Bill Fleckenstein http://money.msn.com/bill-fleckenstein/default.aspx Bill Fleckenstein writes weekly on the market and the economy. http://money.msn.com/bill-fleckenstein/post--final-countdown-on-markets-third-bubble Final countdown on markets' third bubble As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay. Wed, 09 Oct 2013 06:09:25 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de f76fc9ec-201c-452c-8f86-4ada09783c4c BlogArticle E5DED4DF1BF4E3F7 98 105 2013-09-27T16:20:34.803 As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay. On the heels of the much-anticipated Federal Open Market Committee meeting, I thought it might be worthwhile to take a step back and try to assess the big picture, as I believe we might be idling up to a rather large inflection point, i.e., the beginning of the end of the central bank print-fest-inspired levitation of financial markets.   Beginning of the end justifies the means   By that I mean that if the Fed has lost control of the bond market -- which is my belief, though we can't yet be certain -- interest rates will rise no matter what the Fed does, with very negative ramifications for the stock market and the economy.   Combined with the speculation we have seen -- as typified by Tesla Motors ( TSLA), LinkedIn ( LNKD), TripAdvisor ( TRIP), Facebook ( FB), Yelp ( YELP), Zillow ( Z) and other wild, kinky stocks of this era -- when equities do top out (if they haven't already), computers will get loose on the downside at some point and we will have a brutal crash (although that is getting ahead of ourselves).   This is the third bubble-like experience we have had in the past 20 years. The first was the equity bubble, and the clues to that ending were the separation between the crazy and sane stocks in late 1999 and early 2000, followed by the blow-off in March 2000. The end was somewhat recognizable at the time, but, given that the stock market was the epicenter, it was the market itself that had to provide the signs that the end was nigh.   Mr. Market, in the billiard room, with the candlestick   As for the real estate bubble, where the bust broke wide open in 2008, the early clues that the end was at hand came from the subprime market, which was where the marginal buyer operated. In early 2007, we saw the initial first-payment defaults, and that was the tipoff that the marginal buyer had been found and could not pay.   That was the end of the subprime market, which marked the beginning of the end of the real estate bubble. And yet, even though the real estate market was the economy during the middle of the last decade, it took from March 2007 (when the first-payment defaults began) until August to finally put a top into the stock market. Although it wasn't until 2008 when the real damage was done.   As for the post-2008 period, money printing on the part of the Fed and other central banks has powered the stock market higher and helped the economy to some degree (i.e. by driving the real estate market), but it has really been a result of ridiculously low interest rates (not just short-term rates, which the central banks control, but longer-term rates as well), which provided the impetus for all the levitation I've described.   First the panic button, then the reset button   If the bond market (with maturities of five years and out) is no longer willing to follow what is dictated by short-term rates and the central banks, then higher yields lie ahead. Since no one really expects that, higher rates will wreak havoc throughout the financial system and various economic structures.   At some point, the realization that the Fed no longer controls interest rates will cause a "reset" in the stock market, which will be at a level quite a bit lower than where it is today. I expect the Fed to fight this eventuality with even more money, but of course that won't work, though it will be beneficial for precious metals.   In short, in the next month or so, we will find out just what the bond market wants to do. But I expect the current rally to fail and that the key to when trouble starts will be when yields on 10-year government bonds climb back over 3.00%.   What we need in this country is to get the Federal Reserve out of the business of money printing and day-to-day jawboning and back to some sound standard. The discipline that would create would finally force Congress to make the painful adjustments to get our financial house in order. This is not going to be easy, and it won’t happen tomorrow, but I believe that is where we're headed.   All good things must come to an end sometime   This will be my last column for MSN Money. I’m in the process of integrating access to previously unavailable free content on my website, www.fleckensteincapital.com, in addition to the paid subscription, which gives you full access to my Daily Rap column, Ask Fleck, the complete archives of both, as well as videos, interviews, and other special features. To be notified when the free content is available, follow me on Twitter @FlecksThoughts, Facebook or email  and simply enter “MSN Money Reader” in the subject line, no further information is necessary. Fleck you mentioned the tip off of the first two bubbles. Is there a tip off to this bond bubble popping besides interest rates going thru 3%?? Could the tip off have been the bankruptcy of Detroit?? It is interesting that the first two bubbles started deflating 6months to a year in advance of the stock market topping. It is also interesting that the stock market really started being affected by the deflating asset class in Oct 2000 and Oct 2007. So here we are today with the air coming out of the bond market for the last 6 months to a year and it is Oct 2013! The takeaway is that the stock market will look the other way for up to a year and then will start to be affected by the popping of the bubble asset class. With the 10 year treasury market declining for a year now and the tip off, the Detroit bankruptcy, it may just be time. any thoughts Fleck? vernon BlogArticle Bill Fleckenstein bonds commodities Federal Reserve Treasurys http://money.msn.com/bill-fleckenstein/post--central-bankers-running-out-of-road Central bankers running out of road If Federal Reserve forecasts point toward full employment and price stability, policymakers at the upcoming FOMC meeting will have a hard time getting Wall Street to reconcile that outlook with a 1% Fed funds rate. Sun, 29 Sep 2013 15:18:03 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 33c4f7a5-de1f-481c-87a4-74a5cfb54194 BlogArticle E5DED4DF1BF4E3F7 41 44 2013-09-13T19:37:18.933 If Federal Reserve forecasts point toward full employment and price stability, policymakers at the upcoming FOMC meeting will have a hard time getting Wall Street to reconcile that outlook with a 1% Fed funds rate. The much-anticipated nonfarm payroll report took center stage upon its Sept. 6 release, with the data considerably weaker than expected. The actual headline number was down only slightly, at 169,000 jobs, versus expectations of 180,000 (the Federal-Reserve-is-going-to-taper-because-the-economy-is-so-great crowd had been mentally penciling in 200,000, maintaining an optimism they have demonstrated for many months). But the revisions were pretty startling: July was revised down by about 60,000 jobs and June was also reduced.   Nonetheless, it would appear that stock bulls still want to believe that the Fed is going to taper, and that action means everything is going to be better because the Fed thinks so. (How anyone can believe that after what we have witnessed the Fed do in the past 20 years is unfathomable to me, but there it is.)   Reverse engineering, reverse psychology   Just as a lot of folks marked time waiting for the recent jobs numbers, I expect there will be a certain amount of procrastination among investors ahead of the Federal Open Market Committee meetings on Sept. 17-18. Obviously, the high likelihood is that not much is going to occur at that meeting. Either the Fed won't taper, which obviously means no change in policy, or it will taper a tiny amount (say, $10 billion or so a month).   In the big scheme of things, the difference between those two scenarios is essentially a rounding error. But market expectations also factor into how markets move, and even if the Fed ends up doing nothing, that will have ramifications (i.e., liquidity-driven markets need even more liquidity over time), as regular readers are no doubt aware.   The fact of the matter is, after four years and more than $3 trillion of quantitative easing, the economy is still limping along and job creation is pathetic, yet the Fed believes its policies have worked and many stock bulls see the financial environment as nearly perfect for speculation (though I doubt that the average citizen in America feels very good at all about financial conditions, as the Fed has most definitely exacerbated the spread between the poor/middle class and those above them).   At the end of the day, the Fed is basically trapped. It can’t reduce the amount of liquidity it is injecting into the system by very much without having financial markets and economy roll over hard (though that doesn't keep Bernanke & Co. from deluding themselves into thinking that they can remove the accommodation).   Because they continue to believe in their own abilities (incorrectly), if they go very far down that road, they will have to reverse gears and print more money all over again, and they will keep doing that until the bond market stops them -- a point I have been making for more than four years now.   You can't get there from here   When I discuss the Fed and how it is trapped I tend to do it more or less from the 10,000-foot level, because it is so obvious to me. However, my friend the Lord of the Dark Matter shared a bit of research this week from JPMorgan’s chief U.S. economist, Michael Feroli, who described the Fed's predicament from more of a micro standpoint.   The reason I bring this up is because the whole world obviously does not agree with my opinion of what the Fed has done. In fact, quite the contrary, as a lot of people seem to think the Fed knows what it is doing. But as more people discover what Feroli is pointing out, they will realize the Fed is trapped, and as that becomes clearer, it will have implications for financial assets and gold. To quote Feroli:  "The Fed faces an interesting situation at the September FOMC meeting. At that meeting they will introduce their 2016 interest rate forecasts for the first time. The problem is that at the end of 2016 their economic forecasts may well show an economy that is close to full employment and price stability. Normally in that situation one would expect the Fed funds rate to be close to neutral -- which is somewhere close to 4%. However, their end-of-2015 forecasts have a funds rate forecast centered around 1%. An end-of-2016 funds rate of 4%, which implies 300bp of tightening over the course of 2016, is well in excess of what the market is pricing in. If the FOMC were to produce such a forecast, and if the market were to take its cue from that forecast, then the ensuing tightening in financial conditions would undo much of the hard work the Fed has done in getting rates low enough to support the recovery.   "In some ways the Fed is at risk of being a victim of its own success. After a few fits and starts, the Fed has finally convinced the market it will keep rates low for a very long time. However, the Fed's ever-expanding embrace of transparency means it now has to quantify how its verbal attachment to accommodative policy translates into economic and policy rate forecasts. For someone like Michael Woodford, whose paper at last year's Jackson Hole conference arguably had a meaningful impact on the policy debate, such forecasts shouldn't have much of an influence on financial conditions: after all, it is well known that the Fed doesn't have much of an advantage over the private sector in forecasting accuracy."  Amen to that!   Blue chips off the old block  Lastly, I wanted to comment on the decision by the induction committee at the Dow Jones Hall of Fame to add Goldman Sachs Group ( GS), Visa ( V) and Nike ( NKE) to the Dow Jones Industrial Average ( $INDU), while kicking out Hewlett-Packard ( HPQ), Bank of America ( BAC), and Alcoa ( AA). (Alcoa was a longtime member of the Dow -- since 1959 -- and one of the 10 oldest; HP and Bank of America were added within the last 15 years or so.)   When folks tell you how stocks always work out in the long run, they fail to point out, as far as the indexes go, that there is a reshuffling that affects the long-term performance. Having said that, quite often stocks peak not long after they are added to the Dow -- witness Intel ( INTC), Cisco Systems ( CSCO) and Microsoft ( MSFT), which I suppose are at risk now because they have underperformed. (Microsoft owns MSN Money.)   In the past 20 years or so, those who make the decisions appear to be looking for former winners and extrapolating forward. In any case, given that the Dow is ridiculous price-weighted, adding high-priced names and kicking out lower-priced ones is a lame attempt to boost the index, but iy will mostly just add to volatility.   King World News   In my latest interview with Eric King, we go into a fair amount of detail regarding how the various will-they-or-won't-they tapering scenarios could play out, the role of crowd psychology and how we are in a unique moment in financial history. Interested readers can  listen to it here.   Note to readers  There will no column next week, as I will be traveling, but we will have some important news in the next few weeks, so stay tuned. In the meantime, be sure to follow us on Twitter @FlecksMarketRap. At the time of publication, Bill Fleckenstein owned gold. Gold may not help, but a little of it can't hurt, either, just in case. BlogArticle AA BAC Bill Fleckenstein CSCO Federal Reserve HPQ ORCL http://money.msn.com/bill-fleckenstein/post--is-the-end-of-an-error-coming-soon Is the end of an error coming soon? This might be the month of reckoning for failed central bank money-printing policies. Mounting evidence suggests that markets are starting to notice that the Fed is trapped. Wed, 11 Sep 2013 16:09:38 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 93ae4526-6afd-412e-b4f5-89d0acea660a BlogArticle E5DED4DF1BF4E3F7 30 40 2013-09-06T19:05:02.67 This might be the month of reckoning for failed central bank money-printing policies. Mounting evidence suggests that markets are starting to notice that the Fed is trapped. It was interesting to see in the most-recent quarterly filing (released a week ago) that Goldman Sachs Group ( GS) spent around $500 million in the period to buy 3.7 million shares of SPDR Gold Shares ( GLD), making Goldman the exchange-traded fund's seventh-largest shareholder.   After having been a vocal proponent of the view that a much stronger economy (which we haven't seen) would lead to a tougher Federal Reserve (which won't ever happen) and a weaker gold price (which we did experience until June 30), Goldman is perhaps starting to connect the dots.   Putting the 'gold' in Goldman   To be sure, Goldman's negative call on gold received a tremendous amount of fanfare, and it appeared to be at the epicenter of the huge price break we saw in the second quarter. But I haven't seen comments anywhere discussing its quiet, bullish bet. (For all we know, depending on exactly how the company holds the shares, it could be some sort of arbitrage against something else, but I doubt that.)   As for why we own gold in the first place, that of course has to do with reckless money-printing on the part of the Fed (the subject of my book "Greenspan's Bubbles: the Age of Ignorance at the Federal Reserve"). That effort started somewhat innocently in the early 1990s, and, at first, it produced a powerful bull market, which turned into a huge bubble in the late 1990s.   That led to a bust, which led to more money-printing, followed by a massive real estate bubble and an epic collapse, with the financial system nearly disappearing, which resulted in an even more gargantuan amount of money-printing.   A rise by any other name . . .   Those of us who understand the process have known that each dose of liquidity by the Fed has weakened the economy, and that money-printing would not solve anything, as can be seen in the sequence of events outlined above.   Money-printing cannot solve problems. It doesn't really give us much gross domestic product growth, as we have seen. It hasn't really helped on the employment front either, as job growth is meager (of course, it is also hampered by other government policies). What money-printing has accomplished is to push the stock market high enough to cause people to once again become delusional in their expectations.   The bloom has come off the (stock market) rose a bit recently, but this is essentially the same process that has been at work for more than 20 years. Money-printing gets the stock market to a place where folks think that it means something.   We witnessed the same thing in the late 1990s, when the Wall Street Journal saw fit to capitalize "New Economy," which was a farce, and the Fed concocted a crazy theory about too much savings in the world with regard to what generated the real estate bubble that burst in 2007-08. Now, somehow, stock prices are so high they have induced people to believe in Goldilocks again.   It takes two to contango   The purpose of reviewing all of the above is to set the stage for the possibility that we are starting to come to the end of the charade, and in the next couple of weeks, the Fed is going to have to decide whether it is going to begin to taper -- and we will see what happens if it does -- or that it can't even start.   The early handicapping of that outcome began with today’s nonfarm payroll report (released after this column's deadline), but in the end, the die is cast. If Bernanke et al decide to taper, it won't be long before they are compelled to change their minds. Money-printing will continue until the bond market makes it clear that that is not an acceptable outcome, a process I think is already under way.   (I see 10-year rates approaching 3% not because of the prospect of some modest amount of tapering, but because enough money has been printed to take the deflationary outcome off the table and because the bond market is slowly pricing in the fact that the coupons out to 30 years are at a discount to the inflation rate.)   In any case, hopefully September will be a major inflection point for what is known as "modern-day" finance and money-printing.   At the time of publication, Bill Fleckenstein owned gold. The 17 trillion really is 34 trillion.  The reason I say that is because you have to pat 17 trillion dollars to get to zero debt.  Then when the bills come in, 17 trillion of them ( which will come sooner or later) you have to come up with 17 trillion more.  Positive 17 trillion to negative 17 trillion equals 34 trillion. BlogArticle Bill Fleckenstein bonds commodities Federal Reserve http://money.msn.com/bill-fleckenstein/post--central-bankers-ready-if-markets-dont-obey Central bankers ready if markets don't 'obey' As the walls close in on central bankers and their inane policies, they seem ready to fight with the only weapon they know how to use: the printing press. Thu, 05 Sep 2013 09:39:20 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 119fa0fb-e53f-42ae-9d2d-2218bb4488dc BlogArticle E5DED4DF1BF4E3F7 32 37 2013-08-30T19:45:09.84 As the walls close in on central bankers and their inane policies, they seem ready to fight with the only weapon they know how to use: the printing press. Though it may have largely been lost in the shuffle of Middle East headlines, sales of new homes fell 13.4% in July to 394,000, which was a far cry from the 487,000 forecast by the consensus and the biggest variance from expectations in more than five years. In addition, sales in June were revised down to 455,000 from 497,000.   Those numbers are proof that whatever logic the real estate Pollyannas, who said mortgage rates weren't going to affect demand for new homes, were using is totally false.   More than just in the neighborhood  First, hats off to real estate analyst Mark Hanson (aka Mr. Mortgage), who completely nailed this statistic a few weeks ago and has gotten just about every data point on the housing market right recently. By extension, that means all the economic bulls who predicated their thinking on a "sustainable" housing recovery -- and that includes the Federal Reserve (based on what I have heard various Fed heads say) -- need to go back to the drawing board.   In light of that, as well as the seemingly sudden importance of unrest in Syria, I am reminded of a point I have made many times, though not recently: Markets these days seem to discount next to nothing. My guess would be that is a function of quantitative easing, computer-driven trading and so many "professional" babysitters of Other People's Money trying to stay close to their benchmarks.   A game of wait, then hurry up  While computers can read press releases, listen to conference calls and compare the price action at any given moment to any day in history, slicing and dicing the data in a million ways, what they probably don't do is attempt to discount future big-picture developments; their main strategy is being able to react faster than the next guy.   Thus, large geopolitical problems or long-simmering macro problems don't matter until they start to matter, at which point discounting that should have taken place along the way tends to occur in a short space of time. If I am correct in this thesis, it means there are going to be plenty of prospective dislocations as various problems come home to roost.   The hot air beneath our wings  Obviously, the unrest in various parts of the globe is going to add pressure on the Fed not to taper, but the employment report next Friday will have a fair amount of say in terms of swaying market opinion.   However, the inclination of central bankers, I think, was typified by Mark Carney, the head of the Bank of England, who said on Wednesday that the BOE stood ready to add stimulus if investor expectations for higher interest rates rise too far and undermine the recovery. If he feels that way, the Federal Reserve probably does as well.   In a perfect world, the Fed would announce at the September meeting of the Federal Open Market Committee that it is not going to taper (and we can see where stock and bond rallies want to fail), [RD(1] which should help the world see that the Fed is trapped: Its policies don't work, yet it can't stop pursuing them.   To wit: Four years ago Ben Bernanke and company talked about exit strategies. Now, they discuss only reducing the amount of monthly money printing from $85 billion to $70 billion -- and if they try to do even that, they are going to find out they have to reverse gears and go the other way.   Only the bond market can put this insanity to rest.   I believe we are very close to the world realizing that the Fed is trapped. The only question is when will people realize it and understand the consequences?   Around here we call them 'wish doctors'  Speaking of trapped central bankers, an Aug. 22 article in the Financial Times by Gillian Tett, headlined " Central bank chiefs need to master the art of storytelling," concluded with what I thought surely had to be a spoof.   "The next Fed chair also needs to be a masterful storyteller and cultural analyst, who can read social sentiment, shape norms, (re)create trust and persuade us all to think in a manner that suits the Fed's economic goals, without us even noticing.   "Somebody, in other words, who can cast spells with both their spreadsheets and words. In short, what is needed is nothing less than a monetary shaman."   But then I realized which newspaper she was writing for, and that she was deadly serious.   It's a crying sham  I think Tett’s soliloquy perfectly captures how far the pendulum has swung from the gold standard -- and that it can go no further in this direction.   What we need, in her view, is someone who can make us believe that reality is different than it is. This is an absolutely priceless vignette to save for the future to illustrate how detached financial thinking has become from anything resembling common sense. Of course, the joke is on her, as she doesn't realize that what she wants is exactly what we already have: charlatans who have no shame. Bill Fleckenstein   WHY ?????????????????? A ONE TRACK MIND!!!!!!!!!!!!!!!!!!!!!!!!!! WHY IS IT THAT EVERY ARTICLE  that HE WRITES basically says the same thing? BlogArticle http://money.msn.com/bill-fleckenstein/post--fed-problems-whats-past-is-prologue Fed problems: What's past is prologue Conventional wisdom attributes market indigestion to anticipation of Federal Reserve action, but the evidence indicates investors are finally reacting to what our central bankers have already done. Wed, 28 Aug 2013 07:47:19 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 5c63dfb3-406f-4024-ac86-b1a5e5b42d24 BlogArticle E5DED4DF1BF4E3F7 29 39 2013-08-23T16:43:51.01 Conventional wisdom attributes market indigestion to anticipation of Federal Reserve action, but the evidence indicates investors are finally reacting to what our central bankers have already done. I'm going to begin on the subject of financial publication headlines, expectations and what might really be behind the recent weakness in stocks and bonds. The Financial Times recently led off with the following above-the-fold headline: "Sell-off as markets expect early Fed move."   The article began: "Expectations of an early move by the U.S. Federal Reserve to slow its support for the U.S. economy firmed (on Aug. 15) after the release of data showing a strengthening labour market and higher inflation." The British newspaper went on to attempt to blame the previous day's stock market decline on jobless claims.   I would be the first to admit that on many days the market does what it does and there really is no proximate cause or logical explanation. But I can guarantee you that the FT's explanation is not what happened, because all the other macro data were weak and there was no new news about potential early tapering.   They're not buying it  In fact, in an article the day before in the same publication -- headlined, "Central banks struggle to convince investors" -- author Ralph Atkins tried to get at the real problem, although he couldn't quite put his finger on it. Atkins noted that central banks have failed to persuade markets on a case for interest rates remaining low, but asserted: “Central bankers are used to having their way.”   Atkins continued, "The U.S. Federal Reserve's large-scale asset purchases, or quantitative easing, delivered the desired market rallies. Mario Draghi, European Central Bank president, crushed eurozone doubters by pledging to backstop government debt markets.   "But the latest actions by the ECB and the Bank of England -- using 'forward guidance' to persuade investors that interest rates will remain firmly at historical lows -- have had, at best, mixed results. Market borrowing costs have actually edged higher and on some gauges investors have brought forward the expected date for hikes in official interest rates. If market scepticism builds, the two central banks may be forced into fresh measures to stimulate growth."   The QE and the damage done Therein lies the dilemma. If markets don't do what the central banks want, the central planners will do more, thinking that the problem is that they haven't done -- or threatened to do -- enough. However, if the markets know that the central banks will do more if required (i.e., in the event that bond markets don't bring rates back down to where the central banks want them), then why are bond markets declining?   The only logical answer is that they are reacting to what the central banks have already done. That predicament is the one no financial bull wishes to contemplate, but it is at the heart of the problems we are headed toward.   My belief is that bond markets around the world have not backed up because of any serious fear that a massive amount of stimulus is going away, but rather because the deflationary fear trade was way overdone. Now debt markets are declining because there is no real investment demand at these levels. Yes, there are forced buyers, such as pension funds and insurance companies, but investors are not really dying to own them, as yields are absurdly low.   Aug. 20 saw the release of the Fed’s July Federal Open Market Committee meeting minutes, which were eagerly awaited even though they once again revealed nothing new. In the wake of the release, the bond market sold off hard, closing at a yield of 2.89% for the 10-year, a new high. Thus, our Treasury market continues to be weak, in defiance of the Fed's wishes, bolstering my contention that the Fed is no longer able to control that market as it used to.   In short order  On a related note, The Wall Street Journal ran a front-page story on Aug. 20 headlined, " Rising markets batter short sellers." In it, one featured short seller stated: "'It is actually more painful now than it was in '99.'" Though I am very sympathetic to that statement, I would like to disagree with it. There is really no comparison between the lunacy of 1999 and the present day.   The insanity back then was not confined just to dot-com business concepts. Most stocks were ridiculously valued until the very end, when there was a group of mundane securities that weren't too expensive. Nonetheless, the environment was much better because that bubble had not yet spawned the real estate bubble or the misallocations of capital and bad policies that followed in the wake of both.   Thus, prices of stocks were insanely high, but there were not the massive macro problems that exist today. Thus, given the horrible fundamental backdrop, stocks are expensive and risky, but there are only a modest number (perhaps 100) of truly ridiculous valuations.   The same trader was later quoted as saying he believes that his short positions "will be proved right -- eventually," which brings up another point that needs to be made about short selling. Namely, that while research is essential, it alone won't get you very far. Short selling, sadly, is all about tactics, managing risk and the constant need to modulate positions, i.e., when to press and when to take positions off.   Also, anyone who has survived this long on the short side should realize that it is nearly impossible to win when the Fed is doing what it is doing. The amount of money (about two weeks' worth of QE) that blew the top off the stock market in 1999 is literally a rounding error compared with the QE we have seen since 2009. Thus, it will be difficult for the shorts to win until either the bond market reacts more violently or we get closer to the time when bond traders take the printing press away from the Fed. And then they will win big. Vociferous_Loser has no money, invests in nothing. He's a dumpster-diver. Yet here he is, ranting 24/7 an investing forum. What a maroon. BlogArticle http://money.msn.com/bill-fleckenstein/post--valuing-the-invaluable Valuing the invaluable More signs suggest that gold has reached a turning point. But putting a fair value on the yellow metal is harder than assessing what a business is worth. Thu, 22 Aug 2013 10:13:33 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de a90c45f2-9eb7-4aa7-8439-99a0815d6c9f BlogArticle E5DED4DF1BF4E3F7 33 40 2013-08-16T18:12:35.343 More signs suggest that gold has reached a turning point. But putting a fair value on the yellow metal is harder than assessing what a business is worth. Last week, I received a question from a member of my subscription site who wanted to know about recent action in gold and the miners (which have been showing signs of life), and whether higher prices would give me more confidence that we had seen the lows.   In trying to craft an intelligent and useful answer, I spent a lot of time thinking about the gold market and related ideas I hadn't really discussed in the past.   What follows is my response, which I hope illuminates why it is so difficult to be truly emphatic about the price of gold -- as opposed to the value of a business.   Accounts conceivable  I feel strongly that June 30 was most likely the low for gold and the miners. But the problem with gold is that it is just a price. It isn't like a business, where you can track such things as balance sheet items, sales, margins, channel activity, competitors and suppliers to get a very strong feeling that something important has changed or that the time to act in a big way is now -- long or short.   About the closest thing we have to a timely, nearly unequivocal fundamental fact is that gold has been in backwardation for 30 business days. This should never happen -- and has happened only rarely, briefly in 1999 and 2008 -- because it should just get arbitraged away.   The fact that the market hasn't reverted to contango suggests there isn't enough metal around in New York or London (at current prices) to allow that to happen. A potential conclusion is that there is such huge demand versus supply at current prices that the price should not be able to go lower (and stay there).   If that's true, it would argue in favor of the idea that the lows in June were "it" and that this tightness, combined with the short position and prior liquidation, means that prices are poised to rocket higher at some point soon.   A store of guesswork  The problem is that no one knows for sure. I have talked to several people who are close to the metals trading industry (whom I have known for a long time), and they agree with my analysis. But there could be other technical explanations -- mostly having to do with the fact that interest rates are near zero -- that could mean my thesis is wrong.   We will only know for sure as time goes by and new developments occur. All of the above is also why so many people who have opinions about gold base them solely, and often erroneously, on the chart patterns.   As for the miners, it is even harder to be certain about them, because their whole business revolves around the hard-to-determine future gold price.   The bottom line is it takes melding together lots of clues and charts, as well as fundamental guesswork, to be able to have a correct opinion about the gold price. Obviously, being right about the overall trend, bull market or bear market, is a huge help. I did that pretty well in the bull market but totally missed the shift to the bear market.   I can't believe it, but it took me well over a year to consider the possibility that gold had slipped into a bear market. In any case, I think we are now in the process of restarting the bull market, but I don't know for sure and can't know. Until it is a bull market, it will still be a bear market, with the attendant dangers and different risk management (technique) requirements.   It's who you know  In the investment business we all have periods when we are hot and when we are cold. On that subject, one has to realize in one's own investing there are periods where most everything you think and do is correct, and when that is the case it is possible to be more aggressive.   While it is easy to make money when it seems as though you are getting The Wall Street Journal a week early, the bigger trick is not to get killed when it seems you can do nothing right. When that inevitably happens, you must spend more time sitting on your hands while waiting for your view of how the world should work to coincide with that of the masses, aka the market.   In his most recent Gloom Boom & Doom report, Marc Faber discusses his experience at the tail end of the tech bubble and makes an important and related point. He writes: "I had heavily shorted high-tech stocks in 1998 and subsequently I lost a ton of money. This episode is really a dark spot in my life as an investor and investment advisor. It taught me several lessons that I shall never forget. What I think about markets is completely irrelevant. What matters is what other people think about them. Fundamentally, I was right about the coming collapse of the Nasdaq; however, for as long as the majority of other investors believed in the 'New Economy' theme, high-tech and communication stocks continued to appreciate." Those of us who understood that the dot-com boom was a bubble were all tortured until the bubble burst. That often happens in markets, where you are exactly right about what you think will happen, but the market doesn't agree with you right away, and until it does you have to manage your positions carefully. It should be worth the weight  To state the obvious, when the bull market in gold resumes, it will be easier to make money being long, though it will still be tricky. Unfortunately, trading and investing in gold is more difficult than just investing in the stock market. It is more like managing a short position.   I wish that wasn't the case, but it is. I also wish the Federal Reserve wasn't so incompetent, so we could just buy stocks or bonds and didn't have to focus on the variables we do. But we must play the hand we are dealt, and we have been dealt one with central banks pursuing insane policies that force us to deal with a warped economic/financial world where the money is "no good." I hope this discussion helps readers understand the gold market better and, more importantly, is useful when it comes to managing positions. You're right--unfortunately. It's unfortunate because situations like this are untenable, like a big cliff in a sand pile, and no one knows what will set off the avalanche. The central bankers are all hoping and betting on "the economies will get better before the avalanche". But hope is not an investment discipline, and shouldn't be what you bet on (unless it's just $20 at the track!). BlogArticle Bill Fleckenstein Federal Reserve gold http://money.msn.com/bill-fleckenstein/post--too-easy-money-makes-market-too-risky Too-easy money makes market too risky The liquidity-fueled rally of the past 9 months is easy to like. But recent history tells us higher prices based on easy money carry extreme dangers, so a violent drop could lie ahead. Tue, 01 Oct 2013 18:31:28 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de d9f2f2e6-58b8-4458-ba18-6d1db12302fb BlogArticle E5DED4DF1BF4E3F7 67 68 2013-08-09T14:10:03 The liquidity-fueled rally of the past 9 months is easy to like. But recent history tells us higher prices based on easy money carry extreme dangers, so a violent drop could lie ahead. There is not much one can say to make sense out of the maniacal rise we have seen in the stock market since last fall, other than to note that the third and fourth rounds of bond buying by our Federal Reserve (aka QE3 and QE4) have boosted stock prices 20 to 25%.   Beneath the surface, however, stocks are a house of cards. Simply because prices are rising as a consequence of the massive liquidity injected by the Fed (and the Bank of Japan) – combined with "professionals" running other people's money who are terrified of not keeping up with the averages – does not mean that participating in the stock market at the moment is something that anyone who is sane ought to do.   The wrong kind of royal flush Even so, resisting the siren song of apparently easy money is difficult, and most people eventually get sucked in. This is shown by the latest mutual fund statistics, which show that people are taking money out of bond funds and pushing it into stock funds.   It is not knowable when this maniacal rise in equity prices will come to an end. As I have stated many times, either the market has to exhaust itself, some sort of catalyst has to come into play or something has to stop the Fed. Obviously, the only thing that can take away the printing press is the bond market, and that will take some time.   As for "tapering," if the Fed tries to cut back its bond buying, my guess is that Wall Street would throw a fit and stock prices would tank, which would also hurt the economy. And if Fed Chairman Ben Bernanke and his colleagues are paying attention to the job market, nothing is occurring there to make them want to taper. Thus, I continue to think tapering is very unlikely.   He's just covering his basis Perhaps Bernanke has an ulterior motive and wants to do a bit of tapering, if only to try to create the illusion that he's capable of being "tough." But I really can't speculate about that. I do know that printing money does not boost the economy or create jobs. All it does is misallocate capital, increase risk and precipitate inflation.   Meanwhile, many of those who were crushed in the stock and real-estate busts think we are in a Goldilocks (i.e., perfect) environment. In fact it is actually still 2009, just with much higher stock prices and a somewhat healthier banking system, thanks to taxpayer money and the fact that the Fed is stealing from savers via artificially low interest rates to give the proceeds to banksters. All in all, the financial environment is literally a house of cards built on runaway speculation.   Burning Japanese Tuesday night, Japan was the scene of a fair amount of red ink, as its equity market lost about 4%, though the yen was quite strong. At least for the time being, those seduced into playing the easy-money game in Japan are seeing their financial dreams complicated by the fact that so many are all on the same side of the page. That problem will present itself in America at some point; we just don't know when.   Parenthetically, I think most people look at the fundamentals of the yen and say, "Wow, there is a currency that ought to decline." But in fact it has been rallying for the past month against the dollar, despite talk of tapering, and we can make the same comparison to the euro. I find it interesting that everyone can see the flaws in the yen and euro, yet for a while now those currencies have been doing better than the dollar, which so many people seem to think is still a sound currency. In any case, what this more likely illuminates is the wackiness of what transpires in financial markets in a world saturated with QE-created liquidity.   I am not the only one who thinks that beneath the shiny veneer of rising stock prices, the investing landscape has become fraught with risk. Many longtime successful investors do, as well. In his most recent newsletter, my good friend Fred Hickey shared a quote from Seth Klarman, founder of Baupost Group, that I found particularly timely and poignant. Klarman described the current investment environment as "… harder than it has been at any time in our three decades of existence … the underpinnings of our economy and financial system are so precarious that the unabating risks of collapse dwarf all other factors."   I suggest everyone read those two points a couple of times.   When the best offense is defense At some point, the stock market will decline violently in a short space of time and there will be economic carnage in its wake. I continue to think that the computers that run so much money will eventually get loose on the downside at some point as the underlying economic and financial risks of the world rear their ugly heads. (Read “ Every day, another flash crash” for more on those computers.)   Could it be two years from now? Yes, in theory, though I seriously doubt this can go on that long. I suspect the next nine months could be very pregnant – no pun intended.   In any case, folks need to be prepared for some serious carnage, even though the timing is not yet predictable. Yea corporate profits up 45% something the liberal left rails against until it is their guy getting paid to look the other way. That job growth is part time labor. Remember Jimmy Peanuts Carter? Keep those bank stocks, they did well when interest rates were at 15% + under his enlightenment didn't they. BWAHAHAHAHAHa BlogArticle http://money.msn.com/bill-fleckenstein/post--it-all-goes-back-to-bonds It all goes back to bonds While stocks continue their momentum-driven run, the bond market is still the ultimate canary in the coal mine. Thu, 22 Aug 2013 13:52:43 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de b1a3157e-75f1-421a-9879-89ebf482d100 BlogArticle E5DED4DF1BF4E3F7 28 44 2013-08-02T17:59:55.15 While stocks continue their momentum-driven run, the bond market is still the ultimate canary in the coal mine. The stock market has now weathered the bulk of an earnings season that was OK, on the surface, but not so great prospectively. On that note, I was forwarded a link to an article regarding the second-quarter letter from David Einhorn, Greenlight Capital's founder and president, who made a point that I thought was worth sharing:   "Indeed, in the recent quarter, 70% of companies in the S&P 500 'beat' the official street estimates, while forward estimates fell for roughly the same percentage of companies. At this point in the cycle, lowering the bar seems to be treated as bullish because it increases the likelihood of future earnings beats."   I wasn't aware of that specific percentage of companies that had lowered guidance, but I was obviously aware that it didn't make any difference to the stock prices of the companies involved.   There's no doubt this little game has been successful and is reminiscent of other crazy periods we have seen in the last 15 years. There is also no way to know how long it will last, but it is quite possible to know it is abject silliness, unless of course companies have been wrong to lower their guidance and actually do substantially better than they are currently forecasting. In that case, we would have to conclude that the market figured that out ahead of time.   That is not my expectation, however. Thus, this is a period of wild speculation that will end badly, as such periods always do, though it is impossible to know when.   Aussie dollar goes down under  An interesting story from the foreign exchange market was that the Australian dollar was hit pretty hard on July 30 thanks to remarks by Glenn Stevens, governor of the Reserve Bank of Australia, who made it clear that he wasn't at all upset by the recent decline in the Aussie dollar and actually thought it would go lower.   In other words, he wants a lower currency, as do central bankers in Japan and elsewhere around the planet. The problem they all have is that, in a world where money-printing is perceived to be the solution to all problems, it is difficult for one currency to really decline against another; it can only decline against real goods and services, which has been happening for some time to various degrees, depending on the asset class or particular commodity, service or benefit you might be considering.   There is no doubt we have a higher level of inflation than what the Federal Reserve claims to want. However, with the Western world so anesthetized by easy money, none of the problems are taken seriously (for now), and they won't be, until they are.   Blood and Treasurys  As for the ultimate canary in the coal mine (that being the bond market), it will be informative to see where yields are after the market has fully digested today’s nonfarm payroll report. The reason I point out the bond market is because 10-year rates are not too far from the highs they saw in the wake of the start of the Fed's "tapering" talk.   Regular readers know my view is that these rates have backed up not simply because of Fed jawboning, but also because of the fact that the bond market is potentially in the early stages of taking away the printing press from the Fed. Five-year rates have risen from about 62 basis points to a high of 1.60%, and are now around 1.47%.   So, even though the Fed has made a serious attempt to tell folks that, while it might taper, it surely won't actually tighten for years, the bond market has been unable to rally very far. If Fed Chairman Ben Bernanke makes it clear that he is not going to taper (or is unable to) in September, and if the 5-year note doesn't recapture a huge chunk of this rally (by trading down to, say, 80 basis points), I think a case can be made that the Fed has lost control of the bond market. If by some chance rates start to spike even higher, then we will really know that is the case.   It's sure to be a bonding experience  When the bond market takes the printing press away from the Fed, life in America, and everywhere else where money printing is the main economic policy, is going to be very, very difficult. Bond and stock prices will be lower, which will hurt the asset side of everyone's balance sheet, and of course, rising rates will put a damper on certain aspects of the economy, most notably housing, while increasing the interest expense on government debt (thereby increasing the deficit).   When it is understood that the Fed can't solve the problems, there will be much more angst in general and, hopefully, we eventually will deal with the long-running contingent liabilities and deficit problem we have in this country -- though on this, I'm getting rather far ahead of myself. In any case, I believe the Fed has already started to lose control of the bond market, and we might get more information on that topic in the very near future.   On the air  Click here to hear my most recent interviews with Eric King on King World News. We discuss perceptions regarding bubbles, the Fed, money printing, the funding crisis and how those factors might come into play down the road. post--ups-cites-obamacare-for-cutting-benefits-to-spouses   another example in msn!!! BlogArticle http://money.msn.com/bill-fleckenstein/post--what-weve-learned-from-earnings What we've learned from earnings Recent corporate results show that even if you can accurately predict a company’s earnings, the market’s reaction is still much harder to get right. Thu, 01 Aug 2013 08:41:12 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 367777bc-203e-4e14-8af2-4b3761dd9296 BlogArticle E5DED4DF1BF4E3F7 27 34 2013-07-26T19:51:14.55 Recent corporate results show that even if you can accurately predict a company’s earnings, the market’s reaction is still much harder to get right. As the most-recent "earnings season" winds down, it's worth looking at the overall message from the stock market so far.   Heading in to this earnings season, I was not expecting a lot of positive reports from the companies I follow, due to weak gross domestic product worldwide and the strong dollar. But I was especially interested to see if poor results and/or lowered guidance could take the overall stock market lower, or whether bad news would be ignored.   Thus, I was paying particular attention to some of the larger names in the technology sector as a litmus test for real economic strength.   Just a slap on the wrist  As I suspected, Intel ( INTC) and Microsoft ( MSFT) were unsuccessful at beat-the-number and had to lower guidance for the year. But the stocks weren't  hit that hard. (Microsoft publishes MSN Money.) Meanwhile, IBM ( IBM) -- which once again reported light revenue -- managed to make yet another earnings number (as long as you're willing to look past never-ending write-offs and believe the accounting treatment of its acquisitions and what that does for its profit-and-loss statement down the road).   Nevertheless, IBM's revenue shortfall was ignored, and its earnings were the focus. That, combined with how easily the market shrugged off lowered guidance and light revenue for Yahoo ( YHOO) in favor of fantasizing about an Alibaba initial public offering, made me feel as though the imagination component of stocks was going to trump any sort of bad news -- and the reaction to IBM's results sort of corroborated that. (On the other hand, eBay's ( EBAY) revenue was also light, and its stock price was punished.)   By the end of last week, we had seen results from Google ( GOOG), Microsoft and SAP ( SAP). As a group, pretty much all the major players in the tech world had either revenue or margin problems, or expected to (as Oracle ( ORCL) announced last month), indicating that the world economy is not as strong as people had expected.   Distorting reality  If we were not in a money-printing environment, this would be the exact setup for building substantial positions on the short side, because these sorts of issues would obviously matter. As more companies report similar problems, it cumulatively would put pressure on the market to the downside. However, since we are in a money-printing environment, that makes life particularly tricky.   One of my short-selling rules is that if the Federal Reserve is printing money, one has to refrain or be extremely careful and use guerrilla tactics -- i.e., try to get in front a of a catalyst. When that comes and goes, get out of the way, unless somehow the cumulative effect matters. Consequently, the few shorts I have tried lately have been very short-lived.   While some companies (Microsoft and eBay, for instance) did see their share prices decline after announcing earnings, the stock market in general was largely unaffected by poor corporate earnings news. As this week came to a close, it was becoming pretty clear that, for now, stocks would move higher. while bad news would be ignored.   Corroborating that viewpoint, Caterpillar ( CAT) lowered its earnings guidance on July 24 and downgraded its view of world growth, but the stock was penalized by only a couple of percentage points.   Thus, the stock market is on autopilot until it exhausts itself (which could happen at any time, maybe next week), bond rates rise high enough or some catalyst trips up speculators. However, I do believe that the risks for equities continue to rise as prices move higher and people are seduced by momentum.   Unlearning our lessons  Speaking of bonds, one could make the argument that the 10-year bond failed at around 2.5%.But before getting too excited about that, and to really be convinced, we will need to see 10-year rates rise above the high of 2.73%, or so we saw a couple of weeks ago. I continue to think that, at some point, equities will take a tumble and bonds will have a knee-jerk bounce, so I would like to see how high that goes.   I made the comment late in winter that it felt like 1998. From time to time I continue to feel that way about stocks, and right now is one of those occasions. Compared with the bubbles of the 1920s and late 1990s, the amount of money that has been printed is so staggering you can't say that stocks can't go crazy, which is why I have avoided short-selling.   But I still find it hard to believe that so many people are pouring so much money into stocks after the debacles we have seen in the past decade, while all of the pre-existing problems rotting beneath the surface -- with the exception, perhaps, of massive consumer debt -- are still with us (though consumers have traded their debt for not being able to get a decent job). In any case, from my perspective, the markets are basically a wild sea of speculation. I wonder what will happen when the worthlessness of all the toxic debt, sovereigns included, is accounted for by the world market.  I also suspect that the "vampire squid" will again be ahead shorting the trade, while simultaneously pushing their clients into the long side of it. BlogArticle http://money.msn.com/bill-fleckenstein/post--bunk-from-central-bankers Bunk from central bankers History teaches us that the Federal Reserve has been the root cause of our biggest, most harrowing financial problems Thu, 01 Aug 2013 08:23:56 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 37e6c684-af6e-499a-9eb8-5a3c51e3ae4f BlogArticle E5DED4DF1BF4E3F7 34 45 2013-07-19T15:27:57.473 History teaches us that the Federal Reserve has been the root cause of our biggest, most harrowing financial problems I have not really delved in depth into the subject of the Federal Reserve for some time, but this week I decided to revisit some of my history books on the 1920s and ‘30s. Once again, I was struck by the length of time it took for the Fed's inappropriate policies to wreak havoc, the damage done, and, in between, how wonderful everyone thought everything was. Of course, that creates a bit of déjà vu. But it is instructive to consider the modest actual amount of monetary injections, as a percentage of gross domestic product, in the mid-1920s that led to the stock bubble and, ultimately, to the bust. That stimulus was small compared with the easy money of the late 1990s that culminated with the $30 billion to $50 billion the Fed injected to protect the world from "Y2K." Yet the sums involved in previous periods of irresponsibility are mere rounding errors nowadays. Thus, when I contemplate the damage that will be done by four years (and counting) of quantitative easing, I just shudder at how big the disaster might be -- and there is no doubt this experiment will be a disaster. The Fed has expanded its balance sheet to $3.5 trillion, and it now owns more than 20% of outstanding U.S. debt. Either it is going to continue buying bonds forever, which is impossible, or there is going to be a massive dislocation at some moment, because someone else is going to have to buy that debt when the Fed ultimately stops, even if it doesn't choose to sell anything (and just lets the debt run off). There will be no painless extrication from QE and, as I have said, I don't believe the Fed will be able to leave ZIRP (zero-percent interest rate policy) willingly. My best guess is that inflation will rise high enough to matter and people will question the Fed's policies, but it will not have achieved its objectives on the employment front and will continue to try to suppress interest rates, which will result in a funding crisis. (On the inflation front, the July 16 Consumer Price Index of 0.5% was higher than expected and annualizes to a rate that is closer to the real world than to the 1.5% or so the Fed pretends is the case. Nonetheless, it is mind-boggling to think that so many people in the financial world are actually rooting for the inflation rate to go higher.) More money, more problems Printing money has never worked. The only questions are how big the consequences are going to be and when they are going to hit. This is as true today as it was 80-plus years ago, when our young central bank made its first forays into monetary mismanagement. While the current mainstream view, with Chairman Ben Bernanke its leading proponent, holds that it is the Fed's response to the Crash of 1929 that helped worsen and prolong the Great Depression, the fact is that the Fed deserves the blame much earlier. The Fed (even on the gold-bullion standard) actually had a very large role in causing the boom, which got out of control (Bernanke, please note). In Benjamin Anderson's fabulous book "Economics and the Public Welfare" (mandatory reading for any serious student of the Depression), he states, on page 156:  "(T)he Federal Reserve System used (open market operations) deliberately for the purpose of relaxing the money market and stimulating bank expansion in 1924 and 1927. At a time when unusual circumstances called for extra caution, they abandoned old standards and became daring innovators in the effort to play God. “ . . . The process of the creation of excess reserves with the resultant great expansion of bank credit did not move slowly and gradually from early 1922 to early 1928. It was concentrated, rather, in three great moves. “ . . . Then again in the latter part of 1927 there came a third great move in the purchase of government securities, with a new great burst of expansion in bank credit. “ . . . (This) touched the match to the powder keg and set the uncontrollable forces working which blew us up late in 1929." Anderson continues, on page 192: "With the renewal of the Federal Reserve cheap-money policy late in the summer of 1927 a sharp acceleration of the upward movement of stock prices began. " And on page 193: "(Finally) alarmed, the Federal Reserve authorities reversed their policy in the winter of 1927-28. They sold government securities. They raised rediscount rates. “ . . . But the boom went on. There was a new factor in the situation. The public had taken the bit in its teeth. The rise in stock-market prices and the lure of stock-market profits had caught the public imagination." In short, then-New York Fed Chairman Ben Strong decided to boost the economy in the mid-1920s, one thing led to another and, eventually, we had a mania and then a bust. The Federal Reserve was the root cause of creating the problem. Bernanke thinks the Fed had no role to play in this phase, and that it erred by not doing enough later. But that is nonsense. When whiskey sours Those passages by Anderson led me to this from "Modern Times: The World from the Twenties to the Eighties" by Paul Johnson, who wrote: "Domestically and internationally they constantly pumped more credit into the system, and whenever the economy showed signs of flagging they increased the dose. The most notorious occasion was in July 1927, when Strong and (Bank of England Gov. Montagu) Norman held a secret meeting of bankers at the Long Island estates of Ogden Mills, the U.S. Treasury Under-Secretary, and Mrs. Ruth Pratt, the Standard Oil heiress. Strong kept Washington in the dark and refused to let even his most senior colleagues attend. He and Norman decided on another burst of inflation and the protests of (German banker Hjalmar) Schacht and of Charles Rist, Deputy-Governor of the Bank of France, were brushed aside." Johnson continues: "The New York Fed reduced its rate by a further half per cent to 3-1/2; as Strong put it to Rist, 'I will give a little coup de whiskey to the stock-market' -- and as a result set in motion the last culminating wave of speculation. Adolph Miller, a member of the Federal Reserve Board, subsequently described this decision in Senate testimony as 'the greatest and boldest operation ever undertaken by the Federal Reserve System (which) resulted in one of the most costly errors committed by it or any other banking system in the last seventy-five years." The policy appeared to be succeeding, Johnson wrote.  "In the second half of the decade, the cheap credit Strong-Normal policy pumped into the world economy perked up trade. . . . This was genuine economic management at last! Keynes described ‘the successful management of the dollar by the Federal Reserve Board from 1923-8’ as a ‘triumph.’ (British economist and Keynes ally Ralph George) Hawtrey's verdict was: 'The American experiment in stabilization from 1922 to 1928 showed that early treatment could check a tendency either to inflation or to depression. . . . The American experiment was a great advance upon the practice of the nineteenth century.’ “ . . . Strong's last push, in fact, did little to help the 'real' economy. It fed speculation. Very little of the new credit went through to the mass-consumer. . . . Strong's coup de whiskey benefited almost solely the non-wage earners: the last phase of the boom was largely speculative. . . . The 1929 crash exposed in addition the naivety and ignorance of bankers, businessmen, Wall Street experts and academic economists high and low; it showed they did not understand the system they had been so confidently manipulating. They had tried to substitute their own well-meaning policies for what Adam Smith called 'the invisible hand' of the market and they had wrought disaster. Far from demonstrating, as Keynes and his school later argued -- at the time Keynes failed to predict either the crash or the extent and duration of the Depression -- the dangers of a self-regulating economy, the dégringolad indicated quite the opposite: the risks of ill-informed meddling." The main point to understand is that the "ill-informed meddling" on the part of the Fed in the mid-1920s was infinitesimally small compared with what it has done in the past five years, and the ultimate damage will be correspondingly horrendous. Hi Bill:   I'm a little late to this particular post's party, but I think the participation of the "vampire squid" is missing from the analysis, otherwise, I'm convinced. BlogArticle http://money.msn.com/bill-fleckenstein/post--bernanke-uses-his-words Bernanke uses his words The Fed chief reinforces the notion that, in the wake of the central bank's zero-percent interest rate policy, the 'verbiage standard' is all that remains. Sat, 20 Jul 2013 12:01:15 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de d241c1b7-10f3-4367-8a2f-2e8853b48a7e BlogArticle E5DED4DF1BF4E3F7 61 63 2013-07-12T20:48:26.293 The Fed chief reinforces the notion that, in the wake of the central bank's zero-percent interest rate policy, the 'verbiage standard' is all that remains. I'm sure that everyone reading this knows that Federal Reserve Chairman Ben Bernanke's speech July 10 moved markets. The Wall Street Journal's headline -- "Fed affirms easy-money tilt" -- says it all.   When you are on the "verbiage standard," as we now are, the noise level can be quite high.  However, I think the fact that all markets responded (and all accounts I have read regarding Bernanke's comments interpreted them as the remarks of someone very reluctant to taper) means that was the message he wanted to deliver.   As I said in my July 10 column on my website (subscription required) before Ben's speech:  "If by some miracle the economy strengthens, the Fed will cut back the amount of bonds it is buying, but remember, that will not be anything that could remotely be considered tightening, and between now and then our central bankers will try to jawbone longer-term interest rates lower. So they may have a game plan to be slightly less 'accommodative,' but they are liable to talk a whole lot easier than whatever they pretend their policy is going to be. And as those last two sentences should make clear, the noise factor is liable to be exceedingly high."  The predicament the Fed is in is that it is in the process of "losing the bond market," and it is trapped. It can't even hint about reducing its buying by a measly $20 billion (which used to be a big number but is a rounding error nowadays, when it comes to monetization) because of how bonds -- and, at some point, stocks -- misbehave whenever the subject comes up.   As far as the eye can print  The takeaways of what our Fed chairman had to say were that "highly accommodative monetary policy" would be needed for the foreseeable future, and that he finally made a point that I think many of us could agree with, which is that the unemployment rate of 7.6% might "overstate the health of the labor market." Bernanke also made it clear that the Fed would not raise rates for some time, even after we hit 6.5% unemployment.   In short, Bernanke corroborated all of the points that have been espoused by those of us who have felt that we understood the DNA of the Federal Open Market Committee doves. They really don't want to stop printing unless the employment gains are very strong. Which means fretting over taper talk is silly, for two reasons: The economy will not be strong enough, I don't think. And even if it is, the kind of tapering Fed officials are talking about is really quite small.  However, I don't want to lose sight of the fact that while Bernanke (and many others) thinks the bond market is declining because the Fed appeared to talk tough, some of us believe that the bond market is actually in the early stages of taking away the printing press from the Fed. If market participants finally get it through their heads that tapering, let alone any sort of tighter money conditions, is off the table and bonds can't make a substantial rally back near the old highs, then we will probably be able to conclude that the Fed has "lost" that market. (If bond holders begin to discipline the Fed, we will be on our way to the funding crisis I have long warned of.)   It's his way or the high-yield way  This is all very subjective, and we will have to see how it plays out. But what Bernanke made clear is that if the Treasury market doesn't cooperate with him (or the stock market, for that matter) he will respond.   This is the Bernanke quote that I think really got people's attention: "And I guess the final thing I would say in terms of risks of course is that we have seen some tightening of financial conditions, and that if, as I've said and as I said in my press conference and other places, that if financial conditions were to tighten to the extent that they jeopardize the achievement of our inflation and employment objectives, then we would have to push back against that."   So there you have it. The Fed is essentially trapped. If the financial markets don't continue to go higher, or if the bond market doesn't stay where the Fed wants it, it will fight that. Therefore, down the road, if interest rates move higher and the Fed thinks they shouldn't, it will take action (i.e., "push back against that"), which will only reinforce the idea that the Fed has indeed lost control of the bond market, and the ramifications of that will be quite ugly. Said differently, the Fed will conclude that any rate rise against its wishes is unwarranted and resist that, which will make matters worse.   To be sure, taking action premised on that outcome is not today's business. For now, markets are joyous and, at this point, stocks have really set themselves up for disappointment as we go through earnings season. Of course, now that Bernanke has promised stock bulls that he has their back again, the response to negative news will be that much more informative.   The two points I think we want to take away are that the Fed can't even talk about tapering, and the question of at what interest rate will the bond market really fail. Provided you haven't starved to death before you catch them. BlogArticle http://money.msn.com/bill-fleckenstein/post--wall-st-is-like-a-box-of-chocolates Wall St. is like a box of chocolates From bond markets to Chinese stocks to the Fed to gold, Wall Street is dialing up the chaos in a big way. Mon, 08 Jul 2013 14:52:11 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 367fdb8a-5a3f-4edb-98ca-42bdaa1171b5 BlogArticle E5DED4DF1BF4E3F7 39 31 2013-06-28T18:28:02.42 From bond markets to Chinese stocks to the Fed to gold, Wall Street is dialing up the chaos in a big way. As regular readers may know, I closed my short fund in the wake of the collapse of the housing/real estate bubble, which culminated in the financial collapse that ended in early 2009, as I was certain that central banks would print money in response to the crisis.   I never dreamed they would print anywhere near as much as they have, but I knew what was coming and that it would be difficult to make money on the short side.   I felt that the outcome we would experience in that environment would most likely be stagflation, with feeble gross domestic product growth and decent-sized inflation, or, if we were lucky, strong growth but even higher inflation. The possibility I never considered was an outcome that could be described as "Goldilocks."   First of all, I didn't think an outcome of solid growth and low inflation was possible (it hasn't been). And I didn't think, after the beating folks took, that they would be willing to believe in fairy tales once again (which they obviously have been).   Given the perversity of markets, however, the only outcome that seemed impossible is exactly the one the vast majority of investors believe has magically occurred, even though that belief is misguided.   Even more perverse, it is amazing to think that the only outcome that wasn't possible (deflation), given what the central banks planned to achieve, was the one everybody was afraid of and the only one guaranteed to happen (inflation) is the one almost no one seems to fear.   A red herring We're seeing continued volatility in Chinese stock markets. A lot of the clueless media would like to pin the worldwide weakness in equities on China. In my opinion, that is a sideshow. Not that China doesn't matter, but the new power structure in China is trying to purge some of the excesses after the last go-round of easy money.   The People's Bank of China is trying to squeeze the banking system, although it can always stop. Plus, it has the luxury of going the other direction (back to "easy") when it wants to (though it can also go too far). Thus, China is in a stronger position than the remainder of the G-7 countries, where bond markets have tanked, since it has more monetary-policy options.   So while a fair amount of ink has been spilled about China causing our equity market problems, I don't believe that is the case; rather, I see the fault lying with the bond markets.   I watched this very process take place in Mongolia over the last 18 months, and the paths are quite similar, even though China is a thousand times larger. I continue to believe that while China can impact the world economy -- since it is not growing as fast as people have become accustomed to -- it's not going to be a catalyst for a financial accident, though anyone who has a strong opinion about China and who is not a serious student needs to admit that his views are very speculative, as mine certainly are.   It was here a minute ago If the United States and Japan -- and, by extension, other central banks -- have "lost the bond market," as I believe they have, that is going to be a very big deal. You would have to have been in the business more than 30 years to see a G-7 bond market that didn't do its central banks' bidding, with the exception of what we saw in Europe in 2010, before European Central Bank President Mario Draghi invented "long-term refinancing operations" and promised "outright monetary transactions." (As a side note, it will be interesting to see if the market forces him to make good on those OMTs, but that is not today's business.)   Full-court press On June 21, two days after Federal Reserve Chairman Ben Bernanke's news conference, Jon Hilsenrath published the Wall Street Journal blog post " The markets might be misreading the Federal Reserve's messages." So it took the Fed less than 48 hours to utilize this "tool" in its jawbone kit to try to tell people that Bernanke was not trying to do what the media keep insisting he did (even though he really didn't).   This week, stocks started off weak until William Dudley, president of the Federal Reserve Bank of New York, sparked a rally when he said in a June 24 speech that, ". . . with the benefit of hindsight, U.S. monetary policy, though aggressive by historic standards, was not sufficiently accommodative relative to the state of the economy."   So we have Hilsenrath on June 21 and Dudley on June 24 (not to mention remarks by another Fed head, James Bullard, also on June 21). Next most likely to sound off will be Bernanke's likely successor, Janet Yellen. All of this spin control shows that the Fed is alarmed at what has happened to financial markets.   Clap your hands if you believe But what Fed officials don't know is that it wasn't their tightening talk that has done the damage. Nonetheless, the Fed will react to financial and economic weakness by retreating from "taper” talk. There is no way out now; Fed officials can't even discuss tapering, but more quantitative easing will soon be seen to exacerbate the problem.   As I touched on last week, if the central banks have, in fact, lost control, what has been somehow deemed to be Goldilocks instead will, at some point, be seen as the absolute mess that it is, where inflation runs higher than GDP growth and jobs are hard to come by (i.e., stagflation). In that environment, stocks and bonds can be valued only at lower levels than they have been recently, and precious metals will be among the few things that can protect people.   Gold sector exhibits symptoms of chart attack On the subject of gold, I believe that, in addition to the lopsided negative opinion, there could be (and almost certainly has been) some pressure on the metals and miners, as the Other People's Money crowd (i.e., "professional" money managers) get these assets out of their portfolios for the end of the quarter.   Perhaps once we get past this pressure, the structure of the futures market and the massively lopsided sentiment might finally produce a rally of some consequence that is able to feed on itself. About the only thing negative for the metals is the chart, but it is also the one thing there is unanimous agreement about.   Given that this quarter has been such an epic wipeout, and the decline in the metals and miners has been under way for a couple of years, it is getting long in the tooth, by historical standards. But downside exhaustion is like upside exhaustion -- it ends only when it ends. At this rate, miners are declining faster than Internet stocks melted up in early 2000. And that is saying something.   At the time of publication, Bill Fleckenstein owned gold. Good job Bill.  What is your latest take on gold?   I recently cashed in half my holdings, but I wander, with the FED printing money, like it is going out of style, I wander if gold will take another run at two grand; will it? BlogArticle Bill Fleckenstein bonds commodities Federal Reserve http://money.msn.com/bill-fleckenstein/blog--treasury-market-asserting-itself Treasury market asserting itself Bond investors still have the power to stifle the Fed, although they may do it much more quietly than had been expected. Sat, 29 Jun 2013 13:33:03 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 0e785c2b-ab08-42dc-9fe2-1afd88bdeda6 BlogArticle E5DED4DF1BF4E3F7 34 40 2013-06-21T21:04:09.36 Bond investors still have the power to stifle the Fed, although they may do it much more quietly than had been expected. This week brought another installment of "As the QE-driven world turns," starring Federal Reserve Chairman Ben Bernanke, who held a news conference June 19 following the Federal Open Market Committee’s latest policy meeting.   First of all, regarding the presser, let me be clear that there was nothing in what Bernanke said that could have led anyone to think that the Fed is inclined to take actions that could remotely be considered tightening.   Bernanke went out of his way to say that even when Fed officials got around to reducing the amount of Treasurys they were purchasing, they would, to use his metaphor, still be stepping on the accelerator, just at a reduced rate.   He also took great pains to point out that there would be some lag between whenever the Fed reduces its bond buying and when interest rates might rise, or that the Fed's balance sheet might actually shrink. Further, he noted that everything was data-dependent.   If it looks like a dove and talks like a dove . . .  I realize that, in the aftermath, people have been trying to argue that Bernanke used more hawkish language on June 19 and that must mean the economy will improve, but neither is the case.  He did indicate that a cessation of money printing, "…would basically say that we've had a relatively decent outcome in terms of sustained improvement in growth and unemployment." But he also noted that none of their economic targets were "triggers" that would lead to automatic action; rather, they were "thresholds," meaning they would be dissected and discussed. Finally, he stated, "If things are worse we will do more. If they are better we will do less." Bottom line: The Fed chief couldn't have been much more dovish, unless he had said, "Look, we will never stop QE." Short of that, what he said was not remarkable at all.   On the subjective side, given that the economic data have been decent only when graded on the curve of the last few years, it is hard to imagine how anyone could think it will get strong enough for the Fed to taper, as Bernanke envisions, let alone act more aggressively.   The reason I make such a strong point about what Bernanke had to say is because of the response of the bond market. As regular readers know, I have been of the opinion that the Bank of Japan has overdone it with its bond-buying-driven attempts at quantitative easing (aka money printing) and we are in the early stages of seeing Japan's bond market take the printing press away from the central bankers.   They can't talk their way out of this one  Though there has been a large backup in U.S. rates recently, I had thought that might have been a consequence of misguided fears over tough "taper talk." However, seeing the bond market roughed up as badly as it was this week after Bernanke was as friendly as he could be makes me consider the possibility that America, too, might be in the very early stages of seeing the bond market take away the printing press. If so, the ramifications are immense.   Since the Fed's fourth round of QE commenced in December, 10-year Treasury rates have risen about 80 basis points, from 1.6% to 2.4%. Rates on 30-year Treasurys have not risen as much, having been driven only from approximately 2.9% to 3.5%. But the point is that rates have risen very aggressively here and in Japan despite massive purchases on the part of our respective central banks.   In the past, when I have discussed the possibility of a funding crisis or a bear market in bonds, I would always be asked how bonds could decline given the aggressiveness of central bank purchases. I would always try to explain that once it changes its mind, no one is bigger than the market, as we have seen with U.S. and Japanese bonds declining aggressively in the face of mammoth central bank bond buying.    What I, and like-minded others, may have missed is that the bond market here in America could already be starting to react to what has transpired so far, as well as to what is expected to occur next on the part of the central banks. After all, it is no secret that real inflation is higher than the coupon rate. And if you are no longer worried about deflation, why would you accept negative real rates on any fixed-income investment?   QE exit signs are not up to code  A point I have made many times is that the end of the fear of a deflationary collapse in Europe would be the end of the bond market, and that could, in fact, have occurred.   In a QE-driven world, many of us have become used to the predictability of markets doing what central banks want and have operated under the assumption that exit signs would be in giant neon lights.   If, in fact, bond markets are quietly revolting against the nauseating central planning by incompetent economists with Ph.D.s. That is going to be very big news, and it will mean much weaker equity and bond prices.   Of course, at some point all of that weakness feeding back into the economy brings up the subject of additional QE, but if the bond market has changed its tune, that will be even more problematic.   I don't want to get too far ahead of myself, as we are talking about ephemeral macro crosscurrents, but I wanted to raise the possibility that maybe, just maybe, the bond market is asserting itself and life may get trickier than folks expect in the not-too-distant future. Bird watching  Lastly, I want to touch on two other points. The first is the reaction by the stock market, which has caused all headlines to be written in a way that suggests the Fed is going to be hawkish and is a perfect example of how the stock market creates its own spin.   Stocks were bid up on the massive QE by the BOJ and Fed, which caused people to imagine that the economy would soon start accelerating "just enough" (a.k.a., Goldilocks). When stocks have been boosted so high on easy money, hot air and leverage they are vulnerable and can fall fast if psychology changes (or the bond market tanks), which is what is happening. However, the weakness of stock markets is causing most to misinterpret the Fed's intentions.   That brings up a second, related, point. There is an (incorrect) view that the Fed "knows" the economy is getting better and therefore must prepare for its eventual "exit" from money printing. To that I say, the Fed has been wrong at every juncture in the last 10 years, never understanding what was driving the economy and overestimating growth (since 2007 or so). Bernanke is so clueless, he thought subprime was "contained" in late 2007. I rest my case.   In summary, disregard all headlines claiming that Fed intentions have caused stocks to drop. Stocks are tanking because bond markets have been crushed, not because of what the Fed supposedly has planned. Bonds are weak because central banks have lost control.   Eventually, folks will realize that the Fed is not only clueless regarding the economy (they haven't fixed anything), but also trapped. That means it and other central banks should have zero credibility versus the huge amount they have had up to this point. That mindset should lead people to worry about stagflation instead of dreaming about Goldilocks, but more events have to play out before we get to that point. you're not independent, you're way too predjudiced. probably rascist too. BlogArticle Bill Fleckenstein Federal Reserve Treasurys http://money.msn.com/bill-fleckenstein/post.aspx?post=8a76c00c-06c3-4ddf-835e-8affce4e3cbb The Fed's 'taper' and other fairy tales As Japan's problems continue, investors worldwide are still largely convinced central bankers are in control. They're not. The market is. Sun, 23 Jun 2013 05:02:05 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 8a76c00c-06c3-4ddf-835e-8affce4e3cbb BlogArticle E5DED4DF1BF4E3F7 36 46 2013-06-07T20:01:42.41 As Japan's problems continue, investors worldwide are still largely convinced central bankers are in control. They're not. The market is. As I noted last week, I am focusing much more than usual on Japanese markets, since I believe there may be important information to be gleaned from the action there in stocks and, particularly, in Japanese government bonds (JGBs).   The Nikkei 225-stock index was hit hard on Monday and Wednesday, making the cumulative pullback in Japanese stocks about 20% from their recent high. Yet the bond market has rallied only about six basis points from its worst level. Obviously, the Bank of Japan has its work cut out for it as it tries to create negative interest rates and a bond market that doesn't collapse.   As my friend the Lord of the Dark Matter summed up in a recent email: "We all get that (Bank of Japan Governor Haruhiko) Kuroda wants Japanese real interest rates to be negative, but achieving that without implied yen-rate volatility trending higher and Tokyo banks realizing losses on JGBs is going to be tricky."   Bond market to introduce 'start loss' orders I would go one step further and say it's going to be impossible.   Basically, bondholders have to be willing to accept a negative real rate of return, and although that has been the case worldwide for quite a while, the bond market at some point is going to believe central bankers when they say they want more inflation, because they will get it (in fact, they have already).   Once the perception changes to inflation being the only outcome, life for central bankers is going to become incredibly complicated.   One reason markets have become so ebullient, particularly here in the United States: They have concluded that money-printing has created a Goldilocks environment instead of the stagflation or inflation I have long expected. Obviously, Goldilocks is a state of mind and can only last so long, but when you are in the money-printing "sweet spot," anything is possible.   I never would have dreamed it could last this long, nor gone to the extremes that it has, but, then again, we have never had the world's central banks printing this much money.   When you consider that the BOJ and the Fed together are printing $170 billion a month, and that only about $50 billion of liquidity provided by the Fed in the winter of 1999 blew the top off the stock market then, it is easy to see why insanity rules.   However, minds may be changing. David Rosenberg, of Gluskin Sheff, to cite one example, is now expecting stagflation. When the bond markets of the world collectively have the same opinion, the funding crisis will be upon us. (That is not yet today's problem, even though -- as I noted recently -- the very early stages may be occurring in Japan.)   Heading into negative knowledge territory As a bit of an aside, I would like to make a point about the media and the 20% decline in the Nikkei. Most media talking heads know nothing about investing, yet love to talk about a 20% decline as the definition of a bear market, and other assorted nonsense.   The fact of the matter is that 20% doesn't mean anything. It is just a decent-size decline. It could be a correction or the early stages of a bear market (although that is quite unlikely at this early juncture for Japan). Nonetheless, a bear market is a bear market, but it doesn't become one when you cross 20%. You've quite likely been in one, and it might be over, or it might have been just a correction. In any case, thinking about things from that perspective is totally useless.   We have room only for the big picture Speaking of wrong-headed, large numbers of investors still believe it is possible that the Federal Reserve will stop its quantitative easing efforts, let alone "taper" them. I continue to believe it is very unlikely that Fed Chairman Ben Bernanke will ever willingly taper.   After all, we've had five years of 0% interest rates, and the Fed can't even talk about an exit strategy that allows it to sell bonds, only buy fewer of them. The same sort of discussion has been held every year, but the masses fail to comprehend that, and get more excited with each QE-inspired rally -- with the latest goosed by the BOJ actions.   Once it is clear that tapering is not likely to occur, it will be interesting to see where the stock market is. It is quite likely to have a failing rally and, in the interim, stock market weakness might give us some insight into where the bond market might fail.   As I have noted, there are plenty of crosscurrents, and in this era, they can be incredibly violent. Unfortunately, when there is so much money printing going on around the planet, virtually all trades are macro.   On the air In my latest interview with Eric King on King World News I talk about one of the most exciting investment opportunities I have ever seen in my career. Eric called it my "most powerful interview ever." Interested readers can listen to it here. For Congress to to allocate money for Jobs? They did this already in 08 and it cost 800 billion and did nothing. Congress needs to give small business a break on taxes and health care and impose tarrifs on imports and that would get us back to a decent rate of employment. BlogArticle Bill Fleckenstein bonds Federal Reserve Treasurys http://money.msn.com/bill-fleckenstein/post.aspx?post=1a1ea896-7df1-493e-8680-defcd0de8b87 It's all one trade Cracks have appeared in the Japanese bond market, and potentially ours as well, as the world's finances may be reaching critical stress-points. Mon, 03 Jun 2013 13:31:14 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 1a1ea896-7df1-493e-8680-defcd0de8b87 BlogArticle E5DED4DF1BF4E3F7 8 9 2013-05-31T19:34:54.487 Cracks have appeared in the Japanese bond market, and potentially ours as well, as the world's finances may be reaching critical stress-points. Buckle up because we have a lot to cover. The past 10 days have seen some very important action in several markets that is worth delving into in detail.   First, I want to talk about the crack in the Japanese bond market that occurred on May 23. I believe that was a very important moment in recent and longer-term financial history. In the near-term, I believe it marked the end of the "sweet spot," a term I have used to describe the environment we've been in where people believe that central banks could create an easy-money nirvana at the push of a button.   You can check out anytime you like In a recent column, I mused about which bond market -- Japan's, Britain's or ours – would crack first. Now we know: Japan's. The reason I say the sweet spot has ended is because on May 23, the very early stages of a funding crisis hit Japan.   This is demonstrated by the fact that Japanese government bonds traded through 1.00%, which is two-and-a-half times their rate when the Bank of Japan's huge quantitative easing efforts began. One can imagine the carnage that would occur here if our 10-year rates leaped higher in a similar fashion.   It was also a mini-demonstration of a point I made last week: Once you have entered ZIRP (a zero-interest-rate policy) you can never leave, unless you have a funding crisis and the market drives rates higher, despite central bank commands/demands.   In terms of a timeline, I believe the action in Japan is analogous to first-payment defaults during the mortgage meltdown, which began in early 2007 and were a sign that the subprime market had cracked. However, it wasn't declared "contained" until six to nine months later. During that period, fallout from the bursting of the housing bubble was not only not contained, it was spreading.   The storm after the calm The Federal Reserve is trapped and -- as May 23 demonstrated -- so is Japan. The choice central bankers are facing is the same one that has confronted them since the money printing inspired by former Fed Chairman Alan Greenspan began. Once trouble starts, they have to decide if they are going to allow their economies to fall into a depression or go down a path that seems painless but leads to inflation.   My belief has been that central bankers -- as they have already demonstrated -- will always choose the path that leads to inflation because they think they can easily stop it. And for a long time (most especially recently), people have believed that the money-printing path was essentially painless. I believe that view peaked on May 23 (even though no real inflection point can ever pinned down to one day, or even one week).   In other words, the macroeconomic and financial environment cannot get any better than people already thought it was. It was not as good as people thought, but "the best has been seen/imagined." From here, warts will begin to appear, and we will start to go from all news being good to all news being bad. But that is a continuum and will take some time.   Yield signs Turning to this week, worldwide volatility continued, this time centered -- for once -- in the U.S. bond market. That may or may not be meaningful, but in this case, and in light of Japan's bond market, I think it is.   The $64 trillion question, however, is: "Why are bond markets sinking?" Is it (1) just noise; (2) too much liquidity; (3) not enough liquidity; (4) too much leverage/too many people short volatility; or, most importantly, (5) the beginning of a funding crisis?   The recent declines in U.S. and Japanese bonds (I will restrict my comments to those two, since what happens elsewhere will be an extension of what happened with those) are most likely due to a combination of factors, primarily some noise, but also too much leverage/too many who are short volatility. When rates are held artificially low, with the promise that they will be kept there for an even longer period of time, it is easy for careless, greedy and/or naïve investors to get in over their heads trying to turn what is available from the bond market -- i.e., nothing -- into something that might actually be called "yield." As the saying goes, more money has been lost reaching for yield than at the point of a gun. As for the underlying root cause, is there insufficient money printing (which could easily be solved by central banks), or is there too much (which would be the early days of a funding crisis)? I believe that for Japan the answer is a combination of points 1, 2 and 4 above, which lead to point No. 5. Though it isn't articulated as such, the combination of leverage and monetization promises have precipitated a selloff and a gigantic increase in volatility, which will be very hard to get under control. Even if this is ultimately going to create a funding crisis (which is quite likely), nobody would be able to articulate exactly how and why right now. Just as it would have been almost impossible in late 2006 to extrapolate the final collapse of the economy, stock market and financial system at the end of 2008 from the initial first-payment defaults, even though they were all part of the same process. Such is the case today in Japan, though I believe there are going to be many vicious crosscurrents along the way. As for the U.S. bond market, which was really roughed up on May 28, the blame has been laid at the feet of Fed chief Ben Bernanke (i.e., point 3 above) and the other Fed heads trying to talk out of both sides of their mouths. It is understandable that Bernanke & Co. would want to prepare the markets for the eventual end to quantitative easing. They have never understood that they are the problem, and they continually think that money printing will solve everything, so every now and then, when the stock market gets frisky and the economic data get better, they contemplate that they will be able to stop someday. I don't believe that, as when the end comes for QE, it will be because the bond market has forced it to stop. It can happen here But whereas Ben's threat to someday print less money has been blamed for the backup in U.S. yields (and I'm sure that had some role in it), part of what is at work, in my opinion, is the same process that is occurring in Japan. And since the fact that the Fed may someday buy fewer bonds doesn't impact Japan, it is clear its problem is a case of "too much." (That said, teasing out the precise reasons for why markets move on any given day is usually close to impossible, and when you are trying figure out what might be causing a massive inflection point, it can be even more difficult.) The bottom line, I believe, is that Japanese authorities have "lost the bond market" (i.e., rates are much higher than authorities want, despite their best efforts) and the Fed has as well, but, perversely, Japan may be further along in the process, even though its powers that be started much later to really get serious about QE-powered monetary debasement. As far as markets go, the crosscurrents emanating from the macro consequences of money printing (and associated socialistic government policies) are going to be treacherous, and that is unavoidable. One needs to understand that essentially the macroeconomic environment has been all that has mattered for the last decade.  Money printing precipitated the stock bubble, which led to a bust, and nothing mattered but the macro, in both directions. Ditto during the housing bubble: Nothing mattered on the upside or downside except money printing or its consequences. (Reckless policies caused the bubble, but as it unwound, nothing mattered until enough money was printed to turn it around again.) One-lane road ahead In the last four years, nothing has mattered except how much money was printed. When the consequences of that are felt, that is all that will matter. That doesn't mean individual security research is meaningless, because you have to know what you are involved with, but if I were to pick one motto, it would be: "All macro, all the time; it's all one trade." As for our stock market, folks are still concluding that Goldilocks was not a fairy tale and is, in fact, exactly what the Fed has engineered -- i.e., economic activity that is not too hot, nor too cold, with interest rates rising ever so gently. The same delusions that allow one to think that also indicate that rising interest rates are actually bullish because they theoretically mean the economy is getting better. Historically, pre-Greenspan, that was the case most of the time. But now, since we live in a world with make-believe interest rates picked by the Fed, assets are much more likely to be mispriced -- something stock bulls fail to comprehend. Thus, our stock market feels bulletproof, as we are the leaders in the Goldilocks propaganda. The recent carnage in fixed incomes in Japan, the violent equity selloff there and the bond market decline here have done almost nothing to dent the enthusiasm of that camp in America. Save the last dance for QE However, following the crack in Japanese bonds, my friend the Lord of the Dark Matter said, "I would expect in the coming days (and given the violence of this selloff, it is days, not weeks) that central bankers will reaffirm their commitment to liquidity and that they are 'all in.' They will make their intentions both clear and unambiguous. If the markets don't stabilize after that, then it is '1987 time' for equities."   I totally agree. Eventually, even the really slow learners should be able to understand that the central banks are trapped and that their only choice is between depression and easy money. Do you even look at the stock market?  You sound more ignorant every day. BlogArticle Bill Fleckenstein bonds Federal Reserve financial crisis Treasurys http://money.msn.com/bill-fleckenstein/post.aspx?post=e7041be3-a053-41f8-85e8-fc83ce297ede Fed adheres to 'jawbone' standard When it comes to monetary policy, our Federal Reserve is hoping words speak just as loud as actions. Wed, 29 May 2013 14:57:14 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de e7041be3-a053-41f8-85e8-fc83ce297ede BlogArticle E5DED4DF1BF4E3F7 22 27 2013-05-24T21:40:30.7 When it comes to monetary policy, our Federal Reserve is hoping words speak just as loud as actions. It's time once again to check in on our fearless leaders at the Federal Reserve, as Wednesday was the scene of Chairman Ben Bernanke's most recent congressional testimony (as well as the release of the latest FOMC minutes).   Spoiler alert But we already knew -- regardless of what Bernanke or the minutes said -- what the Fed is going to do, namely what it has always done since former Chairman Alan Greenspan manned the helm. This is not debatable: The central bank is going to print money -- too much money, it as it will turn out, and the central bankers won't understand that -- leading to a collapse in the economy and financial markets, and so the Fed will come back and do the same thing on an even bigger scale.   For five years now, there has been steady talk of exit strategies, yet none has occurred. Nor is exiting described as a binary on-off switch any longer, but rather as a dial whereby the flow of money can be scaled up or down, depending on the data.   Thus, the very concept of an exit strategy, where the Fed might suddenly stop buying or actually sell bonds and reduce its balance sheet, has been abandoned and is never going to happen.   This makes it rather annoying and maddening to deal with financial markets that move on every speech given by every Fed head as they work their jawbone standard. But that is where we are.   Fed won't hit the brakes until it's sure we've hit something No one should be shocked to learn that Bernanke opened Wednesday's testimony by saying that a premature tightening risks slowing or ending the recovery.   That is all you need to know: There will be no premature tightening. Bernanke is not going to pre-empt anything, certainly not inflation. In fact, he said, ". . . inflation, if anything, is a little too low."   All of the tough talk, I believe, is because the powers that be at the Fed have some inkling somewhere in the back of their minds that maybe if they "overdo it," financial markets might get a little (in Fed terminology) overheated.   Other than that, they have no interest in ending their massively stimulative policies in any time frame that could remotely be called early. In any case, when the Bernanke headline hit the tape, everything vaulted to the upside. Then, during the question-and-answer period with lawmakers, Bernanke said he could raise or lower the purchase pace of Fed bond buying (gee, what a shock), depending on the data (ditto).   But then he dropped a supposed bombshell, noting that the Fed could cut the pace of bond purchases at one of its next few meetings (yes, slowly, or maybe not at all). That comment caused a great deal of selling in the bond, currency and metals markets, but it initially had only a modest impact on the stock market, which eventually sank with everything else.   Hanging ourselves on every word The bottom line is that this is a whole lot of hot air, but we are forced to deal with it on a daily basis because we live in a world where central bankers think they know the future and the only standard that exists anymore is the jawbone standard.   (And, most importantly, the damage from money printing has already been done, the consequences just haven't yet fully manifested themselves.)   Are bonds u-ZIRP-ing control? Bonds were deservedly smoked on Wednesday, and yields are approaching their highs of the year. If they keep sliding, stocks will get hit (though they could tank for any reason now, given how frothy the market is) and then the economic data will be seen for what it is: weak.   Of course, "taper talk" would then cease and folks would realize that the Fed is (and has been) trapped. You can't abandon zero-interest-rate-policy (aka ZIRP) until the market forces you to via a funding crisis. Period!   At the time of publication, Bill Fleckenstein owned gold. obamacare will kill the consumer on at least 2 fronts. BlogArticle Bill Fleckenstein Federal Reserve stock market http://money.msn.com/bill-fleckenstein/post.aspx?post=9abc1c3d-9bd6-447e-9d32-c106a4dd4df0 Is Japan's bond market in revolt? Our own funding crisis could very well be precipitated by trouble elsewhere. And there are signs that Japan's bond market may be rejecting the nation's monetary policy. Tue, 21 May 2013 12:53:07 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 9abc1c3d-9bd6-447e-9d32-c106a4dd4df0 BlogArticle E5DED4DF1BF4E3F7 35 37 2013-05-17T20:35:35.18 Our own funding crisis could very well be precipitated by trouble elsewhere. And there are signs that Japan's bond market may be rejecting the nation's monetary policy. I was fortunate to spend a recent Saturday with my anonymous friend, to whom I refer in my columns as the Lord of the Dark Matter, and I wanted to share the key points of our conversation.   He believes that we need to stay focused on Japan because its stock and currency markets are acting as if they (preemptively) are rejecting the concept of money printing.   The yen has tanked 15% and Japan's bond yields have climbed from 0.50% to 0.82% (more than 60%) since Japanese quantitative easing commenced in November. That increase in volatility alone might begin to cause problems for Japanese derivative books.   Bonds? Aye! When you are in a country such as Japan, where interest rates have been zero for a long time, you can be sure all manner of volatility has been sold (at the wrong price) in an attempt to enhance yields. So if volatility and interest rates increase, we could see quite a lot of chaos precipitated from Japan, just as when the housing bubble burst and it wasn't just declining housing prices that caused problems. (It was also the levered-up exposure to mortgage-backed assets and other crazy products.)   Thanks to the policies of central banks, we live in a world where there has been a mad scramble for yield, which means too much leverage has been employed and no one is paying attention to credit risk (or the absolute level of interest rates, for that matter). As said more cleverly by LODM, "the world is short gamma." That means that if the situation starts to get out of control in Japan, there will be big ramifications, there and here.   My, gamma, what big teeth you have I don't want to get ahead of myself, because if the Japanese bond market revolts soon, it won’t be just a funding crisis, but a preemptive one as well. My thesis has always been that inflation will eventually cause bond buyers to take the printing presses away from central banks. That is, the funding crisis would be a reaction to inflation.   If Japan’s bond market trouble is imminent, it would be a proactive strike on the part of bond investors. Therefore, I am not quite sure a funding crisis can occur in the short run. But, given the insanity of the Japanese debt market and the monstrous size of the monetization program, we have to be alert to new developments.   We all know that the policies being pursued by governments and central banks are insane and ultimately disastrous, but they won't stop without being forced to. This is also why I would expect the Bank of Japan to do more rather than less at the first sign of real "front page news" trouble.   And what might the BOJ have up its sleeve to fight this unwanted development? The LODM suggested that if the Bank of Japan were really clever and wanted to stabilize the longer end of the bond market, it would do something like cap 10-year Japanese government bonds at 100 basis points, which isn't very far from where they are today. In that way, given the BOJ's inflation target of 2%, it would guarantee negative real returns and dampen volatility. Obviously, that wouldn't change the eventual outcome, but it would likely buy the BOJ some time.   Say a few 'Abe Marias' while they're at it? Of course, nothing like that has been announced. But the point of this exercise is to acknowledge the fact that Japanese Prime Minister Shinzo Abe and his cohort at the BOJ are not going to give up easily. Capping the 10-year for a while is something they can do, and for all I know there are other clever maneuvers they could also try. At any rate, this is potentially a very serious problem, as JGBs comprise about 900% of Japanese banks' Tier 1 capital. Thus, authorities there are going to move heaven and earth as they fight the bond market.   So far, however, world markets have concluded that the BOJ's actions have been a thing of beauty (i.e., the Federal Reserve on steroids), as the Nikkei has levitated 45% this year with no negative ramifications. Thus, I don't want to become too alarmed, and I have taken no action regarding the potential for a Japan-centric financial nuclear event. But I wanted to call it to everyone's attention.   This process has just begun, and there is no point in getting excited too soon, but it is a very important development that bears watching. The anti-Christ is coming soon. This world wide collapse of the economic system is being done merely to force everyone to pledge to the Anti-Christ or strave to death.   It's that simple folks. BlogArticle Bill Fleckenstein economy Federal Reserve financial crisis stock market http://money.msn.com/bill-fleckenstein/post.aspx?post=8c57e74b-c189-47e1-9101-a85ec5a2f547 Central bankers out of their depth With the market hitting record highs even as the US runs up huge deficits, officials around the world are embracing the very Fed policies hurtling us toward financial ruin. Mon, 20 May 2013 09:03:19 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 8c57e74b-c189-47e1-9101-a85ec5a2f547 BlogArticle E5DED4DF1BF4E3F7 43 49 2013-05-10T21:45:31.667 With the market hitting record highs even as the US runs up huge deficits, officials around the world are embracing the very Fed policies hurtling us toward financial ruin. Paul Singer, the founder and CEO of the extraordinarily successful Elliott Management, recently wrote an essay (" The Fed, Lost in the Wilderness") that was the most succinct and accurate discussion I have seen of where we are, how we got here and where we are headed.   Regular readers will not be surprised (given that I wrote the book " Greenspan's Bubbles: the Age of Ignorance at the Federal Reserve") that the first point I appreciate about the essay is that Singer lays the blame where it belongs -- something a surprisingly small number of people are able (or willing) to do.   "The Fed is primarily responsible for (the current) state of affairs, and it is out of its depth," Singer writes. "Former Chairman (Alan) Greenspan created -- and reveled in -- a cult of personality centered on himself, and in the process created a tremendous and growing moral hazard."   By embracing, rather than discouraging, his "maestro" mystique, Greenspan helped foster the sense that not only was he able to keep the economy "just right," but also that he could quickly correct any problems that might arise.   Jerk of all trades, maestro of none  As Singer puts it, Greenspan "cultivated an ever-increasing (but unjustified) faith in the Fed's apparent ability to fine-tune the American (and, by extension, the world's) economy. Ironically, this development was occurring at the very time financial innovations and leverage were making the system more brittle and less safe."   In short, the Greenspan era represents the greatest failure of Fed policy this country has ever experienced. Not only did Greenspan fail to grasp the consequences of his leadership, but his "solutions" also laid the groundwork for the bigger problems of the housing/credit crisis. If not for his incompetence, none of the problems he created would have befallen us.   If Greenspan's tenure is marked by hubris, current Fed Chairman Ben Bernanke's tenure is (in Singer's view), "one of lower and lower discipline (and) less and less conservative stewardship of the precious confidence that is all that stands between fiat currency and monetary ruin. . . . Speculators win, savers are destroyed and the ties that bind either fray or rip."   The other invisible hand: Risk  Singer correctly points out that while the Federal Reserve's money printing seems to be all gain and no pain, it comes at a price (greater  risk) that present-day investors have been conditioned to ignore. Inflation, dislocations in stock and bond prices, and instability of financial institutions are all problems more likely to mount as a result of Fed policy. Yet, since stock markets continue to rise (on weak fundamentals) and there is no widespread concern about inflation (yet), many investors seem content to believe that our problems are being resolved.   Reality, according to Singer, is quite different: "We believe that the global central bankers, led by the Fed as 'thought leader,' have no idea how much pain the world's economy may endure when they begin the still-undetermined and never-before-attempted process of ending this gigantic experimental policy."   And keep in mind, central bank recklessness is a global phenomenon, not a local one. In addition to rampant money printing by the Fed, the Bank of Japan, the Swiss National Bank, the Bank of England, the European Central Bank (in word, if not deed) and, just last week, the central banks of Australia and South Korea have all joined the party.   Also this past week, ECB President Mario Draghi made some bold claims when he stated during a speech in Rome that: "For the southern European countries, a euro above $1.30 would be too high for their economy. Among major central banks, the ECB has been the only bank that is not expanding its balance sheet. But it will likely consider such a step."   Assuming that Draghi follows through with the action he is implying, we will have unanimous and massive fiscal and monetary stimulus from every single G-7 country and, by extension, others as well.   Green with envy  The amount of stimulus being applied is unfathomable. Thus far, the United States is perceived as being in the best position (i.e., the sweetest of the sweet spots), with Japan quickly catching up. It would seem that world governments are in the process of concluding that their stimulative policies are solving all problems and have no negative consequences (thus we are going to see more of them).   How long the deflationists can hold out with their bond bets remains to be seen, but only the bond market can stop these policies -- a point I have made many times. (I should also be clear that it does not look like the policies will be halted anytime soon.)   With the Dow Jones Industrial Average ( $INDU) and Standard & Poor's 500 Index ( $INX) hitting all-time highs even as we run trillion-dollar deficits, we are the financial and economic envy of the G-7 world, even with our massive problems. So you can be sure the Europeans are going to emulate us.   Summing up the current environment, Singer writes:   "Printing money by the trillions of dollars has had the predictable effect of raising the prices of stocks and bonds and thus reducing the cost of servicing government debt. It also has produced second-order effects, such as inflating the prices of commodities, art and other high-end assets purchased by financiers and investors. But it is like an addictive drug, and we have a hard time imagining the slowing or stopping of QE (quantitative easing) without large adverse impacts on the prices of stocks and bonds and the performance of the economy. If the economy does not shift into sustainable high-growth mode as a result of QE, then the exit from QE is somewhere on the continuum between problematic and impossible."   It is impossible to say when all this will unravel, but one thing I am certain of is that those who think it won't be painful are in for yet another rude surprise. At the time of publication, Bill Fleckenstein owned gold. It is all by design in an effort to bring about a globally centralized financial system and government.  Once everything has unravelled and millions have died of famine and war they will say that we "outgrew" the old system and we need a change.  In reality, they caused the problem and they have the solution which gives them all the power and control they want.  They want to rule over us as slaves. BlogArticle Bill Fleckenstein Federal Reserve stock market http://money.msn.com/bill-fleckenstein/post.aspx?post=b2b0c3b4-10b6-4bcc-811c-9c6f4294c5b3 Market's identity crisis marches on Wall Street's apparent strength is still just as illusory as it was this time last year. And we know how that movie ended. Think 'Jekyll and Hyde' rather than 'Hoosiers.' Mon, 06 May 2013 13:37:00 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de b2b0c3b4-10b6-4bcc-811c-9c6f4294c5b3 BlogArticle E5DED4DF1BF4E3F7 36 38 2013-05-03T20:17:45.267 Wall Street's apparent strength is still just as illusory as it was this time last year. And we know how that movie ended. Think 'Jekyll and Hyde' rather than 'Hoosiers.' For years, Amazon.com ( AMZN) always rallied after release of the company's quarterly results, regardless of what those results were. After starting out with its usual upside performance following release of results for last year's fourth quarter, however, the stock quickly gave up those gains, and more, before moving sideways. Thus, I was curious to see what it would do when the company announced its first-quarter earnings on April 25.   I had a feeling that the stock might be a canary in the coal mine for the stock market at large. It was just a guess on my part, and a pretty tenuous one; but to my way of thinking, Amazon essentially has no fundamentals, since there has been no way to handicap what might make the stock go up or down.   Amazon discovers gravity In fact, the stock did decline on April 26, to the tune of 6%, and looks to me like it may have "failed." In addition, given the proximity of the all-time high for the Standard & Poor's 500 Index ( $INX), I thought perhaps a failure in Amazon might be an indicator of one for the S&P and the Dow Jones Industrial Average ( $INDU). (The Nasdaq Composite Index ( $COMPX), though, doesn't look the same.)   Again, this is a pretty thin reed, but when it comes to trading (guessing), you have to have a bit of imagination. I am, therefore, watching the stock market a little closer than usual for a chance to make a little money on the short side. But I will have a very tight leash, as bad news has not really worked as a catalyst for equities to decline.   Customers who bought this item also bought . . . For example, I was briefly short some equipment stocks a couple of weeks ago because I expected Intel ( INTC) to cut its capital-expenditures forecast. It did, and I had a small victory, but that was because I was quick to cover those positions.   Meanwhile, KLA-Tencor ( KLAC) last week had to reduce its guidance for the second quarter (as a consequence, no doubt, of Intel's reduced capital expenditures) and shares declined 8% or so when it reported. However, two of its competitors, Lam Research ( LRCX) and Applied Materials ( AMAT), both ignored the news.   I can see how we could potentially be experiencing a failing rally in the stock market, which might be a big deal. But trying to make money on the short side is still nearly impossible (though obviously if we do see a failed rally, that would soon change).   Earnings season and macro data have been anemic at the margin, but rather than disappoint the bulls, all they have done, for the most part, is assume that the Fed won't be stopping any of its money printing on the early side, as many had been predicting. And yes, this is the exact movie we have seen for three years in a row. But none of those things seem to be a factor.   The only substitute is sanity If there has been one constant in the money-printing binges we have seen since the mid-1990s, it is that when stocks mindlessly climb higher -- whether it be 1998-2000 or 2004-2007 -- nothing else seems to matter.   This is particularly maddening if you concluded, as I have, that you weren't sure money printing would create activity in the gross domestic product (and thus chose not to want to own stocks) but were certain we would see money printing (and chose to own gold.)   Gold has an amazingly powerful set of fundamentals, but that has not mattered for a couple of years. Meanwhile, the stock market fundamentals are awful, but that has not mattered either. That will change; we just don't know when.   On that subject, I was recently sent a quotation from Paul Singer at Elliott Management that was so perfect I thought I would share it here:   "The world is on a seemingly one-way trip to monetary debasement as the catchall economic policy, and there is only one store of value and medium of exchange that has stood the test of time as 'real money': gold. We expect this dynamic to assert itself in a large way at some point. In the meantime, it is quite frustrating to watch the price of gold fall as the conditions that should cause it to appreciate seem more and more prevalent.   "Gold may not exactly be a 'safe haven' in the sense of an asset whose value is precisely known and stable. But it surely is an asset that, in a particular set of circumstances, becomes a unique and irreplaceable 'must-have.' In those circumstances (loss of confidence in governments and paper money), there are no substitutes, and the price of gold may reflect that characteristic at some point." King World News In my latest interview with Eric King, I go into detail on the gold and silver markets, as well as mining stocks. Interested readers can  listen here.    At the time of publication, Bill Fleckenstein owned gold. So many victims of the "Public Option" in education...  And you want them to provide your healthcare? BlogArticle AMZN Bill Fleckenstein Federal Reserve gold INTC stock market http://money.msn.com/bill-fleckenstein/post.aspx?post=40cf0a4b-8553-49ce-ad8c-b59c6b6b3cca The gold panic of 2013 The store of value that Wall Street loves to hate shows off its volatile side. But those who understand the economy and the world understand this is not the time to panic. Wed, 11 Dec 2013 10:20:49 -0800 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 40cf0a4b-8553-49ce-ad8c-b59c6b6b3cca BlogArticle E5DED4DF1BF4E3F7 69 81 2013-04-19T23:04:18.83 The store of value that Wall Street loves to hate shows off its volatile side. But those who understand the economy and the world understand this is not the time to panic. I was out of the country last week and thus did not post a column, but readers are no doubt aware that the gold market tanked about 14% between Friday, April 12, and Monday, April 15. So I will be devoting this week's column to that subject.   The first big question to consider is, Does this slide have predictive value? Does it tell us anything about the future?   I don't believe it does.   The 1987 stock market crash (which was similar to the Friday-Monday panic selling) certainly had none. It was about poor fundamentals and people not adjusting to them because of portfolio insurance, which detonated like a bomb. Yet the market break didn't "tell" us anything.   The gold market itself has experienced similar declines in the past, which have predicted nothing. in 1976, gold dropped from a high of $198 to $105 an ounce, a decline of about 40%. Interestingly enough, the last three days of that decline saw the market drop about 12% (similar to the amount lost during trading on Friday and Monday).   However, that collapse was a giant head-fake. Within about a year gold was back to its previous high (that would be $1,900 in today's environment), and over the course of the next four years it traded up over eightfold from those lows, even as our Federal Reserve (under Paul Volcker) was trying to do the right thing in the end. (And when it was pursuing the wrong policies, prior to Volcker's appointment, that was kid stuff compared with what the Fed and the rest of the world's central banks are doing today.)   What we just witnessed in the gold market, in my opinion, was a panic liquidation that has no predictive value and which occurred in the teeth of the most wildly gold-friendly fundamentals the world has ever seen. Unfortunately, this is a lesson of markets sometimes being perverse and doing whatever they want to.   'I must be crazy to be in a loony bin like this' The second topic to consider is investor psychology. Obviously, psychology plays a huge role in markets, and it seems quite clear to me that a vast majority of the American investing public believes that it is 2007 again.   I say that because virtually all the people who missed the housing bubble are now sanguine about the real estate market, the stock market and the economy. In fact, it seems as if many are downright giddy. It is as if 2008 never occurred (or 2001-2003, either).   For some reason, this Pollyanna/Goldilocks crowd is incapable of seeing the obvious, in that they are in total denial regarding the negative effects of central bank policies. They cheer money-printing, as it takes stock prices higher and boosts the economy ever so slightly, but they refuse to worry about its consequences, not the least of which is inflation.   By extension, they also have complete faith in the very institution that has wrecked the economy and financial system: the Fed.    How people can rationalize the inflation we are experiencing is beyond me, but that is where we are. That will change, but it is not possible to know when.   I believe this clueless bullish glow about everything being OK is one of the reasons there is so much hatred for gold. Back in 2007, none of these out-of-touch Goldilocks types really cared about gold. Back then, the price was, say, $600 an ounce after rallying from a low of $275 in 2001, but nobody really paid attention. In essence, they couldn't even spell "gold."   'That's right, Mr. Martini, there is an Easter bunny' Now, however, gold has traded as high as $1,900 and generated a lot of news, such that the Pollyanna/establishment people have come to view it as a threat to their worldview. In other words, if gold is rallying, perhaps something might actually be wrong (although I'm not sure they even think that), but what they believe for sure is that a decline in gold prices means their view that "all is right with the world" is correct.   Thus, they have a vested interest in rooting gold lower.   That is why there is such massive hatred of it and there are so many negative articles in every mainstream publication (and why Wall Street especially hates gold).   Meanwhile, the people who can see through all the hype and nonsense and who own gold are in the minority, especially in the U.S. In other parts of the world, such as Asia -- where there are physical and central bank buyers -- people do not succumb to the same delusions. In the end, the physical market will win out, but in the short run, the paper market has so much more volume and is so large that it is the tail that wags the dog.   The Goldilocks crowd will soon realize, once again, that its optimism was misplaced and it will be disabused of the view that the economy will be OK this year (this is the third year in a row that a bit of good news in the early part of the year had folks convinced that everything was going to be rosy thereafter).   Again, the culprit for such silliness is the massive amount of money-printing in the world, which is currently larger than ever. (The Bank of Japan and the Fed combined are conjuring up approximately $1.8 trillion of high-powered money each year, an unfathomably large number, which will ultimately be viewed just as negatively as it had previously been thought to be positive.)   In hindsight, I believe the leg up in the gold market, which ended in September 2011 at $1,900, was about people reacting to central bank actions and the positive price response in the gold market brought in lots of people simply because the price was rising.   Since then, the chart pattern and the market's reaction to news have been negative, culminating in the giant smash we had on Monday. I believe this drubbing marks the end of the last couple of years of bear-market action in gold, and the next leg up will be a function of people recognizing that all this central bank lunacy has erroneous negative consequences.   'The best thing we can do is go on with our daily routine,' said Nurse Ratched Said differently, the increase in the gold price from $300 to $1,900 was about central bank actions, and the next leg will be about the consequences of those actions. This is because, so far, people have believed there have been, and will be, no consequences, but that is totally untrue. Rising gold prices will silence most of the naysayers, but how fast they may convert into buyers remains to be seen.   Perhaps Americans are going to be in denial until the completely rigged Consumer Price Index registers 6%. But  money-printing here and everywhere else is going to lead to massive inflation and other problems, and the only way one can be adequately prepared is to have some exposure to precious metals. (How much is a very personal decision.)   Unfortunately, as this recent episode demonstrates, the personality of the metals is quite volatile, given that, besides being a store of value, the metals are "just" a price, which makes it very difficult for people not to become emotional when that price swings to and fro.   I hope that description of psychology and what has transpired is a useful framework for people to use to navigate prospectively.   At the time of publication Bill Fleckenstein owned gold. Someone below wrote...hickens will be much richer than the man with the gold. or another one who said we need...necessities including food, water, clothing, shelter, medical supplies I think Not, and why is that? Because, how are you going to get the chickens, and how are you going to move the chickens? You truck that needs fuel, or a new tire? or perhaps on your back, and how are you going to trade the chicken for the goat or the milk, it's not equal. money has fungibility, Money has to be divisible, it has to be easily exchanged and moved, to where there is no difference between one dollar and another dollar, in one mans pocket to another.  There's Must be a means of trade Always, the Fiat system has Always failed hundreds of times in the past and it ALWAYS goes back to the trade with Gold or Silver. Since 1971 when we were taken off of the Gold Standard we have been on a downward spiral once again, and that's why it is written in the Constitution of the US to TRADE with only the backing of GOLD. So much to it! If you want to have a safety net for yourself and Family from this Worldwide Currency Crises soon to hit harder than you can imagine, one the average person can afford. How could you not afford the potential for FREE 999.9 Gold Bullion,  then go to http://GoldPotential.com/ Have a Safe and day of Joy! Andrea Capps divisible divisible divisible BlogArticle Bill Fleckenstein commodities gold