Wood: “The endgame will be a systemic government debt crisis in the western world”

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Christopher Wood is bearish on Western stocks but still bullish on emerging Asia, especially India and China. He recommends an overweight Asia – Underweight West position for international investors in large part because he believes the inflationary signs in Asia are a sign of renewed strong economic growth there. On the other hand, in his opinion, the West will suffer debt deflationary problems for some time to come.

When asked specifically about Jim Chanos’ call that China is a bubble that could blow up, Wood rejects that view, saying he believes China will grow 8-9% this year. That may be the case, but China is still experiencing a bubble with significant levels of malinvestment. And even Chanos has shied away from saying a deflating Chinese property bubble will definitely stall the Chinese economic juggernaut.  He has merely said that it will be a disaster for people investing in shares leveraged to sectors like building materials.  See Chanos: “We’re not calling for an impending crash of China”.

When Wood is asked about Japan, Britain and the U.S., his view is diametrically opposed.

My view is that there is an inevitable endgame as a result of all this massive spending of taxpayer money in the West and Japan to bail out bankrupt banking systems, so in my view unfortunately the end game will be systemic government debt crisis in the western world.

It will probably happen in Europe and will climax in the US, and I am expecting on a five year view the collapse of the US Dollar paper standard.

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The CNBC presenters were blown away by these comments. But they make absolute sense when you take into account what I have been saying at least since I wrote The Obama-Geithner Plan will fail in February 2009, namely that we are experiencing a fake recovery.

the underlying systemic issues in the financial sector are being papered over through various mechanisms designed to surreptitiously recapitalize banks while monetary and fiscal stimulus induces a rebound before many banks’ inherent insolvency becomes a problem.  This means the banking system will remain weak even after recovery takes hold.  The likely result of the weak system will be a relapse into a depression-like circumstances once the temporary salve of stimulus has worn off.

The Fake Recovery, Apr 2009

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The mindset is not going to change either – not in the U.S., not in the U.K. or Japan. What will happen is that all governments which issue the vast majority of debt in their own currency will print as much money as they can reasonably get away with. And that is definitely going to be a boon for hard assets down the line. See Video: Gold May Reach $3,500 – Christopher Wood from last September at Bloomberg.

Back to the CNBC interview with Wood, when he starts in again, he gets to more of why this will end in disaster in the West.

The key reason why that’s the endgame is that this credit crisis we saw in the west in 2008 and 2009 has simply been deferred, because 95% of the so-called government policy solutions to deal with this crisis have simply been to extend government guarantees.

So the problem’s been transferred from the private sector to the public sector. It’s just a matter of time before investors revolt against these sovereign guarantees … The crisis is going to happen first in Europe. It’s going to climax in the U.S.

There you have it. The video is below.

 

Also see The Age of the Fiat Currency: A 38-year experiment in inflation from April 2009 where I agree with Wood that the dollar standard is coming to an ignoble end.

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