The great fake rally of 2013

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.

By Bill_Fleckenstein Feb 1, 2013 3:01PM

Statistics arrow in three dimensions © Polka Dot, Jupiter, GettyAs 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.

Feb 1, 2013 9:32PM
No matter how much those 636 fools in Washington have screwed-up our economy, they'll never have to worry about the consequences.  After-all, they can "retire" after one term in office, at full pay and all the healthcare they and their families will ever need.  As Alfred E.. Newman once said:  "What, me worry?"
Feb 1, 2013 4:22PM
THANK YOU BILL. It is marginally relieving to see the truth in print and on today of all days (DOW gives excuse to over-borrow from the Fed to exceed 14,000 mark). Marginally-- real people know we're really screwed and even the best Plan B's seem to have compromises from the excessive fiat money.
Feb 1, 2013 8:26PM
As long as Ben prints and prints and gives it to people to spend on corporations that make stuff in china all will be good.  Can anyone amagin what would happen it the fed stopped the 85 billion bond buying program.
Feb 2, 2013 9:17AM
Feb 1, 2013 9:26PM
This is just more hygenic posturing. Having washed its hands in piety the market will return to its manipulation. DOW at 14,000 will not be good enough. 20,000 will not be good enough. Neither will 30,000. This is a bubble, just like the subprime bubble and the housing bubble and the technology bubble. The wrinkle here will be when the bubble bursts and Wall Street wants a bailout. Hopefully, the country goes bust first.
Feb 1, 2013 10:00PM
I know little about the stock market but, even for me, it's easy to see that if you go on forecasting a crash you will eventually be right and then you can stand up and screech "I told you so !!"  Economists and meteorologists are the only folks who can b e wrong most of the time and not get fired.
Feb 2, 2013 8:43AM
The "Great Fake Rally" indeed!
This is not going to end well.
Watch the collapse in real time here >>>
Feb 2, 2013 5:23PM
History has a way of repeating itself.  Anyone familiar with the stock market crash in 1929 knows that the first hit the stock market took was nowhere near as bad as the second, which came a few years later.  Maybe modern man has figured out a way to forestall that problem with what we've learned about economics since the 1920's.  Unfortunately there's a difference between forestalling and preventing.  Can a second market crash be prevented?  I sure hope so, but I certainly don't think so.  John King summarized it nicely in a book he wrote years ago.  He said, "The problem with debt is that ultimately it has to be paid."  It appears to me that the world's governments just keep robbing Peter to pay Paul.  The borrowing and spending has to stop eventually and the results could be beyond most people's comprehension I think.
Feb 2, 2013 11:53AM

As to the Fed "not having much choice in the wake of a financial meltdown" -- there, in this one sentence, is the lie... and the catalyst for the 'invented' and now 'necessary'... solution.


If you start with the wrong premise -- one will always come to the wrong answer.


We tend to speak of the "financial meltdown" as though it were something that "just happened" due to some metaphysical and mysterious series of events, that was out of the control of man.


Nothing -- certainly nothing in the world of men -- just "happens."


Our government does not spend 1 Trillion dollars per year more than it takes accident.  The figures are carefully gone over and looked at beforehand -- then they go ahead and do it anyway. (As a note -- even this crushing, accumulated 16 Trillion debt was at 9 Trillion even before the "financial bailout." So...even that was not "the reason")


The laws preventing investment banks from going on a free-for-all were not accident.


Predatory lending to anyone with a pulse was not engaged in by accident, or "circumstances beyond our control."


Credit default swaps were not engaged in... Just because...


All of the events above -- and many hundreds more, are all carefully engineered to bring about the desired result.


Once the "problem" has been carefully created -- then, of course, there "is no choice but to..."


This is where our Government (elected or no) --- stands by with the ready "solution" that now must be engaged in -- to bring about the desired result.


...and, why is our current mess the "desired result?"


Instead of disbanding the Fed and printing our own money, as called for in the US CONSTITUTION...


Is this the conclusion we come to, to now realize our our terrible error, and return to the supreme law of the land, the US Constitution?  Well, not exactly.  However we do come to the exact conclusion that was engineered from the beginning: "look how much we need the Fed" to save us from this terrible disaster that "just happened."



Feb 1, 2013 8:24PM

Create your own reality, and have "them" participate in yours.

Feb 2, 2013 7:20AM
You know when the end has come to the market's rise. It's when all the retail buyers decide they don't want to miss out so they buy high, watch the market tank, sell low, and then vow they will never do that again. Time to take money off the table.
Feb 2, 2013 1:31AM
If, in fact the whole system implodes, lead and powder will probably be a better investment than gold. Gold is an investment, just like stocks, with little real value or utility when it comes to basic survival.
Feb 2, 2013 10:50AM
Buying stocks is like playing roulette.  The market is shaped by the media and ultimately the government.  The only safe bet, long term, is investment real estate.  I don't give a crap what someone tells me my properties are worth right now, they still make the same money when they were "worth" 40% more. Buy yourself some property, find a good property manager, and then go fishing. Life is short.
Feb 2, 2013 1:32AM
Ya know. I'm not in any way super smart about money, but I watch the stock market and the DOW-JONES and S&P 500 and such. I see Americans buying stocks and raising the markets and investing money again,. Then All I read is the Speculators and Hedge fund jerks shouting and jumping that the market is in a "false rally"? Really? a "false" rally? What jerks! They make money on selling "doom & Gloom" and when there is a little hope, they cry because the investors won't react to their will, to the way they want them to act, where they want the money to go to. Yes, talk about what's going to ruin our markets? Its the damn Speculators! They run the oil and gasoline markets, now they want to make money driving up wholesale prices on the selling of "doom & gloom" to that market!  Its all about market manipulation and selling that **** to a gullible news media.
Feb 1, 2013 11:10PM
thanks Bill, Your points are right on.
Feb 2, 2013 12:24PM
All you non believers that stayed on the sideline for the last five months and missed out on some big gains. Now like Bill your praying it tanks so you can get back in. Since March of 09 I've more than doubled my money and all I hear is how the market is going to crash and we're going into another recession. All you bears stay out and hope you make your 1 1/2%. For me I just made my goal and hit the 1 Mil last week. And I know most of you are going to say your going to lose it but you know what that's what all my friends that have less than $100,000 in their 401K's have been saying for the last 20 yrs. I bet all of you that back in 2009 Bill called that the Great Fake Rally of 2009!!!
Feb 1, 2013 9:49PM

This guy has and always will forecast doom. Unfortunately the one time when doom occurred, he did not predict it.

I am not in the market that much, I do not believe housing prices always go up, but it is equally foolish to be a bear all the time although it is easier to be taken seriously because although bears are wrong way more often than bulls, society seems to treat pessimists as more realistic. This is a false notion.

Reality is both optism and pessimism. A good financial advisor is both a bull and a bear depending on the information the see and interpret.

Bill Fleckstein is a bear, period. Guys like him yell fire so often without it happening, that when they finally are right, no one listens and everyone gets burned...and they get to finally look smart and say I told you so.


Feb 1, 2013 9:11PM
Yes Bill that is how I see things as well.  I'm so sure you are right that I bought NUGT for the first time @ 7.70 per share.  Loading up on the junior miners (gdxj) as well.  Really don't see a end to all this madness till the stock and bond market crash.  I will continue to buy gold stocks and soon will be buying silver.
It really isn't the Dow number that is relevant.  If a loaf of bread costs $150 then the stock market should be at 20,000.  In my mind it really does come down to what can I buy with $100 of US Currency.  Bill mentions inflation and seems to be indicating that the Dow should not reflect that same inflation.  It really is the little guys and the seniors who feel the most effect from the complete mess these "Masters of Finance" have gotten us into.  Is it any wonder to see a cheating scandal at Harvard on a course that deals with Congress....just too ironic?  The ones who cheated and did not get caught will probably be quite successful when they do get elected into govt.   Thanks a lot ****es!! 
Feb 2, 2013 4:32PM

Fleck doesn't say its gonna pop tomorrow. Nor does Anthony nor Jubak. I happen to agree with what they say 100%. However, I am still 80% invested, took 20% off this past week. It wouldn't surprise me to see another 10% gain this year at all.


If you guys plan on staying in 100% for the next 10 years knock yourself out. Any thoughts what may happen when the trilion dollar deficit spending and trillion dollars a year of FED printed money stops? They can't go on in perpituity.


What are the fundamentals that caused the S & P to jump 1% friday? More people left the workforce than new jobs added. 150k only keeps up with population growth. Only thing i saw remotely that would do that is the ISM number and that wasn't a 1% number.


Only question in my mind is that old stock market mystery ....timing. What are you comfortable with with artificially held down rates that will rise rapidly when printing stops? Debt and interest on it that will ballon when printing stops. Dollar falling like a brick. What will inflation look like with many countries now printing money to deflate their currencies, like a race. I probably won't own a stock by years end. Hopefully i am wrong but i don't see how any of the above scenarios end well.

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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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[BRIEFING.COM] The stock market began the new trading week on the defensive note with small-cap stocks pacing the retreat. The Russell 2000 (-1.4%) and Nasdaq Composite (-1.1%) displayed relative weakness, while the S&P 500 lost 0.8% with all ten sectors ending in the red.

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