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.aspx?post=8a76c00c-06c3-4ddf-835e-8affce4e3cbb As Japan's problems continue, investors worldwide are still largely convinced central bankers are in control. They're not. The market is. Thu, 13 Jun 2013 11:47:36 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 8a76c00c-06c3-4ddf-835e-8affce4e3cbb BlogArticle E5DED4DF1BF4E3F7 38 44 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. I want to say one more thing...Mid-Day America almost any apartment complex...there's tons of cars in parking lots and people around and about...living life. We sure do have a lot of people relaxing with free benefits and food cards. Why work? I don't know how they're pulling off the food stamp program and housing benefits....it's wonderful, only in America. BlogArticle Bill Fleckenstein bonds Federal Reserve Treasurys http://money.msn.com/bill-fleckenstein/post.aspx?post=1a1ea896-7df1-493e-8680-defcd0de8b87 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 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 23 28 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 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 34 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 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 44 38 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 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 37 39 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 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. Thu, 16 May 2013 17:39:02 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 40cf0a4b-8553-49ce-ad8c-b59c6b6b3cca BlogArticle E5DED4DF1BF4E3F7 71 79 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. When gold reaches its true value vis-a-vis goods and services available for purchase, many pundits will change their tune.  Comparing 1890 food prices to the $21/oz. price of gold back then, gold is "worth" no more than $700/oz. today. A house that cost $10,000, or 476 oz. of gold, in 1890 would cost $350,000 (250 oz ) today, according to Schiller - indicating that either housing prices are still too low, or that gold should cost no more than $735 per oz. BlogArticle Bill Fleckenstein commodities gold http://money.msn.com/bill-fleckenstein/post.aspx?post=216292e4-7f35-47e3-ab14-46f964fc8d7e What could go wrong with a strategy that requires no thinking and for which you have no alternative anyway? Everything, eventually. Wed, 01 May 2013 12:11:10 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 216292e4-7f35-47e3-ab14-46f964fc8d7e BlogArticle E5DED4DF1BF4E3F7 31 31 2013-04-05T20:04:46.407 What could go wrong with a strategy that requires no thinking and for which you have no alternative anyway? Everything, eventually. Seeing as how there has not been much new news to discuss, I thought I might take a moment to expand on the phenomenon of nonsense becoming news.   This is a variation of the old Wall Street saw (that I have noted from time to time) of the stock market action writing the headlines. The reason I bring it up is because Wednesday's Wall Street Journal had three news items that illustrated my point while also being nonsensical, maddening or both.   First off was an article headlined, " Silver bears pounce as manufacturing sputters." The article claims that the reason silver has been weak is because "mounting evidence that the rebound in global manufacturing is stalling has investors worried that industrial demand, one of silver's last remaining pillars of support, is crumbling as well."   The author quotes Andy Rosenberger, a portfolio manager, regarding what he says is a win-win strategy of being short silver.   "If the economy improves, you get more demand for silver but less of a tailwind from the Federal Reserve," Rosenberger is quoted as saying. "And if the economy doesn't improve, you don't get the industrial demand." Hence his short position.   (By the way, Tuesday's sell-off in gold was precipitated by a major dead fish house in Europe claiming that the U.S. economy was getting better, therefore the dollar was going to be stronger, therefore you should sell gold, which echoes the story Goldman Sachs was touting last December.)   As for Rosenberger, in the case of precious metals, his can't-lose "thinking" is that you sell silver if the economy is getting better and you sell silver if it isn't, which speaks to my point about the action writing the news. Since metals prices are down, the news is bearish and all stories are spun bearishly.   The truth of the matter regarding silver and Rosenberger's argument is that if the economy stays the same, or doesn't improve, we will get more quantitative easing from the Federal Reserve. However, if the economy does improve we will get more inflation eventually, which will precipitate more silver demand. Note that this version will be the one that gets tossed around when silver goes on another rampage, but for now the get-short argument carries the day.   Bonds-high! On the exact same page of The Journal, an article headlined, " Rare jitters for Japan's bonds," discussed the fact that Japanese government bonds have become somewhat volatile, as we are on the eve of the next Bank of Japan meeting, during which, the consensus is, it will promise to broaden the scale and scope of asset purchases as the bank seeks not just to banish deflation but also to precipitate a couple of percentage points worth of inflation.   This is an example of a market that is maddening, as JGBs have recently been on a tear, making an all-time high in price (i.e., a low in yield), though they have backed off recently.   One would think -- given where rates are, what the Japanese intend to do and what has happened to the yen -- that the bond market there would be under pressure. But that is not the case. At some point it will be, but for now, as in so many countries that are printing money and monetizing debts, more risk is deemed to be painless and financial assets are levitating.   If that "policy" worked so well, however, one wonders why it wasn't the standard policy option for hundreds of years. Of course, anyone with any knowledge of history, or even an ounce of common sense, knows that it will only end in disaster. But, once again, that is a problem that won't matter until it matters.   Well, if everybody's doing it … Lastly, in an op-ed column (assuming we can consider such as news), Jason Trennert argues in " The stock market and the 'Tina' factor" (subscription required) that negative real interest rates mean stocks are the only game in town as, "... there is no alternative (thus, you can't lose.) ... With the global central banks closing off all other exits, savers are turning into 'Tinas,'" which is his shorthand for stock market investors. Trennert notes that what is occurring is, "... a more modern form of inflation-financial repression," as well as the fact that real returns are negative to the tune of approximately 2% (although that assumes inflation is running at only 2%, instead of a more realistic 4% to 5%).   In any case, his grand view is that, given how central bankers are forcing rates to be negative one must invest in stocks because -- drum roll, please -- multiples on earnings will be higher.   "It is hard to say what would be an appropriate multiple for the broader stock market when risk-free rates are negative in real terms," he writes. "But here is the likely answer: higher than you might think."   The only way someone gets away with writing an article like that is because the stock market has been hitting new highs and people are giddy. Obviously, negative real interest rates are a recipe for disaster for bond markets and, by extension, the stock market. What it is positive for are precious metal investments, but since they have the bad market action, this logic doesn't apply to them (for now), it applies only to stocks (because the indices are hitting highs on printed money).   This time it's the same I bring all this up to illustrate how, on a regular basis, the stock market action shapes public opinion (though action in other markets can be influenced, as well). It also helps foment an environment where nothing matters until it matters, and then it is the only thing that matters.   Investors are as deluded, careless and reckless as they've been at any juncture we have seen in the past 15 years, including late 1999 to early 2000 in stocks and  2006-2007 for stocks and real estate in America. World bond markets are train wrecks waiting to happen, but until people decide that inflation matters more, the party will continue.   Once again we find ourselves in a situation where the outcome is preordained, but the timing is elusive. At the time of publication, Bill Fleckenstein owned gold. I wonder who manipulates the FED? BlogArticle Bill Fleckenstein commodities Europe stock market http://money.msn.com/bill-fleckenstein/post.aspx?post=bf751fdf-7f62-4383-9084-98514e0e9edf Like Apple stock a year ago, the market’s sunny optimism sits in sharp contrast to the situation on the ground. Going against the mainstream at times like these is the best way to put the odds of success in your favor. Fri, 03 May 2013 00:12:16 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de bf751fdf-7f62-4383-9084-98514e0e9edf BlogArticle E5DED4DF1BF4E3F7 33 42 2013-04-26T14:43:42.29 Like Apple stock a year ago, the market’s sunny optimism sits in sharp contrast to the situation on the ground. Going against the mainstream at times like these is the best way to put the odds of success in your favor. Being a contrarian is not easy. If you are right about a new idea, it always takes time to prove out. In the short run, you usually appear to be wrong, and you look -- and often feel -- silly.   While I don't consider myself contrarian for its own sake (I am a contrarian because it is the best way to improve your risk/reward odds), longtime readers know that I have no problem voicing unpopular opinions. I try to be disciplined about coming to my own conclusions, regardless of what anyone else might think.   About a year ago, I had a great opportunity to illustrate this point. On MSN Money on April 5, 2012, I published a controversial column titled, " Is it time to bet against Apple?" It certainly generated a lot of negative replies.   It's no longer Apple season Those who are interested can re-read it if they are so inclined, but to summarize, I made the point that "as successful as Apple has been, probably some time in the next couple of quarters, if not sooner, I think it is much more likely to make a great short sell (for those who feel lucky, brave or both) than a great investment from the long side. Given the money-printing environment we have been in, I may or may not try that tactic (it all depends on the setup)."   For the record, I did not try shorting it, but I did trade it briefly in late 2012 for a decent bounce of 1%.   At this time a year ago, this view was unpopular, to say the least. Apple ( AAPL) had experienced enormous recent growth and seemingly could do no wrong. To express an opinion that its success might not continue was typically dismissed as sour grapes by someone who had not owned it on the way up. I would have been subject to much less grief if I had talked about why I thought Apple stock would go to $1,650. (If you look at my original column, you will find a link to just such an opinion from a writer at Forbes).   I have been wrong too many times to take any particular pleasure in being right about Apple, which has lost more than 30% in the past year. My point in bringing it up is to learn from this outcome.   What happened with Apple is not unique, which is partly why I was able to come to the conclusion that I did. It is what a top in a stock looks like. This is important because, as I have said repeatedly, you can't know in advance when a stock will experience a top. You have to be alert to the signs. If you know what a top looks like, you will have a better chance of recognizing one as it starts to develop.   The current environment is another example. As stock markets around the world have risen this year, so has confidence that the "worst" -- whatever that is -- might be behind us. Despite the huge misallocations of capital we saw during the stock and housing bubbles, people still believe that Wall Street prices are generally "right" and that, therefore, rising stock prices indicate a rosy future.   94% pure bull? To give an indication how far this mindset has spread, last weekend Barron's again featured a picture of a bull on the cover, this time with a "Dow 16,000" headline. What readers may not remember is that near the market peak in 2007, a Barron's cover called out "Dow 14,000." (Historically, Barron's covers have been a somewhat contrarian indicator.)   What was truly remarkable, however, were the results of the magazine's Big Money poll, which showed that 74% of institutional money managers were either bullish or very bullish -- an all-time high going back 20 years. Furthermore, looking out five years, 94% of these folks are bullish.   I really don't know what to say about that, it is so astounding. When you think about the large institutional crowd that has convinced itself that basically the future has never been brighter, and combine that with money printing by central banks, it does explain why the stock market is where it is.   What it does not explain is how anyone who lived through the past 10 to 15 years could have come to the conclusions they have come to, but that is a different question entirely. (How so many so-called professionals could miss both bubbles and still have their jobs is an even more perplexing question.)   The optimist sees the year as only half-begun In any case, we can't answer the unknowable. Obviously, sentiment is not likely to get much more lopsided. Though the one-sidedness of people's opinions does not mean that the market has to decline tomorrow, it does suggest that a great number of people have acted on this viewpoint and probably explains what has hampered gold.   The emotional dynamic in that market, especially regarding the miners, is the exact opposite of what we saw with Apple a year ago, or with the stock market generically now. Except instead of being able to do no wrong, the metals complex seems unable to do anything right. Sentiment is lopsidedly negative, and prices are depressed. That in and of itself doesn't mean the market will turn tomorrow, but just as experience tells one how to recognize a top, it can do the same for spotting when a market may have hit bottom.   When psychology starts to shift back toward the problems that we face, as it did in the second half of 2011 and 2012 (this year's underlying fundamentals are worse), while stocks will likely sink, gold may find a few more buyers.    At the time of publication, Bill Fleckenstein owned gold. Marie Antoinette is often quoted as saying "Let them eat cake".  However, there is no evidence that she really said this. Right before she was beheaded she did say, "Please save my children".  None of them survived. BlogArticle http://money.msn.com/bill-fleckenstein/post.aspx?post=2bf8b80e-4ac0-4c63-8cee-3cdb59f9fbfd When mainstream financial 'experts' agree something won't matter, it's time to pay attention. The Cyprus 'solution' is about to wreak havoc on the markets. Mon, 01 Apr 2013 12:55:23 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 2bf8b80e-4ac0-4c63-8cee-3cdb59f9fbfd BlogArticle E5DED4DF1BF4E3F7 27 32 2013-03-29T19:55:50.497 When mainstream financial 'experts' agree something won't matter, it's time to pay attention. The Cyprus 'solution' is about to wreak havoc on the markets. Markets were initially soothed this week as bulls rejoiced over Cyprus finding a "solution" to its recent problems.   I suppose in a way that's true, but the differences between this week and the previous one are simply the institution of capital controls and the fact that larger depositors will take a big hit and smaller ones will get the guarantee they had been promised.   Thus, there was a bit of good news (along with the bad) in this decision, even if the consequences are liable to lead to plenty of trouble.   In fact, there is a lot we just don't know about what may occur, as my anonymous friend, whom I refer to as the Lord of the Dark Matter, pointed out about a week ago:   "How does the monetary transmission mechanism work across the eurozone in an environment of capital controls?" he asked. "How can any eurozone policymaker now claim, with a straight face, that a euro in one part of the eurozone is worth the same as a euro in a different part of the eurozone? (Or) going forward, why should there not be a tremendous risk premium in senior unsecured bank debt across the eurozone?"   Those are just a few of the more obvious questions.   Many details and knock-on effects will need to be sorted out, but because there haven't yet been meaningful perturbations in world equity or bond markets, nearly everyone has assumed that all is well.   Today's undervalued pick: Risk analysis In rebuttal to that (non)thought, the LODM really hit the nail on the head -- about the nature of the market's response to both Cyprus and other negative events in general -- with his comments on how they are essentially forced to conclude everything will work out, thanks to the flood of money-printing by the world's central banks.   In his words, "You assume everything will be fine, right up until it is not."   He also pointed out that when Lehman Brothers defaulted in 2008, the Standard & Poor's 500 Index ( $INX) closed out the week marginally higher, because it took a while for the market to realize the consequences of the default, as well as other cascading problems.   The moral of the story is that -- in an era when assets are levitated by central banks printing absurd amounts of money, monetizing government debts and spewing out liquidity -- markets don't discount much or analyze events very well (which is a point I have made often, but never summed it up as succinctly as I believe he did).   As this week wore on, however, it became clear that Cyprus is starting to matter. European markets lost around 1% midweek and, more importantly, debt markets in Italy, Spain and Portugal began leaking, and bank stocks in Europe were put under pressure.   You don't have to be much of a student of the European Union's financial plumbing to understand that the potential for a decent amount of chaos is quite high.   Still room for improvement Of course, the platitudes being mouthed by U.S. stock market bulls that Cyprus was "contained" and/or immaterial were laughable from the outset, and those comments only demonstrated the bulls' complete lack of understanding of how the financial system, economies, markets and psychology are intertwined.   This is why they don't realize that this year’ sstock market rally has had nothing to do with things getting better and everything to do with people's willingness to believe all is well (or about to be), thanks to money-printing levitating the markets.   I would not be surprised to see the market get considerably weaker as we head into and through earnings season. I can't imagine that's going to be very pretty. And given the amount of "hope-ium" that has been consumed by so many, the potential for momentum building on the downside is quite high.   I haven't done anything on the short side, but I am debating with myself if and when I should test those waters.   Waiting on a trend I know that for some time now gold and silver have been unresponsive to what has been a very positive set of fundamentals. But I don't think you could have designed an environment more conducive to precious metals, with all the world's central banks, save for the European Central Bank, printing at warp speed. And now that confidence about the banking system, at least in Europe, has been broken, ECB President Mario Draghi almost certainly will unleash his printing press.   A combination of the loss of confidence, potential bank/government debt problems and worldwide money-printing is the perfect recipe for a wild ride in the metals. I don't know when that will start, but it will.   Flash-flood warning To conclude on the subject of Cyprus and Europe, the LODM this week sent a short and sweet follow-up email that brilliantly summed up the situation:   "From this week onwards, investment committees and risk managers at many of the world's largest pools of capital and let's not forget corporate treasurers will be convening to carefully reconsider their exposure. . . . In other words, there is a non-negligible risk that what has thus far been a steady drip of repositioning and reconsideration of exposure above the deposit insurance limit turns into a torrent."   On the air My latest interview with Eric King of King World News is now available. In it I cover the situation in Cyprus and Europe, and the prospective implications for the psychology variables of trust and confidence.   Also, don't forget to follow @FlecksMarketRap on Twitter.   At the time of publication, Bill Fleckenstein owned gold. oh max, max, max ... don't you know by now that morons, by definition, are unable to either change from the single party they cling to for evangelical reasons (gay marriage, pro-life, racial bias, etc.) or to ever "vote responsibly?"  just sit back, let them fade into the history books with their founder (lincoln) and let the young, the moderates and the libertarians take over the management of America.  the dinosaurs died slowly and they will fade away in much the same fashion .... BlogArticle http://money.msn.com/bill-fleckenstein/post.aspx?post=56677fd1-fc2a-4804-8b41-4b2eeb5865ca As the Dow reaches a meaningless milestone that's divorced from fundamental economic strength, the Fed's money-printing continues to force investors into risk assets. Wed, 13 Mar 2013 13:29:41 -0700 MSN Money Partner 4914d456-2411-4705-a67e-bdfdfba658de 56677fd1-fc2a-4804-8b41-4b2eeb5865ca BlogArticle 090E0091D074D799 64 79 2013-03-08T18:42:55.483 As the Dow reaches a meaningless milestone that's divorced from fundamental economic strength, the Fed's money-printing continues to force investors into risk assets. This week was a perfect example of the old investment saying, "The market writes the news." By that, I mean that market action oftentimes creates opinions as to why said action occurred, when in fact there is no specific reason or catalyst at all.   Thus, there were plenty of stories as to why the market has behaved as it has, but there really was no proximate cause for why it reached record highs this week.    The Dow Jones Industrial Average ( $INDU) hitting a new high has created excitement and a certain amount of pressure on investors to join the party, which has created a bit of a feeding frenzy.   It is difficult for people to accept that markets do inexplicable things all the time, and that it is often just the collective twitching of hundreds of millions of participants.   However, we do know the real reason markets are levitating, and that is because the world's central bankers are printing money in a fashion never before seen or even contemplated. When all of that money meets a little bit of positive psychology, markets can go anywhere. They just need a little time to unwind  Of course, when you have stocks that have been buoyed by easy money and excited crowd behavior, they can also get smashed rather easily at some point, particularly when you have computers operating as they do, although none of that means the market will decline immediately, let alone when those of us who believe it is dangerous think it ought to. (The same was true during the housing bubble.)   This is another reason why I have continued to say over the past four years that it is risky to short stocks (and why owning gold is a preferable antidote to central bank policies), as being short would have been very, very costly over that time.   As it stands, we find ourselves in another period where logic and fundamentals mean little, as price action rules the day. The only intelligent course of action for those who are long stocks generically is to ease out of them as they see fit, and eventually there will be signs to suggest it is time to get short once again.   But until such signals emerge, it is definitely not yet that time. (Remember, when short selling, it is always better to be late to the party, i.e., let the market make a top and roll over, than to try to guess when that top will be reached.)   Gold price not so malleable As for my preferred asset, gold, it has fared poorly for some time now, but that weakness may be ending. Jim Bianco of Bianco Research noted this week that the SPDR Gold Shares ( GLD) exchange-traded fund has liquidated about 3 million ounces since the Feb. 20 lows but that the price of gold itself has not gone lower, which he views as a sign of strength, since all that selling was absorbed without any more price damage.   I had not thought about it that way, but I think it makes sense, as well as possibly indicating that physical buyers are now quite active and that the recent lows may be as low as gold is liable to go. That is just speculation, but we will have a better idea if that thesis is correct when we see how the market responds to Friday's employment report (unfortunately, after this column has been put to bed).   Set phasers to 'Are we there yet?' Meanwhile, on the subject of the consequences of money printing, i.e., inflation, my good friend Fred Hickey's newsletter, The High-Tech Strategist, was emailed out on Tuesday and I encourage everyone to read it. For those who don't subscribe (shame on you), Fred highlighted two important points. First, he explained how he deals with periods when markets don't behave as you expect and your investments go against you (which I think would be useful for readers to understand in terms of managing their own psychology).   Second, he discussed Murray Rothbard's book on inflation, " The Mystery of Banking." The book describes the three phases of inflation: the beginning, where folks are worried about deflation and believe that rising prices are temporary; the middle or recognition phase, where people see inflation as a problem; and the third phase, when people begin to fear the tremendous financial problems that inflation creates. Fred made the point that we are not quite to the second phase. We can't really know in advance when the recognition phase will occur, but it will. I had not thought about inflation in just that way before, as I had viewed the current environment as being in the "sweet spot," where money printing had pushed asset prices higher and made folks feel better while they ignored inflation.   Whether you want to call it the sweet spot or the interlude between phases one and two, that is where we are. Thus, one thing we can be certain of is that the recognition of the problem is still ahead of us, and when it arrives the metals complex will go wild. At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column. He was long gold. No matter how the govt. statistics are portrayed, it's a smoldering house of cards.  You're welcome to go inside and play, and if you're lucky, you may even come out with some winnings.  But when the whole thing goes up in flames and collapses, can you get out in time? BlogArticle Bill Fleckenstein Federal Reserve shorting http://money.msn.com/bill-fleckenstein/post.aspx?post=98338716-f781-44ad-8315-c7b6f712998a The distortions created by the misguided policies of central bankers have inverted the investing world and hurt the precious metals. But investors will wake up. Mon, 15 Apr 2013 16:25:17 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 98338716-f781-44ad-8315-c7b6f712998a BlogArticle E5DED4DF1BF4E3F7 41 48 2013-03-15T18:19:26.367 The distortions created by the misguided policies of central bankers have inverted the investing world and hurt the precious metals. But investors will wake up. I realize I run the risk of sounding like a broken record every week when I discuss precious metals, but given how important they are as a vehicle for protecting one's wealth in today's insane money-printing environment, it would be hypocritical, if not irresponsible, for me to pay attention to less important topics.   What's more, given the action in the metals sector last week and the current sentiment, we may be seeing the beginning of a turn higher, following the recent rejection of lower prices.   Granted, to feel like any real turn is at hand we would need to see aggressively higher prices pretty soon.  Given that so many people have positioned themselves (both psychologically and financially) for gold to decline, we easily could get that jolt higher.   Consider it a hostile takeover I have been involved in the investment business for more than three decades, and I don't believe I have ever seen an asset market (I'm speaking of the metals themselves, not the miners) become so hated when so little has changed and price damage has been so minor.   Yes, the world hated stocks at the bottom in 2008 and in 1982, but the environment was much different. People were scared to death in 2008. In 1982, they were pretty frightened and had alternatives, such as CDs and bonds with yields in double digits. Today, there is really no alternative to owning some gold, unless you happen to have the perfect inflation-protected business, which perhaps some do.   Yet gold is routinely scorned of late, laughed at and puked up, all while central banks are trying to double inflation to around 2% from the 1% or so they claim it is -- when in fact it is quite likely already 4% to 5%.   How anyone can forgo having exposure to precious metals to protect themselves from the eventual destruction of G-7 money is beyond my comprehension, but that is what markets do. They get you horribly negative on something at a moment in time when you should be wildly bullish about it, and vice versa. Note the attitude toward stocks in general right now. The latter should be sold and the former should be bought, yet people are doing the opposite, in size.   The optimist sees the inflation rate as only half-right On the inflation-watch front, I believe that investors should be keeping an eye on Japan and Great Britain, as well as the United States. Money printing is a worldwide phenomenon. Thus, we may see a change in inflation psychology somewhere else before we see it here, and such a "sneak peek" may enable us to understand better how the process is likely to evolve in this go-round.   For the moment, however, it seems as though folks are totally sanguine. In the U.K., inflation expectations, as measured by five- and 10-year break-even rates, ticked up to 3.3% this week -- according to an article in the Financial Times headlined "Investors see rise in U.K. inflation" -- which is a level not seen since 2008. Having said that,  the 10-year gilts yield about 1.95% and are not all that far off their best levels.   They can't have it both ways So the bond market is simultaneously suggesting that inflation is headed to 3.3%, but it is happy to accept a 2% coupon. I am certain the 3.3% expectation will turn out to be low, but that doesn't matter. At this point, bond investors are willing to accept a negative nominal rate, presumably because they believe that the rate of inflation implied by bond yields won't be hit, or that some other happy outcome will save the day.   As for Japan, yields there are hovering near all-time lows. This suggests the moral of the story is that, thus far, the power of money printing has pushed bond markets higher, while its consequences have not concerned enough people to matter.   The same is true in the U.S., where money printing has helped boost the stock market and the economy at the margin, with the latter perhaps looking even better due to faulty seasonal adjustments and assumptions. The combination has powered the Dow Jones Industrial Average ( $INDU) and the Standard & Poor's 500 Index ( $INX) to record highs. That has conspired to cause journalists to write all kinds of glowing stories about the U.S. stock market and economy and, by extension, the dollar.   In the perverse world of money printing, if you conjure enough paper, you can get all your asset markets to rally, along with the very currency you are debasing. It is a wonderful world, until it isn't. Think 2008 -- only worse.   At the time of publication Bill Fleckenstein owned gold Yes Bill, gold is ready to turn...oops!!! wrong way!!! BlogArticle Bill Fleckenstein commodities economy Federal Reserve http://money.msn.com/bill-fleckenstein/post.aspx?post=d3bfc9ba-8d01-40c8-a120-5827c480bd3f Recent events in Cyprus show just how far banks and governments may be willing to go to justify their policies -- and at whose expense. Mon, 25 Mar 2013 19:23:34 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de d3bfc9ba-8d01-40c8-a120-5827c480bd3f BlogArticle E5DED4DF1BF4E3F7 14 14 2013-03-22T20:04:21.123 Recent events in Cyprus show just how far banks and governments may be willing to go to justify their policies -- and at whose expense. By now everyone should be aware of the European Union-inspired plan to confiscate a portion of the money depositors had in banks in Cyprus. I don't want to rehash what has been discussed ad nauseam in newspapers, investment columns and on TV, but I would like to focus on the consequences, as I think they are significant.   While the Cypriot parliament voted down the measure, the psychological damage has been done and, more importantly, cannot be undone.   What this does, in no uncertain terms, is shatter whatever confidence (i.e., trust) depositors may have had in banks in Cyprus. (It is also a great example of known problems not mattering until they matter.) By extension, I would think that depositors everywhere in Europe, and potentially other parts of the world, would be inclined to think twice about the safety of their deposits and what might happen to them.   Thus, the fabric of trust has been torn; or, said differently, confidence has been lost. It is not easy to generate confidence, and it is even harder to regenerate it once it has been destroyed. The genie quite simply will not go back in the bottle.   Wishes? They'll be lucky to get three guesses The geniuses running the European Central Bank and International Monetary Fund have let it be known that they are liable to do anything to depositors at any time, which is a very poor policy decision, given the cards they have to play.   On the other hand, at least they are being brutally honest, though I am sure they don't see it that way. As Joan McCullough of East Shore Partners noted this week, the two different tax rates proposed to be levied on depositors in Cyprus are at least a direct hit that one can accept and move on from.   Contrast that with what the other G-7 central banks are doing -- robbing savers every day by not paying a fair interest rate, debasing currencies and creating more inflation. (Since Cyprus is part of the eurozone, it is actually getting a double whammy of higher taxes and wealth erosion.)   In any case, this marks a watershed in the bailout era, in that justifications for the bailouts to date have been to prevent people from losing confidence in the authorities and the banking system.   Obviously, this has done the exact opposite. However, this action is one of the reasons people own physical gold, since you are relying neither on deposit insurance nor sanity on the part of central bankers, although you do have to put up with a lot of price volatility (there is no free lunch in the world of investing).   'Cyprus is unique' = 'Subprime is contained' Finally, stock bulls and media cheerleaders have already concluded that Cyprus is contained, even as the exact details of the bank deposit confiscation are still being worked out. (See Andrew Ross Sorkin's March 18 column in The New York Times headlined, " A bank levy in Cyprus, and why not to worry," in which he argues that there is no risk because "Cyprus is unique.")   This is yet another example of a serious problem not having a devastating impact instantly and non-thinkers thus concluding that all is well. A similar scenario played out when the stock bubble burst, and all through the unwinding of the housing/credit bubble.   In fact, there is no better example of data becoming cumulatively worse and people still being unable to connect the dots than what we saw as that latter bubble began to burst. The beginning of the end was in the spring of 2007, when first-payment defaults were being taken by the subprime lenders and caused them to blow up. The stock market, of course, ignored that and peaked in August 2007.   Never show up late to the end of the party Subprime was never going to be "contained." The losses spread to Alt-A mortgages and then to everything else, eventually infecting the idiots on Wall Street and the commercial bankers who had levered themselves up on ludicrous mortgage paper.   As the financial system nearly collapsed and the economy went south, the damage was a consequence of the fact that the economy had been powered by the housing bubble, combined with too many folks using stupid amounts of leverage.   However, to this day mainstream pundits refer to the collapse of Lehman Brothers as the start of the crisis, when in fact it was in essence the end of it, as Hank Paulson and the gang came up with TARP, TALF and other alphabet-soup programs to try and turn back the tide. My point is that many people did not understand what was occurring right in front of their eyes. Now, four years later, they still don't have the right timeline.   I bring that up because oftentimes events come along that change the psychology, the fabric of trust, or affect the business cycle and go unrecognized simply because such things take time to play out, or one event impacts another, and then another. Stated more succinctly, just because there was no "implosion" this week as markets got a chance to react to the Cyprus bank plan does not mean that it will not have many more consequences down the road.   Psychology is an extremely important component of the whole investment landscape. The willingness to suspend disbelief regarding inflation and the monetization of debt here, in Europe and everywhere else, for that matter, is a big reason stocks and bonds are where they are. When one considers what people have been willing to look past (or disregard), it is clear that it wouldn't take much sobering up to cause a whole litany of problems.   Definitely behind the eight ball It is impossible to know what will happen next, as the billiard balls move around the table in random and unpredictable fashion. I would just caution people to be careful not to draw conclusions on any given day about how the dominoes will tumble in the wake of what has occurred in Cyprus.   Some of the knock-on effects won't be known for days or weeks, and though the talking heads and journalists will make proclamations, we really don't know where all this will lead to, other than to say that confidence will erode at the margin and people who have money in Cyprus and other shaky banking systems will take action over time. I cannot see how this is anything but bullish for precious metals, even though this week they didn't do anything all that special. At the time of publication, Bill Fleckenstein owned gold. I definitely applaud MSN for publishing this article.   Scary stuff.   And I'm afraid that everything that Veteran Lender is saying is true.   Nothing to do now but wait for the third and final episode of the movie Atlas Shrugged.   Lord have mercy. BlogArticle Bill Fleckenstein commodities Treasury http://money.msn.com/bill-fleckenstein/post.aspx?post=4d7d4743-2c2d-41ee-bd9e-c14c0fddc7b0 While most eyes are focused on Italy, France may be the bellwether for Europe's prospects, with implications for our own economic future. Mon, 11 Mar 2013 06:26:35 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 4d7d4743-2c2d-41ee-bd9e-c14c0fddc7b0 BlogArticle E5DED4DF1BF4E3F7 7 5 2013-03-01T19:00:11.347 While most eyes are focused on Italy, France may be the bellwether for Europe's prospects, with implications for our own economic future. It's been a while since I have relayed much from my anonymous friend, whom I refer to as the Lord of the Dark Matter, but given the uptick in European angst, I thought I ought to. First off, he noted that now that the rally inspired by European Central Bank President Mario Draghi's outright monetary transactions has been exhausted, it's time to pay closer attention to its effect on Europe. (I say "inspired" because Draghi did not have to actually do much in the way of open market transactions, but he will in the not-too-distant future, I would guess.) As for the LODM's views, he suggested that, "While the markets are, understandably, volatile after the Italian election, and I thought about writing about the outcome . . . do not let Italy distract you from the real and growing problem in Europe. Which is France." Cornering the market on sour grapes He also pointed out that one of the early signs of trouble in 2003 was when both France and Germany were allowed to breach the 3% budget-deficit-to-GDP cap in the European Union's Stability and Growth Pact. He wrote: "So let me ask you this: how do you think the citizens of Italy, Spain, Portugal, Ireland and, especially, Greece will feel if France -- which is already begging Brussels for more wiggle room -- is given wiggle room on its 2013 structural deficit commitment? How about Berlin? The battle for EMU (European Monetary Union) was always going to be fought over France, and I would suggest to you that the past three years were just the warm-up act. So as much as we were all excited by developments in Italy this morning, I am not going to take my eyes off France." Of course, anyone who has been paying attention knows that France has large financial and economic problems, although it is in the league of too big to bail out (if it isn't, it is damn close). I expect that we will be more focused on developments in Europe prospectively. Having said that, I believe that Draghi and the rest of the Europhiles will move heaven and earth to make sure that their experiment with that currency doesn't go down in flames, at least not right now. Thus, though the consternation over Europe, and the recognition that the American recovery was inspired by a rising stock market spinning the news in a way it didn't merit, are both going to conspire to put equity markets under pressure. Those of us who think the bond market is the key to the long-term big picture should be interested to see where the bond market fails on this go-round. The highs for equity markets around the world may be very near, if we haven't already seen them for this year. To repeat, if that is the case, the important market will be bonds, and where the bond rally stops. Obviously, as developments get more dicey, worldwide money printing could accelerate, to some degree, and that may put a bit of a floor under equity markets for a while. I am not so keen to short stocks (because of money printing), but there might be a chance that gold prices rise while stocks decline as a consequence of so many people having set themselves up as short gold because they were bullish on the economy or the stock market. That's why they call it the 'nervous system' Bottom line: It looks as if we are heading back to an environment where there are going to be lots of moving parts, and all the standard "room temperature" bets that have been made -- long stocks, long the dollar, short bonds (for the wrong reasons) and short gold -- are going to be tested. Where it's @ I have authorized my editor to start an official Twitter feed for my subscription site. I won't be tweeting myself, and I can't promise how long we will stick with it, but in the meantime he will be quoting snippets from my subscription site, links to interviews, and anything else that seems worthwhile. If you're interested please follow @FlecksMarketRap. Few French seem to actually work. How can one base an economic forcast on France without breaking into a laugh? BlogArticle http://money.msn.com/bill-fleckenstein/post.aspx?post=f4d293dc-6add-4479-9d94-85d56dd7265d If it all weren't so absurdly familiar, the money-printing-fueled rally in stocks underwritten by faith the Fed will fix the economy would be unbelievable. And yet many doubt more-tangible assets. Mon, 25 Mar 2013 10:34:41 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de f4d293dc-6add-4479-9d94-85d56dd7265d BlogArticle E5DED4DF1BF4E3F7 74 82 2013-02-22T19:00:03.217 If it all weren't so absurdly familiar, the money-printing-fueled rally in stocks underwritten by faith the Fed will fix the economy would be unbelievable. And yet many doubt more-tangible assets. As precious metals were pummeled again this week, all sentiment measures that I look at hit their lowest levels this decade. One indicator, the Daily Sentiment Index, hit a level seen only twice before, and not at all since 1993.   I, for one, don't really see how the mood for the metals and miners could get much worse, but that does not mean it has to turn around immediately. The mood will change when it changes, but when it does, it will precipitate big moves.   Part of the reason folks don't think they need precious metals is the belief in the Goldilocks thesis, which has at its root the notion that the economy is getting stronger. An extension of that is the suggestion -- once again -- that the Federal Reserve is going to cease its money printing early and thus head off inflation.   On Wednesday, we saw more angst along those lines, as the tape was all a-jitter over fears that the Federal Open Market Committee minutes were going to show some sort of a tremendously hawkish bent on the part of the monetary doves that run the Fed. The news that some Fed heads might want to "vary" the pace of quantitative easing is reminiscent of last year (see below), when some were incorrectly musing about actual Fed exit strategies.   I cannot believe anyone could possibly give any credence to that thought process. But over the past four years, there have been several periods when people didn't understand what was occurring or how our warped financial system actually works. (I say that because if they did, they would not be looking for early exits based on misplaced visions of economic strength or a lack of understanding about the Fed itself and its money printing.)   How soon we forget Remember, it was just last year -- thanks to warm winter weather and inaccurate seasonal adjustment factors -- that folks were breathing hot and heavy about the Fed not only turning off the spigot of easy money, but draining the reserves. Instead, by the summer and fall, we had a third and then a fourth round of quantitative easing.   Currently, we don't even have any of the particularly strong economic data that we had early last year. We do know that the average consumer is being hit with increased taxes, yet folks seem to think the economy will get better simply because the stock market is rallying. In fact, the rally is happening because the Fed is printing money, not strong economic fundamentals.   The fact that we continue to have this fear of a "responsible" Fed despite its actions over the past two decades is as mind-boggling to me as looking at the level of short-term interest rates. The Fed has done nothing but ruin the economy and financial system, and it has been wrong in its assessments at every juncture. Yet people still take the Fed as seriously as if it had been dead right and extremely responsible. And clearly, no one fears the Fed more than the metals markets.   Look what the CAT dragged in Stock bulls did lose some of their bravado Wednesday, thanks to Fed jitters and Caterpillar's ( CAT) announcement that the machine sales slowdown it had been seeing was accelerating, led by Asia. That is just another recent data point about the global economy not being all that great.   However, in general, people continue to be rewarded for being wrong over and over again, which is rightfully maddening to those who are prudent and understand that the policies of the Fed and other central banks are terrible for all of us. Regrettably, the masses are not thinking along those lines, are sadly delusional and are once again going to take enormous losses at some point.   Worth your while I had wide-ranging conversation regarding gold and crowd psychology with Mariusz Skonieczny, who has a wonderful value-oriented website. Interested readers should definitely check it out. You can listen to the interview here.   At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column. He was long gold. Pretty honest assessment and well written article Bill.Very complex and  unstable and fragile World economy I do not think any one can really for see or assess what will happen next any more...One thing though I believe is also drastically changing is the downfall of trust and confidence in all these institutions and that is NOT GOOD......Perhaps it is best to hope for the best but be prepared if things go South BlogArticle http://money.msn.com/bill-fleckenstein/post.aspx?post=b9d9a17b-9a19-4bbe-9194-7683cabf35f4 The global economy is suffering from a third massive misallocation of capital. And when each stage means a larger and larger distortion of our financial system, the third time is definitely not the charm. Sat, 16 Mar 2013 09:01:03 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de b9d9a17b-9a19-4bbe-9194-7683cabf35f4 BlogArticle E5DED4DF1BF4E3F7 67 74 2013-02-15T20:02:07.627 The global economy is suffering from a third massive misallocation of capital. And when each stage means a larger and larger distortion of our financial system, the third time is definitely not the charm. Early last week there was some chatter regarding the upcoming G-20 meeting that tried to play down the idea that the G-7 countries -- the biggest of the industrialized nations -- are engaged in a competition to see who can debase their currency the fastest. Of course, such chatter is meaningless, because even if those countries were in a currency war, they wouldn't acknowledge it.   More important, what is under way is bigger than squabbling over who can make the most confetti. We are in the midst (or, more likely, somewhat past that point) of the third massive misallocation of capital of the past 15 to 20 years, all three of which have been precipitated by irresponsible central bank activity.   Anyone hear an echo? The first instance was mostly a Federal Reserve-inspired party/debacle (the equity bubble) that allowed people to live beyond their means, dream that they could be day traders or start up spurious businesses they believed would one day be worth billions of dollars.   When that burst, the Fed printed even more money and we had the even more dangerous misallocation of capital that resulted in the real estate bubble, where people used debt to live beyond their means and the financial system itself embarked on a similar strategy. The result was a cataclysm that nearly wiped out the world's banking structures in 2008/2009.   The response to that was worldwide quantitative easing (as central banks monetized government debt with money they created with the click of a mouse). While this has not produced the bubble-like euphoria we saw in the equity and real estate bubbles, it has allowed governments to behave in totally irresponsible fashion.   That has allowed people to believe that a recovery is under way, that the bond markets are OK and that we don't have any inflation; thus, all of our problems are in the process of being solved. In other words, everything is just right (à la Goldilocks).   Aka, a Grimm reality That is, sadly, pure fantasy (again). What has caused the stock and bond markets to levitate is nothing short of an extraordinary amount of worldwide money printing that thus far has not resulted in "enough" inflation for people to recognize it as such. (Most likely, the fear of a deflationary accident still lingers, even though that is receding into the background.)   How long folks will remain in denial (delusional) is not knowable in advance, just as it wasn't possible to know when the equity and real estate bubbles would end. What is knowable, as it was with the prior two bubbles, is that it will end, and very badly.   Once central banks cannot monetize government debt, we will have a variation of the scare we saw over the past couple of years involving European governments, but this time focusing most likely on Japan, Great Britain and the U.S., as well as Europe.   In other words, we are in the final misallocation of capital. As I have noted before, we can't really call it a bond bubble, since we don't have the euphoria and behavior-changing aspects that normally accompany bubbles. But the warping that has been caused during this go-round is no less significant, and the ramifications will be even more powerful, simply because the scale of the abuse is gargantuan. The Federal Reserve IDIOT! BlogArticle http://money.msn.com/bill-fleckenstein/post.aspx?post=f177e0fa-47c5-45d6-8cd4-b66322cb6f6e The most recent Barron's Roundtable shows that while the market is celebrating, smart money folks who've been right about past busts see the next breakdown dead ahead. Fri, 22 Feb 2013 08:49:05 -0800 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de f177e0fa-47c5-45d6-8cd4-b66322cb6f6e BlogArticle E5DED4DF1BF4E3F7 71 87 2013-02-08T19:01:19.063 The most recent Barron's Roundtable shows that while the market is celebrating, smart money folks who've been right about past busts see the next breakdown dead ahead. The world's equity markets continued their money-printing-inspired party over the last few days and, in conjunction, a certain amount of recklessness continues to build. However, there is reason to suspect, courtesy of Barron's, that the rally may be about to end.    (I normally don't buy Barron's, but I did this week because I wanted to read the Roundtable comments from Fred Hickey, publisher of The High-Tech Strategist, and Bill Gross, founder and co-chief investment officer of Pimco).   On the cover of the Feb. 4 issue, the headline read, "Stock alert! Get ready for a record on the Dow," followed by a lead paragraph that modestly reminded us, "We told you so. In October, we predicted the Dow would pass its 14,165 record by early this year. Now we are just 1% short. Expect a breakthrough soon."   I don't recall ever seeing such brazen end-zone dancing by a major financial publication, and if history is any guide, this means the stock market rally is essentially over.   Of course, I would never put any money on such a glib observation, but over the years I have found end-zone dancing -- which is essentially the same as hate mail -- to have an amazing ability to signal turning points. The people who do it are so full of themselves, and so certain they are correct, that they throw caution to the wind, which is what marks the tops of rallies.   A (Gross) margin of safety Turning to the contents of the Roundtable, I thought it was interesting that Bill Gross's first pick was gold in the form of the SPDR Gold Trust ( GLD) exchange-traded fund. He, too, believes that the path we are on leads to inflation (not deflation), which will discipline the bond market, which will in turn ultimately discipline the Federal Reserve. In short, he sees a variation of what I refer to as the "funding crisis" in our future, in which the government has a hard time selling bonds to finance debt, though he does not think it will happen in 2013.   As for money printing, Gross said, " . . . it will continue until inflation exceeds the upper end of the central banks' target of 2.5% or, by some miracle, we get real economic growth." Another Roundtable regular, Felix Zulauf, summed it up later in the article, ". . . the Ponzi scheme continues until inflation becomes a problem," to which Gross responded, "That's right. Ultimately, that is what will cause investors at the margin to desert bonds."   That makes three of the smartest panelists on the Barron's Roundtable -- i.e., Gross, Zulauf, and my good friend Fred Hickey -- who are all bullish on gold.   In the long run, I think the slow-to-evolve recognition that (1) the "deflationary accident" fear trade has ended and (2) we are on our way to inflation (and ultimately a funding crisis) is going to cause more and more people to own gold. And when gold does finally move, at long last, it is liable to be wild. There will be an intense scramble (thanks to price action) as people finally "understand" the arguments and rush to join the party.   But in the short run, none of the arguments in favor seem to have mattered to the gold market.   Just the tipping point of the iceberg It is not just Gross who sees a funding crisis in our future. In a recent interview, Kyle Bass, the founder of Hayman Capital, revealed that he sees the situation the same way, as does Seth Klarman, the founder of the Baupost Group.   Out of respect for Baupost's intellectual property, I don't want to quote too liberally from its content. But there was one description from the group's year-end letter of the problem regarding the reckless, out-of-control spending in America, and the Fed's funding of nearly 100% of the federal deficit with the money it prints up that I feel I must share:   "It is dangerous to need constant access to the capital markets for such staggering amounts of financing. An unknowable tipping point looms over the horizon. When we reach it, outsiders and U.S. citizens alike will become suspicious of our creditworthiness, causing interest rates to rise and the dollar to plummet. Holders of greenbacks will rush to spend their money while it still has some value, causing the prices of goods and stores of value (like gold) to surge. No one knows precisely how much debt is too much, or at what moment the tipping point will be reached. It's like driving a car with a faulty navigation system along a steep mountain road at night while wearing a blindfold. Sooner or later, you're going to plummet over the edge."   Gold keeps obeying gravity and defying logic As for the current psychology, it is certainly very pro-stocks and anti-metal, and nothing illuminated that better than a week ago, when Fed head James Bullard (who runs the Federal Reserve Bank of St. Louis) said that if unemployment got to the low 7% range, the Fed could curtail its bond-buying quantitative-easing program a bit early, albeit by a measly $10 billion.   The stock market looked at that comment, laughed and then soared, while gold sold off like a frightened sissy.   At some point, the gold market won't fear the Fed; it, too, will laugh in its face because the Fed is such a joke. When that happens, it will also signal that the bond market is in real trouble. Yet as long as the metals fear the Fed and act as though it has credibility, markets can't really get out of hand. It is when the Fed "loses" the bond market, which I suspect we will be able to tell by the action in gold, that financial markets will get really dicey.   The bond market is radically mispriced because it has effectively been a bubble, though without the euphoria and behavior-warping strategies that are typically part of bubbles. (Arguably, given the fact that the bond markets have allowed governments to live beyond their means, the economy has been warped.)   In any case, though there is plenty of short-term obliviousness and denial, there does seem to be a growing recognition of where we are headed, at least among folks who have incredibly great track records and haven't been wrong about our prior bubbles -- unlike most of the people who are currently wildly bullish about stocks.   At the time of publication, Bill Fleckenstein owned gold. Any of you fortune tellers have a take on where silver bullion will be from the present, to a five year out time line. BlogArticle http://money.msn.com/bill-fleckenstein/post.aspx?post=46eaaca4-5478-4635-b0b1-ccaec0c6df52 The stock market's strong start to the year tells us more about the investing crowd's need to believe that all the big problems are behind us than it does about the potential for a strong economy. Fri, 08 Feb 2013 06:25:31 -0800 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 46eaaca4-5478-4635-b0b1-ccaec0c6df52 BlogArticle E5DED4DF1BF4E3F7 84 101 2013-02-01T19:01:06.8 The stock market's strong start to the year tells us more about the investing crowd's need to believe that all the big problems are behind us than it does about the potential for a strong economy. As the collective worldwide equity rally soldiers on, folks across the board once again have suspended disbelief to conclude that all problems are solved (or at least contained).   Whether it's Japan's deflation (which folks believe will be conquered by the money printing there), to the mess in Europe, to America's economic, financial and monetary woes, everything is deemed to be on the mend. Thus, money is being thrown at stocks, and the year has certainly gotten off to quite the start, with the major indices all running off notable strings of up days.   It probably won't be long before Bubblevision (aka CNBC) gets all lathered up about the "just right" Goldilocks economy yet again, as it has during every period in the past 15 years when money printing warped markets and the economy. (More about that later).   Mr. Market loves his new oversized racket In short, a superficial analysis indicates we are in a bit of a sweet spot, so enthusiasm for the stock market continues to build. But along with higher equity prices has come another bout of collective amnesia.   Meanwhile, the world's bond markets have not been clubbed yet, as 10-year Treasury bonds keep making higher highs and lower lows (in interest rates), and last week traded at their highest level since last spring.   The bond market is now lower than it was when the latest rounds of quantitative easing began, but it will still be some time before it truly disciplines the Federal Reserve by taking away the printing press (which will ultimately punish equities as well). However, currently most investors are able to look past rising rates, shrug their shoulders and say, "Hey, rates are still really low, and they are rising now because the economy is better." (That, too, is a Goldilocks view.)   Who needs gold . . . As for the precious metals, folks continue to decide they don't need gold when equities are working and all the problems have been solved. (They haven't been, but that is irrelevant at the moment.) Contrarians should take note of the difference between the psychology toward stocks in general and mining stocks or metals, as they are at opposite extremes.   On the subject of the metals, I thought I might take a stab at what has ailed gold for the past six to 12 months. My suspicion is that people have concluded that they don't need the metals. Not that Americans had ever really decided they needed much exposure to begin with.   But for now, Europe appears to be on the mend. (Note that I said "appears," because while European Central Bank President Mario Draghi's money printing and promises to do whatever it takes have papered over the problems there, but they have not gone away.) The structure of the eurozone is unchanged, and unemployment is enormous there as well, so the fiscal and economic pressures remain quite high despite the current improved mood.   And here in America, there was so much angst over what was really not that big a deal -- namely, concerns over the so-called fiscal cliff and the debt-ceiling wrangling -- that getting past those has produced a knee-jerk response and has caused people to totally ignore the massive government debts that are not being addressed.   . . . when we’ve been fooled? Thus, we are in a period where money printing has supported debt markets and boosted stock prices, but none of the massively negative consequences from the flood of money has been seen (leading many people to conclude that there won't be any, which is wrong). No currencies have been drastically weak, because all G-7 currencies are bad, and inflation hasn't really started screaming, while people are willing to overlook what inflation exists -- for now.   So we are at a moment in time where the act of money printing no longer causes gold to move higher, since it is boosting stock markets and lulling people to sleep. However, all the drastic consequences are staring us in the face and will soon start to matter.   But just as it is difficult to tell in advance when the madness of crowds will exhaust itself (as we saw during the equity and housing bubbles), it is difficult to say when the "crowd" is going to realize that just because stocks are higher doesn't mean we aren't headed for a train wreck in America. Eventually the Fed will no longer able to print its way past trouble, not to mention the fact that inflation is certainly headed higher.   For Wall Street optimists, the glass is always half fool To sum it up, the majority of investors are being head-faked, as the effects of money printing have "helped" markets and economies, but the consequences have yet to be felt. Thus, they have erroneously concluded that stocks are the place to be, everything is OK, and who needs gold?   That conclusion is incorrect, just like the idea that you will always make money in stocks over time, or that home prices never go down or other crazy notions that large groups of people cling to from time to time.   But that's where we are, and it will end only when it does. I, for one, am pleased that we have at least reached the phase where the bond markets are no longer abjectly cheering money printing, because that is the first sign of the beginning of the end of this insane epoch in financial history.   At the time of publication, Bill Fleckenstein owned gold. I think Bill is being kind to American investors when he says they must have amnesia about the history of stock prices since 2000.  I would say stone-dumb since a triple top has formed that only a Obama appointee would miss!  Have personally been buying gold since 1997 and silver in size since 2003, and I will be able to retire before age 90 and without having to wear a Walmart Greeter's apron at any time.  THE TURN IN BOND YIELDS IS THE KEY.  Remember from Econ 101 that bond yields are determined by inflation expectations, default expectations, overall credit-worthiness, and maturity to repayment of principal.  These 4 horseman are going to ride into town and behead most of the populace before this Monetary Inflation/Printing Thing is over.  2013 ends in a very unlucky number, and I think the Bernanke-Obama Depression unfolds for all the half-asleep Sheeple to behold this year.  Remember Barack ........ YOU OWN THE AMERICAN ECONOMY NOW! BlogArticle http://money.msn.com/bill-fleckenstein/post.aspx?post=aff45768-c658-4f29-b930-f7480a85f0e3 Why so many put so much trust in our central bank's central planners is a mystery, given how out of touch they seem to be. So don't be lured in because it seems like everything is under control. Sat, 16 Mar 2013 07:31:57 -0700 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de aff45768-c658-4f29-b930-f7480a85f0e3 BlogArticle E5DED4DF1BF4E3F7 52 62 2013-01-25T19:00:22.21 Why so many put so much trust in our central bank's central planners is a mystery, given how out of touch they seem to be. So don't be lured in because it seems like everything is under control. A New York Times article caught my eye, since it described a subject near and dear to my heart, namely, the lack of omniscience at the Federal Reserve.   Headlined " Days before housing bust, Fed doubted need to act," the Jan. 18 article by Binyamin Appelbaum walked through how the Fed responded to the early part of the housing bust, beginning with what the Fed was thinking in August 2007. It makes it quite clear that the geniuses in charge of our monetary policy were completely unaware of the fact that the housing bubble had been the economy, among other important issues.   What we knew they didn't know then That is naturally par for the course, since Fed "logic" always starts from a false premise, that being that bad things in the economy just "happen" and it is the Fed's job to fix them, rather than understanding that it is the Fed that keeps precipitating our problems through its money printing.   Just for grins I went back and read some of the columns on my subscription site ( www.fleckensteincapital.com) from August and September 2007. I must admit it was pretty shocking, though somewhat entertaining (in a sick sort of way) to see just how oblivious so many were to something so obvious.   To revisit some of the highlights (or lowlights, as the case may be), the first half of August 2007 featured Bear Stearns (remember it?) announcing more problems with one its funds, rampant carnage in the housing construction and finance sectors, Japan's Ministry of Finance stating that "the subprime issue won't have an impact on the U.S. economy," my own statement that the Fed "does not understand how dangerous the problems are" (this was during a week in which it appeared the Fed was behaving responsibly, but as we now know, that was only because it had no idea that the housing bubble was the U.S. economy), followed by basically a blank-check bailout from Fed Chairman Ben Bernanke.   As I, and many others, said ad nauseam at the time, the financial meltdown created by the Fed's idiotic policies was bound to create problems that would stay with us for a long time. Looking back at that period through a "real time" lens (both in my own writings and The Times article) really drives home how incompetent the Fed is.   Returning to the present, we have the Fed monetizing government debt at the rate of about $1 trillion a year. Other central banks are charting a similar course, one in which they would be thrilled if they could get inflation to 2%. (In fact, they probably wouldn't be totally unhappy with it going higher.)   Given that inflation is a lagging indicator, and massaged through the absurd assumptions made by the official counters at the Bureau of Labor Statistics, one can be sure that by the time the Fed hits its target, the real cost of living will be rising by somewhere between 5% and 7%. At some point, the bond market is going to revolt over this.   Things may get better before they get worse But for now, money printing has certainly put a bid in world stock markets. World economies are rebounding along with the market, to some degree, and for the same reason. Thus, apart from the always-present potential for another (and a bigger) flash crash, markets are in the process of doing everything they can to suck in more money.   That is a long way of saying that, as frisky as world stock markets feel now, they could get a lot friskier and dopier before the bond markets of the world force the central banks to act like adults.   However, readers should remember how dangerous individual stocks (or the stock market in general) can be. Money printing results in all sorts of deceptive "action."   Just look at Apple ( AAPL). In March 2012, I wrote a cautionary column (" Is it time to bet against Apple?") while others were euphoric, and I was derided by many readers for doing so. Yet since then, the stock has lost 25% of its value.   The moral of the story? In a world warped by money printing, be careful that you don't get sucked in by the seductiveness of the stock market.   At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column. Typical so called guru, does he also remember pimping msft for years? BlogArticle http://money.msn.com/bill-fleckenstein/post.aspx?post=4b9f4c82-e7c1-47df-ad3d-834ef83dbae6 As investors realize the market's deflation phantoms aren't real, they'll notice a potentially fearful rise in inflation. That will give the bond market jitters. Thu, 07 Feb 2013 11:19:44 -0800 Bill_Fleckenstein 4914d456-2411-4705-a67e-bdfdfba658de 4b9f4c82-e7c1-47df-ad3d-834ef83dbae6 BlogArticle E5DED4DF1BF4E3F7 51 74 2013-01-18T19:09:30.603 As investors realize the market's deflation phantoms aren't real, they'll notice a potentially fearful rise in inflation. That will give the bond market jitters. Earlier this week, outgoing Eurogroup President Jean-Claude Juncker attempted to jawbone the euro lower when he said that, "the euro foreign-exchange rate is dangerously high."   So we now live in a world where not only are central banks intent on producing inflation, but the G-7 industrialized countries also all want their currencies lower. Paradoxically, the conclusion of the bond market is to worry about deflation when the logical result is inflation.   I, for one, think that game has ended. But the bond market certainly has not begun to factor in success of the central banks in debasing their currencies, or making them decline against the value of goods and services, something that has occurred even as the world has yapped about deflation.   Think of it as extra-mild deflation On that score, an article by Anjli Raval in Wednesday's Financial Times headlined, "Labour shortage holds back builder Lennar" was most instructive. Raval began: "Lennar ( LEN) said labour shortages and higher construction material and land costs were challenges for the US homebuilder even as it reported a surge in fourth-quarter earnings."   The writer went on to note, "The scarcity of construction labourers, as well as plumbers, electricians and carpenters among others that are the backbone of the residential construction industry, has resulted in projects facing delays . . . . The company said additional charges and higher prices for construction materials such as lumber, drywall and concrete had increased the average cost of building a new home by $1,600."   With housing at the epicenter of the economic debacle of the last few years, I ask you, is that what one would expect to see a major builder saying if we were experiencing unbridled deflation?   I have made the point many times that we haven't experienced deflation, but we have had a bear market in housing, though in some places and at some price points it has ended (keeping in mind, we could still have another leg down prospectively when interest rates rise).   Regular readers know I have been quite adamant about all roads leading to inflation, which is in part due to the fear of deflation. But how people can continue to beat the drum for the latter, given what is occurring across a broad front, including the housing market, I really don't know.   The 'mental' side of 'fundamentals' Meanwhile, people need to remember that psychology (i.e., "money of the mind," as Jim Grant of Grant's Interest Rate Observer has named it) plays an important though not analyzable role in how folks perceive inflation, deflation and the purchasing power of their currencies.   They have been willing to overlook all sorts of cumulative inflation and currency abuse over the years as they have piled into bonds at ridiculously low rates. If I am right that the bond bull market has ended (as the deflation fear trade has), the next step would be toward pricing in "no deflation," then, ultimately, inflation.   If that psychology is in the process of changing, it will take some time, but it will be extremely powerful when the masses realize they need to do something and that they have been tricked into owning their third radically mispriced market in the past 15 years (equities, then real estate and now bonds).   Folks are going to lose gigantic amounts of money in bonds, as they did in our two bubbles, and, at some point, that may add a new group of buyers to the precious metals market. Unfortunately, those people who are the last to move into the metals market will find a fourth way to lose money, but that is getting way too far ahead of ourselves.   King World News In my latest interview with Eric King, I was a bit more animated than usual, if I do say so myself. Interested readers can listen to it here.   At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column in his personal portfolio. Ever wonder who these  nit-wits are who click thumbs down on the inflation comments?  Do they not believe in the inflation taking place as we speak? Do they not believe the undeniable documented history of every country who tried printing their way to prosperity?  Do they just think it quaint that back in 1969 I bought a brand new car for $3100.00 and now thirty-one thousand dollars will buy an average sedan? Inflation is your enemy. Government is THE cause of inflation. We are in a terrible mess and the next generation are the victims that will suffer most. BlogArticle