Somber warnings from proven prophets
The most recent Barron's Roundtable shows that while the market is celebrating, smart money folks who've been right about past busts see the next breakdown dead ahead.
The world's equity markets continued their money-printing-inspired 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.
Of course, I would never put any money on such a glib observation, but over the years I have found end-zone dancing -- which is essentially the same as hate mail -- to have an amazing ability to signal turning points. The people who do it are so full of themselves, and so certain they are correct, that they throw caution to the wind, which is what marks the tops of rallies.
A (Gross) margin of safety
Turning to the contents of the Roundtable, I thought it was interesting that Bill Gross's first pick was gold in the form of the SPDR Gold Trust (GLD) exchange-traded fund. He, too, believes that the path we are on leads to inflation (not deflation), which will discipline the bond market, which will in turn ultimately discipline the Federal Reserve. In short, he sees a variation of what I refer to as the "funding crisis" in our future, in which the government has a hard time selling bonds to finance debt, though he does not think it will happen in 2013.
As for money printing, Gross said, " . . . it will continue until inflation exceeds the upper end of the central banks' target of 2.5% or, by some miracle, we get real economic growth." Another Roundtable regular, Felix Zulauf, summed it up later in the article, ". . . the Ponzi scheme continues until inflation becomes a problem," to which Gross responded, "That's right. Ultimately, that is what will cause investors at the margin to desert bonds."
That makes three of the smartest panelists on the Barron's Roundtable -- i.e., Gross, Zulauf, and my good friend Fred Hickey -- who are all bullish on gold.
In the long run, I think the slow-to-evolve recognition that (1) the "deflationary accident" fear trade has ended and (2) we are on our way to inflation (and ultimately a funding crisis) is going to cause more and more people to own gold. And when gold does finally move, at long last, it is liable to be wild. There will be an intense scramble (thanks to price action) as people finally "understand" the arguments and rush to join the party.
But in the short run, none of the arguments in favor seem to have mattered to the gold market.
Just the tipping point of the iceberg
It is not just Gross who sees a funding crisis in our future. In a recent interview, Kyle Bass, the founder of Hayman Capital, revealed that he sees the situation the same way, as does Seth Klarman, the founder of the Baupost Group.
Out of respect for Baupost's intellectual property, I don't want to quote too liberally from its content. But there was one description from the group's year-end letter of the problem regarding the reckless, out-of-control spending in America, and the Fed's funding of nearly 100% of the federal deficit with the money it prints up that I feel I must share:
"It is dangerous to need constant access to the capital markets for such staggering amounts of financing. An unknowable tipping point looms over the horizon. When we reach it, outsiders and U.S. citizens alike will become suspicious of our creditworthiness, causing interest rates to rise and the dollar to plummet. Holders of greenbacks will rush to spend their money while it still has some value, causing the prices of goods and stores of value (like gold) to surge. No one knows precisely how much debt is too much, or at what moment the tipping point will be reached. It's like driving a car with a faulty navigation system along a steep mountain road at night while wearing a blindfold. Sooner or later, you're going to plummet over the edge."
Gold keeps obeying gravity and defying logic
As for the current psychology, it is certainly very pro-stocks and anti-metal, and nothing illuminated that better than a week ago, when Fed head James Bullard (who runs the Federal Reserve Bank of St. Louis) said that if unemployment got to the low 7% range, the Fed could curtail its bond-buying quantitative-easing program a bit early, albeit by a measly $10 billion.
The stock market looked at that comment, laughed and then soared, while gold sold off like a frightened sissy.
At some point, the gold market won't fear the Fed; it, too, will laugh in its face because the Fed is such a joke. When that happens, it will also signal that the bond market is in real trouble. Yet as long as the metals fear the Fed and act as though it has credibility, markets can't really get out of hand. It is when the Fed "loses" the bond market, which I suspect we will be able to tell by the action in gold, that financial markets will get really dicey.
The bond market is radically mispriced because it has effectively been a bubble, though without the euphoria and behavior-warping strategies that are typically part of bubbles. (Arguably, given the fact that the bond markets have allowed governments to live beyond their means, the economy has been warped.)
In any case, though there is plenty of short-term obliviousness and denial, there does seem to be a growing recognition of where we are headed, at least among folks who have incredibly great track records and haven't been wrong about our prior bubbles -- unlike most of the people who are currently wildly bullish about stocks.
At the time of publication, Bill Fleckenstein owned gold.
You said it, Bill
The ONLY way this is going to end is with massive inflation, thanks to the FED.
I don't know exactly when, but it looks like hard money is going to come back into style. It's going to be a long, hard road and many people are going to get hurt becuase they've believed the government's lies for the last 100 years, since the FED [illegally] went into business.
I hope I live to see the day
1. Obama has added 7 trillion dollars in national debt.
2. This was NOT unavoidable. Obama's spending has grown the federal budget from about 3 trillion anually to about 3.8 trillion. HIS CHOICE!!!!!
3. Republicans have shouted we need spending control!!!! Much to their shagrin at the poles.
4. The Republicans will prove to have been right!
5. You Obama supporting fools will be to blame. Sorry, just a fact.
I hate that I/Many have to say "we told you so". I hate it because I loved this great country, and my neighbors have sold it for a prezel and a beer. They voted for Santa Claus. No they votes to steal other people's money and or to borrow money for their gifts. I hope you enjoyed what ever gifts you got from teh Uncle over that last few years. And now you will reap poverty.
we all been taught dont spend what you dont have why is our country led by such greed
and stupidity you dont see gates or buffet spending more then they make what makes washington so different god help us the us is done as we know it please quote me less then 2 years a total finnancial collapse great job obama i hope you will be proud as the president that destroyed america
I've been hearing this since 2009 when the dow was at 6500 and here we are four years later at 14,000... I don't get it.
And that raising taxes and then spending the money will give us a major inflation as we seen in the past. This one is going to be a beaut.
AND OF COURSE WE TOLD THEM SO.
Near zero interest rate and the banks are making money. Soon the tax payers will pay for this sillyness.
Thanks Obama and Ben
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ABOUT BILL FLECKENSTEIN
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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As the devil-may-care bravado of Wall Street marches on, history warns that -- in the end -- there will be the devil to pay.
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