Wall St. is like a box of chocolates

From bond markets to Chinese stocks to the Fed to gold, Wall Street is dialing up the chaos in a big way.

By Bill_Fleckenstein Jun 28, 2013 2:28PM

Shredding money - Source: © Scott Speakes/CorbisAs regular readers may know, I closed my short fund in the wake of the collapse of the housing/real estate bubble, which culminated in the financial collapse that ended in early 2009, as I was certain that central banks would print money in response to the crisis.


I never dreamed they would print anywhere near as much as they have, but I knew what was coming and that it would be difficult to make money on the short side.


I felt that the outcome we would experience in that environment would most likely be stagflation, with feeble gross domestic product growth and decent-sized inflation, or, if we were lucky, strong growth but even higher inflation. The possibility I never considered was an outcome that could be described as "Goldilocks."


First of all, I didn't think an outcome of solid growth and low inflation was possible (it hasn't been). And I didn't think, after the beating folks took, that they would be willing to believe in fairy tales once again (which they obviously have been).


Given the perversity of markets, however, the only outcome that seemed impossible is exactly the one the vast majority of investors believe has magically occurred, even though that belief is misguided.


Even more perverse, it is amazing to think that the only outcome that wasn't possible (deflation), given what the central banks planned to achieve, was the one everybody was afraid of and the only one guaranteed to happen (inflation) is the one almost no one seems to fear.


A red herring

We're seeing continued volatility in Chinese stock markets. A lot of the clueless media would like to pin the worldwide weakness in equities on China. In my opinion, that is a sideshow. Not that China doesn't matter, but the new power structure in China is trying to purge some of the excesses after the last go-round of easy money.


The People's Bank of China is trying to squeeze the banking system, although it can always stop. Plus, it has the luxury of going the other direction (back to "easy") when it wants to (though it can also go too far). Thus, China is in a stronger position than the remainder of the G-7 countries, where bond markets have tanked, since it has more monetary-policy options.


So while a fair amount of ink has been spilled about China causing our equity market problems, I don't believe that is the case; rather, I see the fault lying with the bond markets.


I watched this very process take place in Mongolia over the last 18 months, and the paths are quite similar, even though China is a thousand times larger. I continue to believe that while China can impact the world economy -- since it is not growing as fast as people have become accustomed to -- it's not going to be a catalyst for a financial accident, though anyone who has a strong opinion about China and who is not a serious student needs to admit that his views are very speculative, as mine certainly are.


It was here a minute ago

If the United States and Japan -- and, by extension, other central banks -- have "lost the bond market," as I believe they have, that is going to be a very big deal. You would have to have been in the business more than 30 years to see a G-7 bond market that didn't do its central banks' bidding, with the exception of what we saw in Europe in 2010, before European Central Bank President Mario Draghi invented "long-term refinancing operations" and promised "outright monetary transactions." (As a side note, it will be interesting to see if the market forces him to make good on those OMTs, but that is not today's business.)


Full-court press

On June 21, two days after Federal Reserve Chairman Ben Bernanke's news conference, Jon Hilsenrath published the Wall Street Journal blog post "The markets might be misreading the Federal Reserve's messages." So it took the Fed less than 48 hours to utilize this "tool" in its jawbone kit to try to tell people that Bernanke was not trying to do what the media keep insisting he did (even though he really didn't).


This week, stocks started off weak until William Dudley, president of the Federal Reserve Bank of New York, sparked a rally when he said in a June 24 speech that, ". . . with the benefit of hindsight, U.S. monetary policy, though aggressive by historic standards, was not sufficiently accommodative relative to the state of the economy."


So we have Hilsenrath on June 21 and Dudley on June 24 (not to mention remarks by another Fed head, James Bullard, also on June 21). Next most likely to sound off will be Bernanke's likely successor, Janet Yellen. All of this spin control shows that the Fed is alarmed at what has happened to financial markets.


Clap your hands if you believe

But what Fed officials don't know is that it wasn't their tightening talk that has done the damage. Nonetheless, the Fed will react to financial and economic weakness by retreating from "taper” talk. There is no way out now; Fed officials can't even discuss tapering, but more quantitative easing will soon be seen to exacerbate the problem.


As I touched on last week, if the central banks have, in fact, lost control, what has been somehow deemed to be Goldilocks instead will, at some point, be seen as the absolute mess that it is, where inflation runs higher than GDP growth and jobs are hard to come by (i.e., stagflation). In that environment, stocks and bonds can be valued only at lower levels than they have been recently, and precious metals will be among the few things that can protect people.


Gold sector exhibits symptoms of chart attack

On the subject of gold, I believe that, in addition to the lopsided negative opinion, there could be (and almost certainly has been) some pressure on the metals and miners, as the Other People's Money crowd (i.e., "professional" money managers) get these assets out of their portfolios for the end of the quarter.


Perhaps once we get past this pressure, the structure of the futures market and the massively lopsided sentiment might finally produce a rally of some consequence that is able to feed on itself. About the only thing negative for the metals is the chart, but it is also the one thing there is unanimous agreement about.


Given that this quarter has been such an epic wipeout, and the decline in the metals and miners has been under way for a couple of years, it is getting long in the tooth, by historical standards. But downside exhaustion is like upside exhaustion -- it ends only when it ends. At this rate, miners are declining faster than Internet stocks melted up in early 2000. And that is saying something.


At the time of publication, Bill Fleckenstein owned gold.

Jun 28, 2013 4:32PM

Bill - good article and I a agree with all of your points.   When the Fed is magically creating money with a few "key strokes" on a computer, we are in serious trouble!  It seems that Mr. Bernanke believes in alchemy and I agree we are in for a serious "melt down" at some time in the future.  I am shorting Treasuries and buying gold and also shorting European stocks as well.  I believe the "party is over" and there will be little the Fed can do other than to stand by and watch the economy tank.


When and if the Fed wants to unwind the $3 Trillion in bonds it has purchased with "funny money", just how will it do this without driving rates through the roof?  Who is going to pay par value for a 4% 30 year Treasury when inflation is running at 10 to 15% per annum like in the 70's??  Conclusion - All of these bonds will have to be marked down to a significant discount to attract buyers -- this will be the next "mess" that the Taxpayer gets left "holding the bag on".

Jun 28, 2013 7:42PM



Great Post.  Controversial indeed.  There is no "Plan B" or C.  Deficits and the printing press.


I think I write for most of us when I say I would like to hear your descriptive analysis of what the post-apocolyptic America will be.  The post-Keynesians and their "kool-aid" will fail.  Peter Schiff has said, "The medicine will become the poison."  I do believe he is correct. 

Jun 29, 2013 7:19AM
Ben Bernanke has given us "Goldilocks".

But who are the three bears?

You  guessed it: Bonds, Stocks and Real Estate.

I don't think this fairy tale has a happy ending.

Jun 28, 2013 10:03PM
So, the "market" pitched a big fit and the fed blinked yet again. If the "market" thought that stocks were worth the level that they are at then the "market" would not care about the current price of stocks. Obviously the only thing feeding current stock prices is cheap azz money. The gambler loves cheap money.
Jun 29, 2013 4:50AM
Bill, first and foremost, any conversation about the economy should start and end with Global Derivatives. They were, are. and will forever in the future be the 800 pound Gorilla in the Room. It was and is because of Derivatives that Central Banks have to Print Massive Amount of Money. Those Scam Derivatives still sit unchecked on EVERY Major Bank's Balance sheets. And the estimates range from as Little as(Laugh)500 Trillion to well over 700 Trillion. Now that Dollars folks.

Yet you hear poster after poster Wax Poetic about the FAR smaller  FED'S balance sheet. There are many options for what Uncle Ben can do about it's balance sheet and very FEW options that can be done about the Big Banks balance sheets and their massive exposure to scam Derivatives, which by the way, they Created and Shorted against. Derivatives are the start point and END point to the woes of the Global Economy, yet few folks are willing to talk about it, especially Uncle Ben.
Jun 29, 2013 7:13AM
If Chinese can hold an American business owner hostage unless he pays severance pay then surely we can hold Congress hostage so they can do some actual work.
Jun 29, 2013 12:19AM
The appropriate quote from Forest Gump that fits wall street right now would be "stupid is as stupid does".
Jun 28, 2013 8:56PM
With Congress' fiscal austerity program going in the opposite direction to the FEDs monetary stimulus program is it any wonder that the economy is confused. The window for saving the economy with an (always temporary) Keynesian approach seems to be closing with wars and QEs both failing to do the trick. Neither Bernake or the Congress is worried about the market or Main Street. Congress is concerned with expanding its power and political ideologies, Bernake is worried about a new depression and creating jobs in an inhospitable global arena. So yes, stagflation does seem a viable outcome.
Jun 28, 2013 4:17PM

Bonds. They're supposed to actually accomplish something. It's a bridge built on trust that monies put into them are used for purpose that creates life, lift, progress or a footing for all three. Name ONE bond that is doing that?

Fiat Money. By the time France sledgehammered the printing plates, they were grossly indebted and outside of stock-jobbers, no one else was doing good. In fact, the well of frustration among the people grew faster and more robust than any bond program out there.


I am fine reading the various articles about this and that... but what I REALLY want to read about are speculative portraits of post-apocalyptic America and the imagined details. We absolutely ARE going down, isn't it time to push the Kool Aid aside and focus on our Plan B's?

Jun 30, 2013 11:15PM

Wall Street is like a den of thieves, because they are a den of thieves

It's time for us all to admit, we no longer have a democracy, Banks rule our nation.

Banks said they wanted Glass Steagel repealed, it was.

Banks said they wanted Derivatives de-regulated, it was

Banks told government to look the other way while they over leveraged trillions based on fictitious mortgage backed derivatives, they did.

Banks told congress, give us $700 billion or the world as you know it will end, they did.

This was no accident, it was carefully planned out and orchestrated by the Banks.

Now the Banks are playing a new tune and we just keep dancing and shouting, give them what they want so the music plays on.

As long as Bank Lobbies are legal, our freedom and liberty is an illusion.

Jun 29, 2013 3:23AM
Maybe Ben just needs a intervention, 0% addiction can be cured, just ask Greenspan. The longer you wait the harder it will be, please Ben, just a 1/4%, you can do it, one step at a time, one day at a time.
Jun 29, 2013 10:25AM

Bernacke is gone in January, he will keep the street on the sugar tit until he is gone. Not let it fall apart on his watch. He hinted at stopping quantitative easing and the market lost over 600 pts. in a couple of days. They whinned and and gripped and he backed off but after Jan he will be gone and the drug will be taken from the junky.

No real value in that market, not to the tune of 15,000 DOW. It will have to adjust to a realistic level without the FED propping it up.

Jun 29, 2013 7:53PM

"V_L ,how can we afford to pump 75 billion a month into wallstreet but 80 billion a year to feed the poor is on the docket? interested in your response....."


We can't. Never could. For all the $85 billion monthly QE Bernanke has given to his banks who put it in the markets where it winds up in Blue Chip business platforms with hiring blockades... he could have created a lottery and gave $100,000 to 85,000 random people a month and told them to spend it or lose it in 12 months. Some would have lost it foolishly or stupidly, but others would have bought things like businesses, equipment, big and small ticket goods or engaged it buying homes, investments and so many other things. The lottery would have accomplished what QE hasn't. The indebtedness would have been the same but the ECONOMY would be genuinely booming. It's OUR country folks, time to end elitism, GOP everything, inheritors, glass ceilings, business platforms and all the other cancers killing us. QUIT feeding the pigs.

Jun 29, 2013 2:35AM
It is time to pay up and pay off debts with real money!  Europe, Brazil, Turkey, Japan etc. are all for sale!  So buyers can continue to be selective, and cash is king again!
Jul 1, 2013 5:13AM

Wall Street exists SOLELY to take the produce of your labor and transfer it to the bankers.

No more....no less.

Jun 29, 2013 12:35AM

I agree the monetary system isn't looking good, and things can get ugly.

Yet keep in mind an alternative -  not quite a collapse.

They can keep printing for a long time, and things keep limping along as they have been.


Mediocrity - the new normal.

Jun 29, 2013 3:02AM
Watch for Cyprus move in Europe and pension confiscation. Then it moves here FDIC already has bail ins planned for failed bank. You'll assume risk having an account. Then protests and riots along w/long bank lines because of capital controls.
Jun 29, 2013 11:16AM
As long as we are quoting the movie Forest Gump....STUPID IS, AS STUPID DOES. These champs on Wall Street, and our government, have the art mastered.
Jun 30, 2013 10:02PM
banks own the federal reserve and are on the board and vote as well as behind the board.fact they own America and every othrer fu---- thing . they are the slavemasters and we are the drones.short of massive hits on the ceo's and board members across the world you are completely and totally helpless.
Jun 28, 2013 9:29PM

V_L ,how can we afford to pump 75 billion a month into wallstreet but 80 billion a year to feed the poor is on the docket? interested in your response.....

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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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