Russell Napier: S&P 500 'will fall 70%'

The world is heading for deflation, says Russell Napier. And deflation makes equities cheap.

Russell Napier's Anatomy of the Bear, published four years ago, is "quite a cult classic" among investors, says John Authers in the FT. It explores the four great US bear-market bottoms of the 20th century. In 1921, 1932, 1949 and 1982, says Napier, the S&P 500 became compellingly cheap in terms of its cyclically adjusted price/earnings ratio (Cape). So when will the S&P's Cape be back at bargain-basement levels again, signalling the end of the post-2000 equity bear market? What does that imply for the index's price level? And what will get it there?

Many thought the S&P 500's plunge to 666 in 2009 signalled the trough, but Napier points out that the Cape never reached levels consistent with great bear-market bottoms at that stage. Before valuations could fall that far, the US Federal Reserve threw liquidity at the market, encouraging investors to pile in, creating a big rally and postponing the final stage of the bear.

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