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"From equities to Treasuries, the global macro strategist Russell Napier can&amp;#8217;t find much to be hopeful about in the U.S. these days. He shares his views on the Fed, China, and how to fix the banks with a Warren Buffett tax. \n\n  \nThe outlook is bleak from this seat.\nFORTUNE &amp;#8211; Russell Napier wants to make a couple of things clear. First, says the global macro strategist for brokerage house CLSA, he is not biased against the United States. It\u2019s just that there are so many things working against it right now that the Irishman is, shall we say, a bit bearish on America. And second, he\u2019s not a through-and-through pessimist about the direction in which the global economy is headed. He sees a few bright spots. Just not many. Fortune spoke with him Thursday morning to get a plateful of bad news and what spoonfuls of good he had to offer.\nYou have a sell on the U.S. equity market right now. Why?\nThis is the first time in two years I have been selling U.S. equities. It\u2019s for two reasons. The first is valuation. And the second is that QE2 [quantitative easing] has failed, even though everybody I meet thinks it succeeded.\nOn the valuation front, the cyclically adjusted price-earning ratio of the market is 23 times. From 1981 through 1995, we spent exactly 24 months above that level, and there were always poor long-term returns if you bought. The same goes for 1995 through 2011. There\u2019s one exception, from 1995 to 2000, but make of that what you wish. You can debate the short-term prospects for the market today, but the long-term ones don\u2019t look good. I said the market was cheap in September relative to bonds. It isn\u2019t any more. The market is pricing in a lot of good things that we\u2019re not going to get.\nWhich brings me to QE2. The Fed did succeed in changing some people\u2019s inflation expectations, which has made them bullish on equities. They think people will stop hoarding deposits and start spending them or investing. I have a query with the second part of that argument. Corporations are borrowing in the US, but not through the banking system. The banking system is reliant on households and small enterprises, and they aren\u2019t borrowing. In fact, bank lending continues to decline. Banks are not expanding their balance sheets. The amount of money in America is not going up. So even though the headlines scream that the Fed is printing money, the money supply hasn\u2019t risen. They\u2019re creating fuel to create lots of money, but they haven\u2019t actually created it. The stock market at these levels is looking for 3% real GDP growth and 1.5 to 2% inflation. I don\u2019t think those forecasts are justified. The market is too excited.\nWhat\u2019s the prognosis for US Treasuries? Do our foreign lenders ever give up on us and stop lending?\nI think so &amp;#8212; my guess is within five years tops &amp;#8212; but not for the reasons most people talk about, that they\u2019ve lost faith in the dollar or Treasuries. There are a number of countries out there holding their exchange rates down by buying Treasuries. That\u2019s got to end, and for some it will be much sooner than five years. It\u2019s creating excess inflation in their economies, because they\u2019re simply printing money. Some are already panicking. Brazil and India have let their exchange rates rise. It\u2019s not that they wake up and say, \u201CWe don\u2019t want more dollars.\u201D Rather, it\u2019s, \u201CWe better do something about inflation.\u201D\nSo what happens to Treasuries? To the U.S. economy?\nYields on Treasuries will have to go up. Other countries don\u2019t have to be selling to cause an issue, they just need to stop buying. And to find a new buyer, there\u2019s going to need to be a higher yield. Foreign central banks bought about $800 billion in Treasuries last year. So consider that gap. Who\u2019s going to step up? It\u2019s going to have to be a domestic buyer in the U.S. What price do you need on Treasuries to lure people out of other asset classes? I think it will be significant. I think at least 100 basis points higher than now. And when that money shifts out of private sector assets &amp;#8212; the corporate bond market or equity market &amp;#8212; into public sector assets, there will be a deflationary adjustment.\nIf the switch happened tomorrow morning, the impact would be quite negative for economic growth. Things would get tight pretty quickly for the private sector. Basically, an anti-inflation drive abroad is deflationary for the U.S. It\u2019s the opposite of what Paul Volcker did. He attacked U.S. inflation and bankrupted Mexico. When China finds a Volcker, it\u2019s America that goes bust.\nSo how can policymakers prepare for the possibility?\nThe obvious thing is to run smaller fiscal deficits &amp;#8212; not to borrow so much money. But that generally doesn\u2019t work politically. There may need to be new rules to force people to hold more government debt. Say, a 1.5% transaction tax on all financial instruments except government debt. But really, the real answer is that you should borrow less money.\nWhat about bank capital requirements? There seems to be no end to this debate. Where do you come out on it?\nI think this is the wrong time to pare back capital requirements. You need to take advantage of the opportunity for reform that a crisis brings. That\u2019s why the politicians need to keep going. But at the same time banks need to expand credit. So I would have pushed the issue out a little further.\nWhat\u2019s equally important, though, is the need to get the owners of banks to behave like they own them. Institutions are turning over their bank shares every six months or so. They don\u2019t consider themselves owners. I think we should get capital requirements up in the future but allow them to grow at the moment, and in the meantime make sure shareholders own shares for longer and engage with management. The job of policing management shouldn\u2019t be left to the government. It should be the owners that do that. But we lost that. Again, maybe we need another tax to make shareholders hang on longer. I would call it the Warren Buffett Tax.\nHow have events in Japan changed the short- or long-term global economic outlook?\nIn the equity world it\u2019s actually a positive. The Bank of Japan has been forced into a pro-growth and pro-inflation policy. It would be treasonous not to do so. That means more money, more growth, more inflation. That\u2019s good for equity markets.\nThat\u2019s quite a price to pay for a bullish equities signal. What other positive signs do you see?\nThe biggest thing in the world today is rising Chinese wages. Anyone who still has a manufacturing sector &amp;#8212; not Detroit but Osaka &amp;#8212; gets a boost from rising Chinese wages. We\u2019re now seeing the reindustrialization of some parts of the U.S. and the United Kingdom. Japan was going to benefit from this rapid rise in Chinese wages and will still do so.\nSince the end of Bretton Woods, we\u2019ve had this dream of rebalancing global growth. I think it\u2019s happening quicker than we think through this rise in Chinese wages.\nSo while I may be bearish from the top down, when you\u2019re talking bottom-up, there are wonderful opportunities for people who can pinpoint those benefiting from the reversal.\nAlso on Fortune.com: \n\nSagging stocks put Bernanke on the spot\nGross wants Treasuries north of 4%\nHappy Birthday bull market? What a load of bull."^^<http://www.w3.org/2001/XMLSchema#string>
<http://fortune.com/2011/03/31/selling-america-the-view-from-a-bears-chair/>