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According To Russell Napier Which World Has No Volume, No Volatility And Rising Prices? The USSR

From Russell Napier of the Electronic Research Interchange

Great Expectations, Pregnant Pandas and Last Wednesday’s Treasury Market

"I must be taken as I have been made. The success is not mine, the failure is not mine, but the two together make me."

       - Estella, Great Expectations

What sort of financial world is a world with no volumes, no volatility and steadily rising prices? The only historical example is perhaps the Soviet Union. When the marginal buyer of any product is the state, or its handmaiden the central bank, then simply nothing happens until the state comes out to play.

Across the world the owners of private sector assets sleep under palm trees in Bangkok, relax over mahjong in Beijing, play sudoku in Berlin, read The Sun newspaper in London or take turns to appear on CNBC in New York – all awaiting the arrival of the state. No two private parties will enter a bargain in the absence of the state, for what if the state does not like their price? Then the price will be moved by state fiat and one, or perhaps both, of those parties will look very foolish indeed.


As Magwitch, the escaped convict, remarks in Great Expectations, "What larks, Pip!" when a brief flurry of activity stirs the afternoon once the state shows its hand. Then it’s back to talking nostalgically about supply and demand, the way our ancestors spoke affectionately about gas lighting, trams and the taste of saturated fats. Forecasting is difficult, especially about the future, but it is a simple forecast that this state-induced torpor will one day pass. It did just that between 0900 and 0930 EST on Wednesday October 15th.

On the 15th of October 2014, as this analyst celebrated his 50th birthday, volume in the US Treasury market surged, suddenly and without warning, to a record high. Old timers smiled knowingly, as Magwitch did from behind the headstones, and younger members put aside their Angry Birds and wondered what was wrong.


There it was --- a real market come and gone in half an hour, like a pregnant panda at Edinburgh zoo. What did it mean and what should you do? You should pay attention to what happens to the direction of prices when volumes surge and markets work. When the veil is lifted, pay attention to what you see beneath. Last Wednesday, in the space of half an hour of active trading, the Treasury market had one of its most rapid rises ever recorded and equities fell sharply.

There is a very simple lesson that when the markets finally break through the manipulation they move to price in deflation and not inflation. This is key because it means financial repression has failed. Such repression requires the artificial depression of interest rates but, crucially, it must be paired with boosting inflation above such rates. On October 15th 2014, if only for a few short minutes, market forces broke out and the failure of central bankers was briefly evident.


In North Korea today, Kim Jong Un executed ten Workers’ Party officials for watching South Korean soap operas. Meanwhile in the developed world the excitements of October 15th 2014 have passed and financial fiduciaries continue to get paid to both watch and then appear on daytime television. The time will come when you will have to get back to determining prices.

A price is not a diktat but, like Estella in Great Expectations, the product of both a success and a failure. Last Wednesday, just briefly, diktat disappeared and failure outweighed success in the determination of price. Remember, as Yogi Berra sagely advised, "You can learn a lot just from watching." Don’t forget what you saw between 0900 and 0930 EST On Wednesday October 15th.

“Take nothing on its looks; take everything on evidence. There's no better rule.”

      - Mr Jaggers, Great Expectations