The Great Correction: Awaiting Bailouts that Will Never Come

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We’re going to rename our theory. This is more than a depression; it’s more than a financial and economic phenomenon. It includes a shift of power…a return to normal after 4 centuries of aberration…and the failure of a whole line of Nobel Prizing-winning economic claptrap, including the Efficient Market Hypothesis and Modern Portfolio Theory. Let’s call this phase “The Great Correction”…and wait for events to prove we’re right.

In the meantime…we await clarification…

When will this bounce end? What will happen when it does?

Yesterday was another inconclusive, information-free day. The Dow rose 17 points. Gold went up $5. Oil fell to $79 a barrel.

But the deep trends continue. The government grows…and heads towards bankruptcy. Most developed nations are running huge deficits in their public accounts. The one that has been most in the news is Greece. The Hellenes promised to cut their spending, rioted in the streets, and now hope for some back-up plan from Europe. The rest of the PIGS (peripheral European states, with good food and wine, but bad finances) watch carefully. What Greece gets now they’re likely to get later.

But the problem is hardly limited to the small states of Europe.

Barron’s reports that the states face “massive shortfalls” in their pension programs. This is in addition to the other massive shortfalls faced by governments all over the planet.

“US ratings threat,” is the headline on today’s Financial Times:

“Moody’s Investor Service will warn the US today that unless it gets its public finances into better shape than the Obama administration projects there would be ‘downward pressure’ on its triple A credit rating.”

Moody’s learned a lesson last year. You take money from the ratee. You give a good rating to junk. Then, people point their fingers at you and sue when the junk goes bad. The raters don’t want every Treasury bond holder in the world at their throats.

The US is going broke; no doubt about it. Of course, it may take years…

What the hell? We can wait…

Some Treasury buyers aren’t waiting until the last minute. “China continues selling US Debt in January,” comes a report from The Wall Street Journal.

Japan too, adds Bloomberg.

Japan, of course, faces a financial crisis of its own. It already has government debt greater than 200% of GDP…and its aging citizens are saving less money each year. Pretty soon, it will be unable to finance its deficits. Then what?

Then, yields will rise and Japan will face a crisis similar to that of Greece.

And what about China? Even countries with sound budgets can take huge financial hits.

“China may face massive bank bailouts,” Bloomberg reports.

Yes, dear reader…China has a solid budget…and industries that make money. The trouble is, it has too many of them. And now it’s made the mistake of stimulating them to increase production – as well as increasing infrastructure – at the worst possible moment, just as their major customer goes into a funk.

So, while China’s state finances are in good shape – at least on the surface – its private sector finances are a mess. They are such a huge potential mess that one analyst refers to China as the ‘mother of black swans.’

Who’s going to bail out China’s banking sector? Who’s going to bail out Greece? Who’s going to bail out Japan? Who’s going to bail out the US?

Day by day, the lumbering, clumbering wheels roll on…towards bigger governments with greater debts… One government looks to another one to help it out. The other looks to yet another. One nation depends on its central bank…and its central bank depends on the US Federal Reserve, the capo di tutti capi of all the world’s central banks.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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79 Comments on "The Great Correction: Awaiting Bailouts that Will Never Come"

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wtf
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“Japan … will be unable to finance its deficits” and “Japan will face a crisis similar to that of Greece”
Did I read that correctly? Are you comparing Greece, who surrendered it sovereignty to the European Central Bank, to Japan who is the *sole* creator of Yen? Do you really think the only people who create Yen will not be able to pay debt in Yen? Come on…

Glen
Guest

Who is holding all of the credit if the public and governments have all of the debt? Who owns the planet when the whole economic system collapses? Im sure some people will claim that they do because they have the piece of paper that says so.

prozak
Guest

wtf,

not many people (including our pundits on DR) understand that a country creating debt in a sovereign currency cannot go broke.

Zimbabwe are yet to default.

I realised long ago that the DR is not going to let facts get in the way of a good story.

Ron
Guest
The world that we created is built simply on illusions (with all of its perceptions). When the veil finally drops the illusions ends and reality sets in. The economy is only a symptom of the world we crated, including all of its social/economic components. Sorry to get all transcendental but if your looking for real root causes, beyond economic formulas and analysis then you need to simply consider human nature. More is better at any cost. The way nature handles itself (the natural order of things) so should we allow free markets to handle themselves. A big wolf eats a… Read more »
GrassRanger
Guest

Prozak: “Zimbabwe are yet to default.”

No, Zim did not default formally, it just printed itself into oblivion and its citizens into penury. The effect on the country was approximately the same: poverty for its people.

89peterg
Guest
ron, do you think that the aboriginal australians traditionally allowed their fellows to starve? everyone had a part to play. sure, bludging was not an option, but rampant individualism was inthinkable too. more was not better at any cost eg fireburning was limited, hunting grounds were allowed to renew. though you could argue that these limitations were imposed through natural and social selection by nature (contra – easter islanders demise) – but youre right with modern, abstract, life. it knows no bounds (yet). to assume that nature is dog eat dog and that we should emulate it is to argue… Read more »
John
Guest
Within the tribe those rules applied, Peter, but our indigenous people often raided each others’ camps for gain, including taking women from them. I agree that the nomadic life, including summer and winter camps, did allow rejuvenation, but it’s likely that some sources of food were depleted, forcing walkabout, anyway. Survival in a harsh world, whether past or present, introduces all kinds of ethical dilemmas. Knowing that there were skin-group taboos in place, was it wrong for raiders to steal women (protecting their tribe’s genes)? Is it wrong for corporate raiders to consume smaller companies, to preserve their own continuity?… Read more »
dan
Guest

prozack,
so zimbabwae have not defaulted – thats ok then?
The fact is that the economy and the nation have regressed into being some bongo shithole due to inflation, money printing and a complete economic and social collapse is OK?

Default happens by either non-payment, partial non-payment and inflation.
When are you and wtf moving to zimbabwae?

Ross
Guest
All 7 responses above have merit for mine. On sovereign debt, the sound of the alarm bell is most often a political device as wtf and prozac say. The trade account and capital account do however in the end matter as evidenced by ZIM. Of all the factors ZIM was most emasculated by the CAP (it got no special provisions like NZ because it was a bigger threat on broadacre farming and it had even hastened the UK’s abandonment of Smith). Then the transition money /reparations money agreed to be paid by the Brits in negotiations under Chatham House Rules… Read more »
89peterg
Guest
yes john, I was doing a bit of the noble savage thing there.read the book then see the new movie. something about end of world movies for a good section of the US audience these days i reckon. also just finished watching a BBC series on the Romans (2004 I think) got a bit boring towards the end… rape and pillage, rape and pillage. many scenes grabbing a woman over the shoulder to take. no wonder our genes are more bad monkey than good. still, made me wonder how anything constructive got done in between wars, time and life goes… Read more »
prozak
Guest

very interesting responses.

wtf & I were referring to the article comparing Japan to Greece and the other inaccurate statements made by DR for the purpose of writing an article with some doom-mongering in it.

I raised Zimmer as the extreme example. Never did I imply that zimmer is a great example of an economic model.

wtf
Guest

Yeah, I wasn’t planning on rushing to Zim in a hurry either, merely pointing out that Greece and Japan are in completely different financial situations.

You may (or may not) like to read this post in respect to Hyperinflation in Zim:
http://bilbo.economicoutlook.net/blog/?p=3773

As Ross pointed out, there is more to its root cause than simply ‘printing money’.

Ross
Guest
WTF’s link takes another interesting path with Weimar and the consideration that must be given to sovereign debt (& liabilities). It is worth reading on Billy Hughes and his particular contribution to Weimar as he hung around Europe making an idiot of himself. He didn’t sit with US calls for reason on WWI war debt. But if you read of his attitude to Japan and opposition to Britain’s handing German protectorates to their Pacific Imperial ally post WWI you start to see our part in backing the Americans in the Pacific war slugfest. However on the issue of govt filling… Read more »
wtf
Guest

Ross,
But isn’t that just ‘propping up the banks’, rather than filling demand? i.e. the money isn’t going to those who actually create demand.

Ross
Guest

wtf, my view is that the answer is yes as it applies in the real economy, and yet a sharp no as it applies to the asset inflating and trickle down services economy.

Biker Pete
Guest

Also noted that item, John. Did you see the Property Insert (p.2) in the Sunday Times, yesterday? Showed that back in 1990, Aussies shelled out 34.4% of income to mortgages. Two decades later, it’s down to 29%. What’s interesting is that homes are now ‘bigger and better’, yet we have 5.4% more in disposable income today. Food for thought… .

Stillgotshoeson
Guest

@BP Nit picking “specific dates” is pointless…

also depends the figures you want to use the % ranges from <30 to over 50 depending on the source of the information you read…

1991 we had a recessionary period…..;-)

Biker Pete
Guest

OK… take 2005, Shoes. Percentage spent on mortgage: 32.1%. That’s 3.1% higher than today’s figure of 29%.

My point, subtle as it is, is that those who argue like Hanrahan, that “We’ll all be rooned…” need to consider that interest rates are unlikely to slow the property market. I note that the AMP dropped its mortgage rate last week. Members Equity may follow that lead.

Interestingly, the same article projected that virtually _every_ location in WA would have a median value of a million plus within a decade. Many already do… .

Dan
Guest

Additionally to BP’s comment, consider projected population growth, globally and for Australia (approximately doubling in 40 years), and what it will mean to have a house on some land that you actually own – it’s going to be more the exception than the rule with time. The only issue will be beating off the crowds of people, many yet to be born, who will be left with lesser pickings.

Biker Pete
Guest

The population just hit 22,200,000. It’s growing at 2.1% per year. Skill shortages (already looming) will necessitate increased migration, whether it’s merely interstate or from the north.

It may well be that many yet to be born will need family assistance to get into housing. We do the young no favours by counselling that housing will be cheaper in the future… .

SV
Guest
BP: re: AMP loan. Some drop. State Custodians offer 5.89%, 0.6% cheaper. Dan: doesn’t your scenario actually mean “We’ll all be rooned…”? There are a few risks for making projections 40 years ahead. Say, if more than 50% of voters will be renters, they will find a way to shift legislation in their favor, like currently it favors home owners. Don’t even need 50% of population, just enough to skew marginal seats. Who said the population will double? Our single-term, non-reusable Prime Minister? Who said that people can only live in Sydney and Melbourne, close to CBD? I mean, what… Read more »
Dan
Guest

SV – yeah maybe, but I’d still rather be on the owning side of the situation.

Biker Pete
Guest
I’d agree that 40 years is too far ahead, SV. Even ten is a stretch of the imagination. SV: “…if more than 50% of voters will be renters, they will find a way to shift legislation in their favor, like currently it favors home owners.” It’s likely possession will remain 9/10 of the law. Last year we _declined_ a tenant who was willing to pay us $50 pw more than we were asking for our double-storey beach house. We just said no. I agree with your predictions about technology. I’m actually doing it right now… . My sons both do… Read more »
Stillgotshoeson
Guest

An article from the age nearly 2 years ago…

http://news.theage.com.au/business/mortgage-stress-could-grip-1m-aussies-20080424-28av.html

2 year old article.. House prices have increased, number of loans has increased, wages have not kept up any where near the rise in house prices..
FHOG put 250000 people in homes in the 2 years since this article.. around 1/2 are financialy stressed already…

SV
Guest
No one is saying that owning a house is not a good thing. I am not even saying that the median house prices will not increase, even after today’s dollars. But I am saying that people will not sleep in 4-level bunk beds, not next to CBD nor anywhere else in Australia. There is enough coastal land for 40 mln people, living comfortably in private houses, should this indeed be required. This land is just not close to Sydney and Melbourne. But I put it to you that perhaps it does not need to be. Dan, BP, if you fear… Read more »
Stillgotshoeson
Guest
I agree 100% SV.. part of the reason why, at this stage in my life I do not want a house. I have an alternate investment strategy thet is working for me.. I work in Melbourne, I rent in a suburb that is near my kids so I get to see them.. (primary school aged). I am not waiting for a housing bubble to crash and then buy a house.. Even if houses were to crash now I still would not buy.. When I am in a position that I no longer need to work, and when my children are… Read more »
Biker Pete
Guest

SV, I don’t disagree with anything you’ve said, other than a.) the biz about the fear my kids won’t have shelter. They won’t even have mortgages, when they buy. And they’ll need _nothing_ from us. Grandkids? Who knows?!
b.) persistence of housing shortages. If there’s not _big_ money in it, investors just won’t buy it… .

However we share _exactly_ the same perspectives on location and technological possibilities. Our investment strategies embrace both.

Stillgotshoeson
Guest

Told you we are going to get rate rises above th RBA rate increases..

http://www.theage.com.au/business/westpac-warns-of-rates-pressure-20100322-qrcy.html

John
Guest

Oh dear, I guess that means my rent will rise again. The banks put up the rates and the landlords put up the rents. Being at the bottom of the food chain, it’s always the poor renter who is the one who pays.

Don
Guest
Not really surprised Shoes, disappointed but not surprised. By bailing out their economies through measures such as direct stimulus, bank bailouts, FHOG etc governments have transferred the losses from the private sector (where if a company goes broke the debts are effectively written off – tough luck borrowers!) to the government sector where debt is effectively forever….. unless of course they inflate it away – such are the joys of the times. Australia is quite vulnerable of course since we don’t save enough to finance major projects and the like. The directors from my company are as we speak over… Read more »
Biker Pete
Guest

John: “Oh dear, I guess that means my rent will rise again. The banks put up the rates and the landlords put up the rents. Being at the bottom of the food chain, it’s always the poor renter who is the one who pays.”

No John, landlords invest in rental properties solely in order to subsidise tenants, so tenants can invest in the ASX, gold or cash-in-the-bank. There’s no profit expectation there, whatsoever. ;)

Biker Pete
Guest

Shoes, thanks for that link.
Check out the _vidclip_ in this report on Westpac’s plans:

http://www.watoday.com.au/business/westpac-warns-of-rates-pressure-20100322-qrcy.html?posted=sucessful#makeComment

Stillgotshoeson
Guest
@BP Can not watch the vid at the moment internet connection keeps dropping out… Australian Financial Review today… Westpac tips five years of rate rises One of the country’s leading bankers has warned that interest rates will keep rising for at least five years no matter what happens to the official cash rate set by the Reserve Bank of Australia. I posted that this was going to happen…. I seriously hope that my upside guess of 13.5% mortgage rates is as high as it is going to get.. but 10% to 13.5% is my guess… 17% and 18% like the… Read more »
Biker Pete
Guest

That’s why we ‘insulate’ with offset accounts, Shoes. Rates go up, our money in offsets effectively earns that rate, tax-free. ;)

Don’t knock baked beans and bullets, son. Toast, baked beans and a little ham is my lunch once a week; and an airgun slug provides a fresh bunny drowned and slow-cooked in red, garlic and rosemary for the crockpot.
A man with a bit-of-land has it made… . :)

Watch the vid when you reconnect, Shoes. More food for thought… .

SV
Guest

Westpac is offering 7% on a 5-year term deposit, banks typically operate on 2% margin, so it can lend this money at 9%.
By the way, Rabobank is offering 7.4% for the same deposit. And it is AAA-rated.

Biker Pete
Guest

Son # 1 locked in with Westpac at 6.8% for a year. I’ll send him your post. Frankly, I’d rather he pulled his ASX funds… . Doubt he’d look at any foreign bank, though… .

Stillgotshoeson
Guest
I am aware of how offsets work BP, my concern is a lot of a) homebuyers and b) mortgage investors are getting cashed strapped and not able to take advantage of offsets… I still believe too many “mortgage owners” be they buyers or investors are too close too the edge to survive too many interest rate rises.. this alone may only be a 15 to 20% effect on property couple it with a collapse in the Northern Hemisphere and it will be a disaster,, credit crunch and we may well get the doom and gloom 40 to 50% crash… Again… Read more »
Biker Pete
Guest

Yes, you should definitely watch the vid, Shoes… .

I realise that you’re primarily concerned for your fellow t’othersiders.
As you have reiterated many times, you a.) don’t want to buy a house;
b.) probably wouldn’t buy one after the GPC.

You’re a landlord’s dream, mate! :)

Stillgotshoeson
Guest
I had already seen it… 341 auctions last year with a clearance of 75% 880 Auctions and 87% this year….. So seeing properties for Auction more than doubling in a year.. Is that people under stress selling out.. or upgraders, or downsizers.. Properties for Auction double again to 1760 (may drop to 60%?) properties in a weekend, how will that effect clearance rates.. or Doubles again to 3520 (might drop right down to 35%) then the folowing week 1500 to 3000 more properties on the market to add to the 750 to 1500 that did not sell the week before…… Read more »
Biker Pete
Guest

My guess is ‘upgraders’, which, in the absence of data, is as good as anyone’s… . Can’t see any paper losses, but inflation will eventually beat us all, in the end. :)

Interesting to read LMHFB’s Ivan Karamatic’s advice to FHBs in trouble, in the Sunday Times, 21/03/2010: “Move back in with your parents… rent out your property…” Long before FHBs are hanging or gasing themselves, I figure they might take that less dramatic path… but you can live in hope, I guess… . ;)

Lachlan Scanlan
Guest
“less sophisticated property investors and over commited first home buyers will be buying lengths of rope from the hardware or parking their cars in the garage and leaving the engine running… ” Thanks Shoes it might be naughty but that made me laugh… a lot….oh the drama of the property debate :) Biker (and alter egos) you are without a doubt in my mind Australias most passionate property bull! Do you have real bunnies or hares? I tried to eat a hare I shot with one of my ex wifes rifles (aint messin with her she’s armed to the teeth… Read more »
Biker Pete
Guest

Oh, goody, a lynchin’ party!!~ Let’s hang those miserabble FHBs… .

Bunnies: Only use the back legs, Lachlan. Eight of those, on a bed of home-grown rosemary, drenched in a good cab sav, with a little port, some flat-knife crushed garlic, a few onions, sprinkle with fresh home-cut garlic chives… and cover with a crown of rosemary*. Now slow cook in the crockpot for five hours, thirty minutes. Going to buy a _bandsaw_ when I finally retire, to speed up the initial preparation. (Oh, goody, a bandsawin’ party… better than the Texas CM.) My Kitchen Rox, OK?! :)

Biker Pete
Guest

Forgot the *

My mate Jack reckons I use too much Rosemary.
Can’t get enough of Rosemary!~ ;)

Stillgotshoeson
Guest
@Comment by Lachlan Scanlan on 23 March 2010: Thanks Shoes it might be naughty but that made me laugh… a lot….oh the drama of the property debate :) Glad you appreciated the theaterics I threw in to the debate :) Biker (and alter egos) you are without a doubt in my mind Australias most passionate property bull! Do you have real bunnies or hares? I tried to eat a hare I shot with one of my ex wifes rifles (aint messin with her she’s armed to the teeth and a gun club president taboot). Hare had good flavour but texture… Read more »
Biker Pete
Guest

No hares, Lachlan. We’d enjoy having them here… we’re bowhunters… but only bunnies, I’m afraid. We have our own mob of roos of course, but they’re very trusting and I’ve never been inclined to knock one over.

Like some here, I’d relish an ASX collapse, but the thought of Shoes dangling from his laces is a little too graphic, so I wish you _all_ well…!

Australia’s most passionate property bull

Stillgotshoeson
Guest

I will survive a crash BP….. don’t fret, I will still be here to taunt you after it does….
Will you be here to retort after property goes south…

Stillgotshoeson
Guest

OH that’s right how remiss of me.. you have started to look at selling a few properties… because you have had professional advice from someone you have known for 50 years and has been your accountant for 20 or so.. even though you believe Property is safe, secure and profitable and supplies you with a steady income.. and in fact the tenants are your livelyhood.. your selling your golden geese.. and looking to invest in the ASX……

Biker Pete
Guest
Shoes: “…the tenants are your livelyhood (sic).. your (sic) selling your golden geese.. and looking to invest in the ASX……” Where did you get the last silly bit, Shoes? We’d shift Super from cash into ASX, to gain 500 points and get out again, ASAP. Reread that post and you’ll see it was the 10% interest rate that beckoned… . Actually have a couple of blocks on the market right now. We may sell one house in July, if the tenants don’t renew. Projection of WA’s growth are in line with our plans. Yep, fellas like you are our bread… Read more »
Biker Pete
Guest

Shoes: “I will survive a crash BP….. don’t fret, I will still be here to taunt you after it does…. Will you be here to retort after property goes south… ”

Just saw that gem. Nah, I’ll be long deceased, son. ;)

Stillgotshoeson
Guest
@Comment by Biker Pete on 23 March 2010: Shoes: “I will survive a crash BP….. don’t fret, I will still be here to taunt you after it does…. Will you be here to retort after property goes south… ” Just saw that gem. Nah, I’ll be long deceased, son. ;) Not planning on living much longer then? Prolly should pack up and enjoy life.. spend your millions, you can not take it with you ;-) “Now you don’t sound at all nervous about the ASX. _You_ can time it. :)” Out at a high I am comfortable with, In at… Read more »
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