Too-easy money makes market too risky

The liquidity-fueled rally of the past 9 months is easy to like. But recent history tells us higher prices based on easy money carry extreme dangers, so a violent drop could lie ahead.

By Bill_Fleckenstein Aug 9, 2013 10:10AM

Image: Arrow Down © Kyu Oh/Photodisc/Getty ImagesThere is not much one can say to make sense out of the maniacal rise we have seen in the stock market since last fall, other than to note that the third and fourth rounds of bond buying by our Federal Reserve (aka QE3 and QE4) have boosted stock prices 20 to 25%.


Beneath the surface, however, stocks are a house of cards. Simply because prices are rising as a consequence of the massive liquidity injected by the Fed (and the Bank of Japan) – combined with "professionals" running other people's money who are terrified of not keeping up with the averages – does not mean that participating in the stock market at the moment is something that anyone who is sane ought to do.


The wrong kind of royal flush

Even so, resisting the siren song of apparently easy money is difficult, and most people eventually get sucked in. This is shown by the latest mutual fund statistics, which show that people are taking money out of bond funds and pushing it into stock funds.


It is not knowable when this maniacal rise in equity prices will come to an end. As I have stated many times, either the market has to exhaust itself, some sort of catalyst has to come into play or something has to stop the Fed. Obviously, the only thing that can take away the printing press is the bond market, and that will take some time.


As for "tapering," if the Fed tries to cut back its bond buying, my guess is that Wall Street would throw a fit and stock prices would tank, which would also hurt the economy. And if Fed Chairman Ben Bernanke and his colleagues are paying attention to the job market, nothing is occurring there to make them want to taper. Thus, I continue to think tapering is very unlikely.


He's just covering his basis

Perhaps Bernanke has an ulterior motive and wants to do a bit of tapering, if only to try to create the illusion that he's capable of being "tough." But I really can't speculate about that. I do know that printing money does not boost the economy or create jobs. All it does is misallocate capital, increase risk and precipitate inflation.


Meanwhile, many of those who were crushed in the stock and real-estate busts think we are in a Goldilocks (i.e., perfect) environment. In fact it is actually still 2009, just with much higher stock prices and a somewhat healthier banking system, thanks to taxpayer money and the fact that the Fed is stealing from savers via artificially low interest rates to give the proceeds to banksters. All in all, the financial environment is literally a house of cards built on runaway speculation.


Burning Japanese

Tuesday night, Japan was the scene of a fair amount of red ink, as its equity market lost about 4%, though the yen was quite strong. At least for the time being, those seduced into playing the easy-money game in Japan are seeing their financial dreams complicated by the fact that so many are all on the same side of the page. That problem will present itself in America at some point; we just don't know when.


Parenthetically, I think most people look at the fundamentals of the yen and say, "Wow, there is a currency that ought to decline." But in fact it has been rallying for the past month against the dollar, despite talk of tapering, and we can make the same comparison to the euro. I find it interesting that everyone can see the flaws in the yen and euro, yet for a while now those currencies have been doing better than the dollar, which so many people seem to think is still a sound currency. In any case, what this more likely illuminates is the wackiness of what transpires in financial markets in a world saturated with QE-created liquidity.


I am not the only one who thinks that beneath the shiny veneer of rising stock prices, the investing landscape has become fraught with risk. Many longtime successful investors do, as well. In his most recent newsletter, my good friend Fred Hickey shared a quote from Seth Klarman, founder of Baupost Group, that I found particularly timely and poignant. Klarman described the current investment environment as "… harder than it has been at any time in our three decades of existence … the underpinnings of our economy and financial system are so precarious that the unabating risks of collapse dwarf all other factors."


I suggest everyone read those two points a couple of times.


When the best offense is defense

At some point, the stock market will decline violently in a short space of time and there will be economic carnage in its wake. I continue to think that the computers that run so much money will eventually get loose on the downside at some point as the underlying economic and financial risks of the world rear their ugly heads. (Read “Every day, another flash crash” for more on those computers.)


Could it be two years from now? Yes, in theory, though I seriously doubt this can go on that long. I suspect the next nine months could be very pregnant – no pun intended.


In any case, folks need to be prepared for some serious carnage, even though the timing is not yet predictable.

Aug 9, 2013 5:33PM
I bet it takes longer than he thinks.  I still think he's right - just early like Mirhaydari.  It just brings to mind the saying "don't fight the Fed".

On the other hand - trying to catch a falling knife, especially one this sharp, doesn't sound so good either.

Sheesh - wish I understood it all better.  Honestly sometimes it seems like the more I learn the dumber I get.

Aug 9, 2013 5:35PM
The market is hooked on "Bennies". Getting financial addicts off the easy money high will be ugly.
Aug 9, 2013 5:26PM
Bill's opinion has to be taken seriously. I've had good profits, mostly with bank stocks, and today I've suddenly decided to sell a good half of my holdings. I think there might be a re-buying opportunity at levels 10-20% below today's within the next 3 months. I've managed to live through the 1987 crash ( in HongKong, where the stock market was closed for 4 days after the US market crashed ) and I've got  a certain feeling that this event may be repeated, probably in a slightly different form.
Aug 9, 2013 1:54PM
Cash is king right now....sold everything...
Aug 9, 2013 9:56PM
Bill, the Money Changers know that they have to come up with new creative SCAMS in order to extend Bull Markets. Whether it's the over 500 Trillion plus in Derivatives Scams and or the current QEs. We only delay the inevitable and give the illusion that everything is as it should be. Well it isn't. What I didn't see mention is how they have gotten out of paying higher wages now for well over a decade. That has also help fuel the Markets. So Instead of paying Workers more and expanding the company, they are borrowing Cheap Money for Stock Buybacks and Dividends.

Far too many Companies aren't investing in the Future, they are selling out our Future. Timing isn't predictable simply because they are always changing the way they play the Game. The rest of us are stuck with being the Punching Bag. The FEDS know all too well that they can't print to infinity and keep rates this low when Global Debt is this High. It's not even about when we will crash and burn but what can we do this time around to recover. This time, it won't be so easy to put Humpty Dumpty back together again.
Aug 10, 2013 12:22PM

The Wall Street banks have done tremendous damage to the future of the United States thanks to the repeal of the Glass-Steagel Act.  Their tremendous greed and materialism was unleashed as a result of  this event and ultimately led to the financial meltdown in 2008. The economy still has not recovered. Sadly, the Wall Street banks, thanks to the tax payer bailout and the Federal Reserve's zero interest rate borrowing policy, are doing swell again while thre rest of Main Street is in the toilet.


The genie may be out of the bottle, but there is some talk in Washington to reinstitute Glass-Steagel. Let's hope it may come to pass. And while thinking wishfully, it sure would be nice to see the interest carry trade put to an end. The interest carry trade is nothing more than a sham for rich hedge fund managers and private equity managers to avoid paying taxes at the regular rates.

Aug 9, 2013 6:03PM
Just wait when the summer season is over and we have all these seasonal workers claiming unemployment benefits.  The stock market will crash and its coming folks.  Goodluck and God speed!
Aug 10, 2013 12:13PM

What happened to a FREE MARKET ?? Is this not Corporate Socialism?

The profits that are part of the Equation ,, do they go back to a political party and is that not a form of BRIBERY OR RACKETEERING at the highest level ?? 
The Government insider trading act that was voted down ,,,,is this  our Elected officials with knowledge and the ability to prop up their  OWN investments?

Aug 10, 2013 12:56PM
I don't play the stock market' I don't care if it goes up or down. I have enough to get by in life. One less thing to worry about, might even live longer.
Aug 11, 2013 12:16PM

"The purpose of QE was to dilute the currency to compromise hyper-inflation."


Quantitative Easing: is an unconventional used by central banks to stimulate the national economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions, thus increasing the monetary base.


What do you THINK that means? It means they print more money as in-- DILUTE the value of all currency by making more of it. Those "assets" are bogus. After Goldman Sachs eliminated Quality and Assurance in the process of validating the Integrity of the instruments, none have Integrity.  Unfortunately, the circle of life for 100% of the QE is fully contained in controlled and manipulated markets. There's nothing unconventional about it. It doesn't work. Therefore... it wasn't unconventional, it was TERRORISM.

Aug 10, 2013 7:44AM
when MSN financial or investment analysts tell me its time to sell, I usually buy, when they say buy, I usually hold or sell, it has worked for me, they are simply early or late every single damn time.
Aug 9, 2013 6:42PM
the printing of money is creating inflation that Obama is hiding to people,property and rent are going up also food prices .oil is going up too .gold miners are taking out capacity from world markets ,sooner than later gold will spike again same as palladium.Agriculture land is at sky high prices and will translate in higher food prices.The sky high bubble in stock market is due to  fed money is used to loan without collateral to buy risky stocks.if these stocks collapse because of high inflation it wll put all bank loans at risk and will create a depression localized in USA,canada and contrast Europe and china economy will improve because depression in usa will mean lower oil prices that Europe and china also japan are heavy it will be just a change of world economic power becoming chine n1 together with Europe,.this new recessioin will make usa will stop being n1 economic power
Aug 10, 2013 6:45AM

I need a bigger vault to store my gold and precious metals.


Holding cash is foolish... holding stocks is boolish until the merry-go-round stops and holding bonds of any type is just plain ole stupid with 0 upside and a whole lot of downside.

When the crash comes... and it will... the only people making any returns will be the ones holding hard assets.

Aug 10, 2013 10:01AM
when it crashes the only ones who will fall are in the 401k .  independent investor  can sell at any time  and get  out 
Aug 10, 2013 11:27AM
Since easy money is too risky, should people get off of the Obama welfare rolls?
Aug 11, 2013 8:14PM

The Fed's 85 billion dollar bond purchases every month into our market and sitting on +16 trillion dollar of national debt. Enough said as far as I'm concerned. I don't care to make stock market predictions nor will I say it will all end badly. I don't know what the future holds. However, I'm a fiscal conservative at heart and I still don't agree with current Fed policy. When Ben leaves his post and passes the baton, it will be interesting to see how things turn out. 

Aug 11, 2013 8:34AM

"I've had good profits, mostly with bank stocks, and today I've suddenly decided to sell a good half of my holdings."


A good move, but please consider carefully what happens next. In reality, the markets are not up. The purpose of QE (Quantitative Easing) was to dilute the currency to compromise hyper-inflation. There's every chance now that the fully crippled compromised and diluted Dollar has no buying power left and QE was actually no different than a terror act that destroyed the majority of America. IF... there isn't a full scale rehiring, and millions of people who otherwise will cost the nation more than it printed are not gainfully employed and sustaining, the markets and banks evaporate. WHY? Because while we Eased through the paper formulated depression, every business in America sold it's assets, accumulated a record level of cash, eliminated operations and reduced itself to a paper and button pushing administrative platforms. Banks-- Finance, IT and Administrative platforms with ZERO portfolio and investment sustaining capabilities, are losing customers daily. You can all read. Two hikes- healthcare and auto coverage- wipe out more than 100% of the majority of household incomes. In 1905 when Loan Sharks did this to 4 out of 5 families in America, it shut the nation down. We didn't have a Fed in 1905 and most of America was rural and farmland where people could be self-sustaining. The nation collapsed anyway and it took a Draconian Act to unstick it. Everybody lost... banks, people, businesses and America. Today's scenario is far worse because banks processed the Fed's $85 billion AND put us on the hook for TRILLIONS more through the credit buy-back program. We do not have the GDP to out the sheer cost of the Fed's folly or the massive cancer bubble of market made millionaires from it.

Just know this... cash isn't king. It won't be anything very soon. China holds the most gold and can control the price in a downturn. Real estate is only valuable when people can afford to live or work in it, speculation buys you a box you get to pay taxes on and a force-revised Tax Code leaves you with no shelter or write-off. The biggest battle zones have been our own homes and the cities, towns, villages we live in. The enemy has tried to make us dependent on imports for existence. You WILL lose your stocks and bonds OR cash if you don't deploy it where it does YOU the most good... restoring where you live, unless you retired and moved South. Too bad for you, nature as well as business have duped you into dying in the boondocks. Before you thumb me down, ask yourself what you've got, after Wal-Mart is forced to abandon your town. It was part of the plan, and you swallowed it.

Aug 9, 2013 7:37PM
The one and only reason the FED cats are doing all this talk is they realize and recognize acquiring all this debt for a project they all feel now is futile is futile.  They no longer have confidence the juice is working.  The secret killer is not cancer in America it is free trade.  Until the arbitrage is complete, we are 1/3 there at this point by my calculations.  We will continue to see downward pressure on wages and as well now profits to the point in very short order all these boosted numbers will begin shrinking and along with deflation debt will grow and grow.  This is futile.  My clue is the reduction in corporate taxes is to be coupled with an agreement to voluntarily; very unofficially, reduce imports in order to give small business the impetus to gain some hiring traction.  Quite succinctly we are being held captive by free trade.  We can't go forward and we can't go in reverse.  Like I say, it is futile at this point and the FED knows it.
Aug 10, 2013 10:25AM
Bill, print or not to print, that is the question ? If the fed didn't re-capitalize the banks we would have a depression. If the fed didn't re-vitalize the housing industry, we would have a depression. My question is " Why is the fed doing all the work, while Congress has their fingers up there butts doing nothing to correct the situation. ?
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Image: Bill Fleckenstein, MSN money

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



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