As I, and quite a few others by this point, have said over the past few years, all "solutions" offered by governments have been an epic kick the road episode, moving massive debts from the private sector to the public sector. Many countries already were on very poor fiscal paths due to promises offered, but unfunded - so layering on even grander debts via emergency "solutions" the past few years has only brought forward the timeline of when the piper must be paid.
Now, unlike Greece, many of the countries in questions (US, UK, Japan at the top of the list) are amongst the largest in the world. And a fallback solution they all have already begun to take is outright printing of money by their central banks, which serves to lower the living standard of their people by devaluing the currency but provides an ability to pay off some of these debts. The question is how far they can take it before others in the world no longer want what is increasingly viewed as having the value of toilet paper. This will be the main fiscal issue in the coming decade as rolling sovereign debt issues amongst smaller, medium and the largest countries grip the globe. The timing of each crisis is the main question...
I was taken aback to see CLSA's Chris Wood on CNBC yesterday; the Hong Kong firm is better know across the pond as I have seen Wood quoted often in UK papers the last few years but almost never in the US. In fact, this is the first time I've seen him on video in the US.. For some quick background on Wood you can see a few stories on him from 2007:
Sep 2007, UK Times Online - Chief Strategist at CLSA Predicts Record Gold Run
Gold was in the $700s at the time and, while Wood's call for greater than $3000 gold within 3 years did not pan out, it was directionally correct and his comments at the time were prescient. Please keep in mind, some of these things seem obvious in retrospect (20/20 vision is so helpful) but at the time the stock market was running to all time highs (October 2007), almost every US pundit / TV personality was completely in the dark and we were still hearing such things as "subprime is contained" (from the US Secretary of the Treasury, and a former Goldman CEO, no less). Uttering the "R" word (Recession) made people laugh at you, not to mention talk of "The Big One." After all, the "all knowing stock market" was forecasting 6 months out and, certainly as it sat at all time highs, could only forecast Kool Aid for as far as the eye could see. This blog had just started in August of that year, and I was having none of the punditry consensus (see here and here), so I can appreciate these comments by Wood even more, because I remember how comments such as mine were in the minority. In retrospect, as I read my own thoughts in 2007 - as dark as they were - I was an "optimist" versus what eventually happened. From 2007:
That was followed up a few weeks later in the UK Telegraph: Chris Wood, the Man Who Predicted the Subprime Crisis
Mr Wood said that the sub-prime conflagration would be the catalyst for a wider breakdown in markets.
However, Wood predicted that investors would soon realise that the sub-prime crisis is simply the catalyst of a much wider breakdown, arguing that it has been the “Archduke Ferdinand assassination event” that sparks a bigger calamity.
“This is not a sub-prime crisis. Sub-prime has merely exposed the bigger scam of structured finance; a scam that is about pretending that bad credit is good credit,” he said.
In recent months, Wood's stock has risen still further, largely as a result of his forecast in October 2005 which said baldly: "Investors should sell all exposure to the American mortgage securities market." A year before HSBC issued its first profit warning on the back of its exposure to US home-loan defaults, Wood had spotted stress fractures in the system which, during the past three months, have become fissures.
I always find it important to see the track record of "pundits" since many are recycled week after week, month after month, without regard for accuracy of past calls. Most simply give us the same Kool Aid - the few who did not, should be given a much larger benefit of the doubt go forward. Just as then, many are scoffing at their current predictions... one should do so only with great risk to their capital.
Was Wood a few years early in calling the mortgage crisis? Yes - he freely admits it. The party continued for 2 more years and reached ever greater heights after 2005. Does the past ensure that he (or I, or anyone of a similar thought process) is going to be correct go forward? Certainly not, but since 90% of the punditry only know how to repeat "keep sending my firm money, stocks are great for the long haul, green shoots, I see rainbows and butterflies in 2 years, USA! USA! USA!" it's OK to absorb some verbiage from those who do not live in "Happy Happy Land."
Below is the video from CNBC - certainly worth the listen and the CNBC hosts are in their typical shock and awe mode over the idea that such things even have a REMOTE chance of happening. It speaks to the denial in the country of potential outcomes. While I have no idea if the vigilantes will come to US shores "in 5 years" (I've guessed its closer to 10 years), I do agree with almost everything Wood says here, and the irony is that the US will benefit in the nearer term as it will be the last to be visited by the grim reaper. Hence, it will be funny to watch the smugness as the damage hits other countries first, and investors flee into US currency and bonds - as they did in 2008 and early 2009 and we see again happening now with a minor blip like Greece.
But, as Wood says, the "end game" is the US. The last domino, if you will.