Economic theory is built on the flawed premise of a rational, economically-motivated individual. Financial historian Russell Napier argues this ignores psychology, sociology, and politics, making financial history a better guide for investors. The theory's mathematical edifice crumbles without this core assumption.
Financial historian Russell Napier predicts governments will shift from fiscal/monetary tools to direct regulatory power to control capital. This involves compelling pension funds and insurers to invest in specific assets (like government bonds or domestic infrastructure) to achieve political goals, a tool he calls the "clunking fist."
The U.S. industrial strategy isn't pure "reshoring" but "friend-shoring." The goal is to build a global supply chain that excludes China, not to bring all production home. This creates massive investment opportunities in allied countries like Mexico, Vietnam, Korea, and Japan, which are beneficiaries of this geopolitical realignment.
To counter the economic threat from China's state-directed capitalism, the U.S. is ironically being forced to adopt similar strategies. This involves greater government intervention in capital allocation and industrial policy, representing a convergence of economic models rather than a clear victory for free-market capitalism.
A U.S. national security document's phrase, "the future belongs to makers," signals a significant policy shift. Credit and tax incentives will likely be redirected from financial engineering (e.g., leveraged buyouts in private equity) to tangible industrial production in order to build resilient, non-Chinese supply chains.
During the 1966-1982 stagflationary period, the S&P 500 performed poorly in real terms. However, historical data from Fama and French shows that U.S. mid-cap value stocks successfully preserved their purchasing power. This suggests that in a similar environment of high inflation, these stocks may offer a relative safe haven.
While low rates and high nominal growth typically favor equities, financial repression introduces a counterintuitive risk. If institutions are forced to buy government bonds, they must sell liquid assets—primarily equities. This could lead to a slow, multi-year decline in the S&P 500, mirroring the 1966-1982 period, instead of a sudden crash.
Financial repression isn't just about forcing institutions to buy government bonds. A key, subtle mechanism is making other asset classes less appealing. For example, implementing rent controls can remove the inflation-hedging quality of property, while high transaction taxes can deter equity investing, thus herding capital into government debt.