Bill Fleckenstein

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.

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."

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.

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.

The world's equity markets continued their money-printing-inspi​red 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.

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).

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.