Is the end of an error coming soon?

This might be the month of reckoning for failed central bank money-printing policies. Mounting evidence suggests that markets are starting to notice that the Fed is trapped.

By Bill_Fleckenstein Sep 6, 2013 3:05PM

Gold Bars © Stockbyte/SuperStockIt was interesting to see in the most-recent quarterly filing (released a week ago) that Goldman Sachs Group (GS) spent around $500 million in the period to buy 3.7 million shares of SPDR Gold Shares (GLD), making Goldman the exchange-traded fund's seventh-largest shareholder.

 

After having been a vocal proponent of the view that a much stronger economy (which we haven't seen) would lead to a tougher Federal Reserve (which won't ever happen) and a weaker gold price (which we did experience until June 30), Goldman is perhaps starting to connect the dots.

 

Putting the 'gold' in Goldman

 

To be sure, Goldman's negative call on gold received a tremendous amount of fanfare, and it appeared to be at the epicenter of the huge price break we saw in the second quarter. But I haven't seen comments anywhere discussing its quiet, bullish bet. (For all we know, depending on exactly how the company holds the shares, it could be some sort of arbitrage against something else, but I doubt that.)

 

As for why we own gold in the first place, that of course has to do with reckless money-printing on the part of the Fed (the subject of my book "Greenspan's Bubbles: the Age of Ignorance at the Federal Reserve"). That effort started somewhat innocently in the early 1990s, and, at first, it produced a powerful bull market, which turned into a huge bubble in the late 1990s.

 

That led to a bust, which led to more money-printing, followed by a massive real estate bubble and an epic collapse, with the financial system nearly disappearing, which resulted in an even more gargantuan amount of money-printing.

 

A rise by any other name . . .

 

Those of us who understand the process have known that each dose of liquidity by the Fed has weakened the economy, and that money-printing would not solve anything, as can be seen in the sequence of events outlined above.

 

Money-printing cannot solve problems. It doesn't really give us much gross domestic product growth, as we have seen. It hasn't really helped on the employment front either, as job growth is meager (of course, it is also hampered by other government policies). What money-printing has accomplished is to push the stock market high enough to cause people to once again become delusional in their expectations.

 

The bloom has come off the (stock market) rose a bit recently, but this is essentially the same process that has been at work for more than 20 years. Money-printing gets the stock market to a place where folks think that it means something.

 

We witnessed the same thing in the late 1990s, when the Wall Street Journal saw fit to capitalize "New Economy," which was a farce, and the Fed concocted a crazy theory about too much savings in the world with regard to what generated the real estate bubble that burst in 2007-08. Now, somehow, stock prices are so high they have induced people to believe in Goldilocks again.

 

It takes two to contango

 

The purpose of reviewing all of the above is to set the stage for the possibility that we are starting to come to the end of the charade, and in the next couple of weeks, the Fed is going to have to decide whether it is going to begin to taper -- and we will see what happens if it does -- or that it can't even start.

 

The early handicapping of that outcome began with today’s nonfarm payroll report (released after this column's deadline), but in the end, the die is cast. If Bernanke et al decide to taper, it won't be long before they are compelled to change their minds. Money-printing will continue until the bond market makes it clear that that is not an acceptable outcome, a process I think is already under way.

 

(I see 10-year rates approaching 3% not because of the prospect of some modest amount of tapering, but because enough money has been printed to take the deflationary outcome off the table and because the bond market is slowly pricing in the fact that the coupons out to 30 years are at a discount to the inflation rate.)

 

In any case, hopefully September will be a major inflection point for what is known as "modern-day" finance and money-printing.

 

At the time of publication, Bill Fleckenstein owned gold.

 

49Comments
Sep 6, 2013 7:10PM
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Goldman says one thing, does another. You have to give them points for consistency.
Sep 7, 2013 9:54AM
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This "PERFECT STORM" has been in the making for the last 5 decades. Greed and denial make great bedfellows. The 17 Trillion Dollar debt is just the scratching the surface.  Fiat currency and the so called "financial instruments" make the REAL debt number much more than the number we all see. My suggestion is to be ready. Money is just paper now. We should have ABOLISHED the FEDERAL RESERVE when JFK was in office. Lord knows he tried. That's when they murdered him.    
Sep 6, 2013 8:56PM
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The end is absolutely near but not the end of the world, just greed and grubbers. Do you have a skill worth someone paying for? Now would be the time to work that out. Paper... buttons... numbers? Not really worth anything. Build a better mouse trap and the world comes to you. FREE enterprise, it's what separates us from the animal kingdom.
Sep 7, 2013 10:31AM
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Mr. Bill Fleckenstein,

 

You are correct -- the Fed cannot discontinue its printing fiasco.  However, I do believe the Fed will taper by say, $10 - 15 billion per month.  Why?  To give the illusion that it is in control and that the economy is strong enough on its own to continue growing with less QE.  Of course this is not true.  Appearances and perception are the new facts and proof.  A slight taper could temporarily pacify the bond market.  Is the Fed a responsible institution?  I believe the Fed will abort its mandate of low inflation for the sake of growth.  Is high inflation compatible with economic growth?  No, higher inflation is correlated with higher interest rates.  But it does wonders for existing debt relief and boosts the price of the collateral via inflation thereby giving the appearance of deleveraging thereby allowing more new debt.

 

And the US is a debt fueled economy.  No new debt, no growth.  Will the Fed ever stop its Quantitative Easing? No, the economy would crash.  Why?  Because America is broken.

Sep 7, 2013 9:12AM
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I have a lot of respect for Bill, unlike many MSN readers, the guy had a short fund, and was very successful, that is not an easy accomplishment, so all you guys trading your 100 shares should lighten up a little.

 

That said, I would be super careful trying to read anything in to what Goldman Sachs is doing, not because the gold purchase could be part of a complex trade, but because Goldman is GM, BOA, GE etc. it is now on the US Government's payroll.

 

 They only make money trading, no more investment banking,  no IPO's, no M&A, just trading and they never lose-why do you think that is?

Sep 7, 2013 7:08AM
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How appropriate that the President will address the nation on Tuesday... Wednesday is 9/11.

Since his first election We the People have been at war without weapons against an internal enemy using collusion greed and administrative blockades to kill us off. Whether the President is behind it or someone else, the FACT is that no one has addressed the REAL issue, but have propped up lots of other issues to draw attention away.

The President's speech on Tuesday HAD BETTER be about ending financial tyranny and going after the job blockaders. The crooks have degrees and I-Phones, the victims have skill sets and families.

My kids report that Gen Y managers are vicious and unethical. Gen X pushes paper and buttons. Their parents got rich off QE. Sports betting, elitism, infidelity, religious zeal and psychopathy are their delights.

The crooked have taken nearly everything from us but we still have our abilities. These abilities generated stabilities that our great nation requires to thrive on. The nation is on the brink of collapse. If we bomb Syria and there is retaliation, we fold up and fail. If that begins to happen, the suppressed people will begin destroying the impediment generations at the same time. The REAL way to recover was to be forthright and let the cream rise to the top... not destroy our best and lift our worst.

Wednesday is 9/11. Once we were bombed and after that we became enslaved to bad divisive people. It's time to reverse that but not by bombing other people, just going after the divisive who caused such carnage. Your moves HAD BETTER be true or you will regret it.

Sep 7, 2013 9:57AM
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The end of the mistake will come when Barry's second term finally ends.  Obamaville is another failed socialist experiment.
Sep 8, 2013 11:47PM
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It's funny that Obama ran his first campaign blabbing about how he was opposed to the Iraq war, and that he didn't vote to support it.  Yet now he and Kerry are waist deep in trying to gather support for this war campaign, even against the opinion of the public.  I think he is hard at work keeping the publics eye off the ball.  You never hear him even whisper about the economy, he knows it's in such a fragile state, and he knows it's his stimulus that caused it.
Sep 7, 2013 9:43AM
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"Now, somehow, stock prices are so high they have induced people to believe in Goldilocks again."

Ben Bernanke and the Federal Reserve have levitated the stock market with all the money printing, bond buying, and POMO (Permanent Open Market Operations).

Yet, for all the bond buying, interest rates on bonds are still increasing. That should crater the housing recovery real soon now.

So, who are the three bears? You guessed it: Bonds, Real Estate and Stocks.
Sep 6, 2013 9:39PM
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 And Obozo lives off debt to produce shovel ready jobs that result in the lowest labor participation rate since 1978. Now the morons that voted for this nit wit socialist not only are more destitute but "own" trillions of debt. And these same drooling stupid morons will sure enough vote for another democrat who will have nothing but lies and class warfare rhetoric. Shame on you morons losers leaches and the worst of all Nazi government workers.
Sep 7, 2013 4:34PM
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When John"Swiftboat" Kerry says all Americans will be threatened if we don't go to war with Syria--

Its A Lie!!!!!!

Cut his lying tounge out of his mouth!

Sep 9, 2013 5:48AM
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someone (i won't mention names) has neither heard of, much less comprehends, the term "giant vampire squid" or knows how the greeks were able to cheat their way into the EU or knows about products being sold by a firm betting against them while selling them or the rolling stone article by matt taibbi or grilling by senate sub-committees or sec fines being levied or little ol' $100 million trading errors or .... oh what's the use ... troll's live in caves ...

 

excellent article william ... what goes around comes around ...

Sep 9, 2013 10:11AM
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Do the the opposite of what Goldman says and you'll be doing what Goldman does.

Sep 6, 2013 8:33PM
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money printing produce inflation.and investors dont want to create jobs because they can invest in products like stocks ,land or gold that produce more return without working hard.the president is cheating the people on inflation because they need to print more money to make more money in stocks.they wil not stop printing money until inflation out of control and then  countries who hold us debt get rid of it and invest that money paying ther own foregn debt or invest the money in their countries.then t-bills will go down independent what fed does
Sep 8, 2013 11:42PM
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I think Obama is doing the only thing he knows to do... Start a war.  That always keeps the econonmy going.
Sep 9, 2013 8:56AM
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The end of an error will come in January 2017.
Sep 7, 2013 12:06PM
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Markets went up because that's where banks placed the bailout money for toxic assets(shadow inventory of homes). Smart money also has been investing in lead copper, and steel. Backup supplies of food and water is a must. Craig Paul Roberts guest appearance on USA watch dog on you tube this past week has some good in sights.
Sep 9, 2013 2:37PM
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Unless other countries or companies from other countries start swooping in and buying up large swaths of America.....the small towns.  Then we could see some movement of the economy....except it would be a sad commentary "yard sale" where America had to desperately search for buyers of our own country for a pittance.  Read "Detroit".
Sep 9, 2013 2:33PM
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I wondered at the time if goldman wanted to buy into the gold market at a lower price.  I really think Bill is more honest than most advisors and more accurate. He doesn't' speak out of both sides of his mouth.
Sep 7, 2013 9:57AM
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It's truly amazing to me how some people who make comments to this feed think they are MORE knowledgeable than the people who are working in the financial markets every day.  It's so easy to be an 'armchair' expert these days when in reality you know nothing.  Why don't you try educating yourself on exactly how our economy works BEFORE you shoot your mouth off on MSN.  It would be a welcome change. 
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ABOUT BILL FLECKENSTEIN

Image: Bill Fleckenstein, MSN money

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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