‘Dangerous Time’ to Avoid Stocks, CLSA’s Napier Says (Update1)

By Patrick Rial

June 25 (Bloomberg) -- Stock investors can look forward to another few years of gains as central banks engineer a return to inflation, providing a tailwind for global markets, according to CLSA Ltd. strategist Russell Napier.

An acceleration in inflation from zero to 4 percent is historically associated with gains in stocks as the benefits of rising prices accrue to profits instead of labor earnings or debt holders, said Napier, the author of “Anatomy of the Bear,” a study of bear markets.

Thereafter, a bearish cycle that began in 2000 will resume as the Federal Reserve allows inflation to spiral out of control and foreign investors stop buying U.S. sovereign debt, sending the Standard & Poor’s 500 Index to an eventual bottom of about 400, Napier predicts. An index of U.S. consumer prices dropped 1.3 percent in May from the previous year, the Labor Department said on June 17. That was the steepest decline since 1950.

“We’re likely to get strong broad money growth, and I think it’s a very dangerous time be out of the equity markets,” the Edinburgh-based strategist said in a telephone interview yesterday. After a few years of gains “the Fed will launch its final attack on inflation and it will take us into a fairly terrible situation. They’ll let go and we’ll head for inflation.”