an extreme situation if money starts.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“So, I mean, the first thing to say is I do tend to generally agree with Warren Buffett that price is what you pay and values what you get. So that is important. And of course, people in a rail bull market don't think value is important. So I would point that out. But the most important reason for me is nearly every one of these countries was running a very large current account deficit and managed exchange rates at the same time. So they were linking basically to the dollar or some sort of basket that was heavily weighted to a dollar. Now, even then, knew enough about monetary economics to know that that meant that your monetary policy was really determined by the condition of your external accountants. And as long as capital was pouring in, it didn't matter that you had a current account deficit. These guys were funding their current account deficit and then they had even excess capital coming in above that. So all their foreign exchanges there were going up, which meant that if their foreign exchange rates were going up, the asset of the central bank, the liabilities of the central bank had to be going up.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“And you may think that that is something in common with Max Weber's Protestantism. Work ethic. And I think that was all kind of read into it. But of course, okay, so maybe in that little niche, maybe, and I don't think actually it's true, but maybe, but Asia's a massive place. And there was lots of corruption in Asia. There was lots of excessive debt in Asia. There were lots of other things going on Asia. But the foreigners came in and they saw the little bit of Asia that kind of, if you like, looked like them and they just extrapolated that right across the whole of Asia and said we're buying Asian values. Now it turned out that these Chinese entrepreneurs also liked a lot of debt and also liked a lot of speculation, also liked a lot of asset trading, which is another characteristic of the Chinese diaspora. But all of that was kind of forgotten. So people, I mean, it's the same all the time. People chose to see what they wanted to see. And Asian values was bandied about very, very widely. I think there may be potentially our Asian values, but there are”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“Yeah, there was a thing called Asian Values at the time. And in my opinion, there's no such thing as Asia. It's just a thing that Westerners call that part of the world. And the idea that Pakistan and North China are in any way similar is kind of ridiculous. They're about as similar as California and Peru. I mean, there's just really no, even less similar than those two. So anyway, suddenly it was Asian values. And the question, so what did we say Asian values were? Well, people really dragged up the Chinese diaspora. And these are Chinese people who had left China a long time ago, but they were really very dominant in business sectors in Indonesia, Malaysia, obviously Singapore and Thailand. And they were very important in terms of the listed sector. They were a sort of cultural minority, but they were a business elite. And people said, well, these are very hardworking, thrifty, high saving people.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“I'm actually earnings look pretty good. So it was a mixture of these two things. And as the crisis, or as the bear market developed, the thing that kept coming up is the reason you had to buy these stocks is the valuations kept coming down. But people didn't realize that the earnings were a figment of a credit and money bubble. The earnings were not the fundamentals. The earnings were also a bubble. And that is, you know, there's lots of things that went wrong. But that was when I was trying to persuade people it was a credit and money bubble that was unwinding. I was told, no, these are high growth economies. And that's reflected in the earnings. And people wouldn't buy into, no, there was another reason why the earnings were looking so positive.”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT
“on a slow growth economy as a fast growth economy, we'll just buy the growth and it may sound a bit silly but a lot of the analysis didn't really get beyond that. So when you sort of started putting a case that a lot of the fundamentals were driven by monetary policy, we're told no, they were driven by higher levels of growth. Now this was particularly important because a lot of the stocks listed on the stock market were banks and property companies. Now anyone who's been around the markets for a while knows that these are two particular types of companies that really benefit from excess credit growth and excess money growth. So those who wanted to conflated high growth driven by banks lending it growth at 30% per annum, money supply growing at 20% per annum. They confided that with the longer term higher structural GDP growth and therefore it's sustainable and they really didn't look at the valuations. The valuations didn't look outrageous because when you have banks lending at 30%”
2022-01-30 · Forward Guidance · Lessons From The Asian Financial Crisis | Russell Napier · IDENTIFIED FROM THE TRANSCRIPT