When bankers get nervous, watch out

As economies worldwide weaken, the pressure is rising on the world's central bankers for dramatic action that will ultimately do more damage. When that happens, the gold rally is on.

By Bill_Fleckenstein Jul 13, 2012 2:42PM

Image: Financial adviser talking with clients © NULL/CorbisWorld stock markets remained under pressure over the last week due to the ongoing dysfunction in Europe and -- not to be underestimated -- the fact that the world economy is slowing down dramatically (which should not come as a shock to anyone who reads this column).

 

I think at this point it is worth discussing the worldwide response by central banks to this macro-deterioration. As my longtime readers know, I have absolutely no respect for any of the idiots who run central banks. They are always wrong. Repeat: they are always wrong.

 

Do you believe in global waning?

 

For the last six to 12 months, they have all felt that their individual economies were stronger than they were. And no central bank has been more off the mark, or guilty of making more mistakes, than our own Federal Reserve.

 

It is so incompetent that, in addition to spawning two gargantuan financial bubbles and the ensuing consequent dislocations, it is not even capable of understanding that when you have the warmest weather in more than 100 years, it skews the seasonally adjusted data. Thus, they were all patting themselves on the back this winter while I and others were pointing out that seasonal data were drastically boosted by the weather.

 

Now the underlying economic weakness can no longer be debated, and of course it is exacerbated by the uncertainty and chaos revolving around European government debt and the implications for Europe's financial system.

 

Recently, the Fed has sent signals that it is getting ready to do more easing of the money supply (beyond extending Operation Twist), and many other central banks have taken steps toward easier money as well. (We've seen this from China, Brazil, the European Central Bank and the Bank of England).

 

One of this week's Wall Street Journal headlines, "Fed weighs more stimulus," pretty much says it all. (The New York Times also ran a similar story).

 

In the journal piece, Jon Hilsenrath -- a regular outlet for the Fed's public relations spin -- makes this point regarding the Federal Open Market Committee (FOMC) meeting minutes released July 11: "The minutes portray an institution in a state of high alert over the economic outlook. Fed officials expressed worry at the meeting about risks to the American economy stemming from the euro-zone debt crisis, the possibility of a 'significant slowdown' in the Chinese economy and the prospect of deep U.S. government spending cuts and tax increases scheduled to go into effect at year-end."

 

The minutes are from late June -- meaning there has been even more weak data released since that bolsters the Feds' concerns.

 

Keep in mind, Fed governors had gotten their hopes up and now those hopes have been slammed, which is going to make them doubly uptight and more prone to panic. (Remember when Bernanke said the subprime mortgage mess was "contained" in 2008 and the extensive actions the Fed took when he found out how wrong he was?)

 

In any case, given the fact that the Fed has been so wrong, I expect that when it finally decides to the do next round of quantitative easing, it will be bigger and bolder and might even include some imaginative new tricks.

 

On Thursday, Joan McCullough of East Shore Partners, whose newsletter I have subscribed to for years, succinctly described the current Fed predicament as follows: "They blew their chance for that after the June FOMC, opting instead for a wimpy move of extending OT (Operation Twist). So they have two options remaining: get hugely creative/unconventional or fuhgeddaboudit altogether."

 

Really using their sinking caps

 

By extension, as I noted, other central banks will also be inclined to panic. That is why it is difficult to make money on the short side right now by betting stock prices will decline, even though stocks are leaking and in all likelihood may take a nasty tumble before the Fed finally panics. Stock bulls think, "Why should I sell when the Fed has my back?" But even in the four-year-old "QE era," the market still has had to get brutal enough to force out weak-handed players, thereby unnerving those who had been intent on remaining calm.

 

That is what has happened in the past, and it could easily happen again. But such an environment makes it tricky to be short stocks because even though some individual stocks might be working, if you try to up your exposure, it is easy to get run over by spurious rumors or more hope.

 

Even as the market has mostly declined over the last couple of weeks, there have been a few hellacious rallies that would make you jittery if you had just increased your short exposure. On Thursday morning, for instance, the S&P futures were lower by about 1.5% in the first hour, then cut those losses in the wake of absolutely nothing.

 

It might be possible to make some money on the short side if you employ guerrilla tactics, but just getting short, pressing and sitting back to collect a big payday might be rather difficult.

 

Yellow dog still on a short leash

 

Turning to the gold market, obviously it has been under pressure, too. I'm sure many folks were disappointed Thursday to see the WSJ headline noted above, combined with all the other stimulus we've seen, not only not make gold rally but see it decline. Unfortunately, that is just where we are right now. The minute "good news" for gold doesn't work, it turns into bad news, because it didn't cause the market to rally.

 

One of the problems the gold market has had is that demand from India has been subdued. The finance minister there has been trying to clamp down on gold purchases, and of course India's currency has been quite weak. That minister has now resigned, so we may see Indian behavior begin to revert back to what it has been. If so, we will be approaching the strong seasonal period for gold in another month, with potentially pent-up demand.

 

However, an additional big negative for gold (in the form of negligible demand) has been the lack of any serious U.S. buying (although the hedge fund community was a big believer last year). Now though, when you look at their view, as expressed by positions in the Commitment of Traders Report, it looks like more of the big, futures-oriented hot money (i.e., hedge funds and commodity trading advisers) is short.

 

More importantly, a big buyer who needs to own gold, but doesn't thus far, is the "average" wealthy American. I think that is unquestionably what has ailed gold stocks, not their own fundamentals, which have been disappointing from time to time, but not nearly as bad as the stocks' behavior would suggest.

 

The bottom line is that the bull market in gold has been more global than American.

 

Who knew mad men were so sane?

 

At some point, though, I continue to believe that more American investors will start buying gold, though I have no idea what the catalyst will be. Recognizing that an idea has to start somewhere, or that as the Chinese say, a journey of a thousand miles begins with the first step, Thursday's Wall Street Journal carried a two-page pullout advertisement by Charles Schwab with the banner "A different view of risk" and tagline "Bubbles, crashes, and downturns are going to happen, but you can take steps to find opportunities in risk."

 

The ad goes on to give a short primer on one facet of the bull case for gold, which is paid off by more big type: "All that glitters: How gold is impacted by the paper value of money." It then accurately concludes: "By printing money the Fed is actually debasing the value of its currency. This is where gold as an asset class comes in, because (Stephen) Cucchiaro (chief investment officer at Windhaven Investment Management, a Schwab affiliate) sees gold as an excellent way to measure the value of paper currency. It isn't possible to print more gold; the amount aboveground is relatively fixed, so as more money is printed, it takes more of it to purchase the same amount of gold. The result: the price of gold goes up and the value of paper money goes down."

 

There, ladies and gentlemen, is the bull case for gold in a nutshell, and eventually more folks are going to realize this. The reason I bring all of this up is because gold bulls feel tortured after nine months of correction (which may go on a bit longer). But in my opinion, given all I have described above, the next rally in gold, when the Fed finally acts, is going to be huge. Thus, I think gold investors need to be mentally prepared for what they might do if that is the case.

 

Anyone with gold exposure probably doesn't need to take that much action until it looks like the powers that be are finally panicking. But when that moment arrives, gold bulls should make sure they have the positions they want, so they can capture attractive (even if a little higher) prices, rather than paying up after the market has rallied a long way and exposing themselves to more risk.

 

For now, gold owners should remember the saying, "Just when the caterpillar thought the world was over, it turned into a butterfly."

 

Thanks to Fred Hickey, my good friend and top-notch analyst, for directing me to a number of facts in this column.

 

At the time of publication, Bill Fleckenstein owned gold.
74Comments
Jul 14, 2012 11:14PM
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The bankers are not nervous. Why should anyone immune from criminal prosecution be nervous?
Jul 13, 2012 10:11PM
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Can you say; this is going to be bigger than the Great Depression of which my late husband grew up in?? I think the answer is yes and don't waste you're time owning gold, there will be a time when that too as well as silver will also fail those who direct you to that same idea.
Jul 16, 2012 9:28AM
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                                                          Ideas the no longer work.

 

1. Keynesian economics - stimulus doesn't work.

2. Socialism - we have run out of other peoples money.

3. Representative government - congress is brought and pay for vested interest groups.

4. Obama - prefers a lie even when the truth would work better.

 

Jul 14, 2012 12:47AM
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try eating gold when you are hungry.  invest in survival goods.  heirloom seeds for vegtables.  hunting guns and ammo.  camping supplies.  rugged clothing.  cold weather gear and clothes.  if you have the money now look for some property away from major cities and at least a two day walk from civilization with spring water and good foilage for cover.  you might want to build you a cabin where it would be hard to spot from the air.  root cellar for seeds and keeping vegtables.  don't trust anyone who might happen along.  good luck
Jul 15, 2012 11:31PM
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The current course cannot be continued for too much longer. It was recently reported that the average American household's wealth has shrunk 40% in the past five years. Yet despite this, the American government has grown to an unprecedented size and it's budget now eclipses $ 3.5 trillion annually.

 

In order to feed this leviathan The "QE" parade will continue. As we go through each successive round of money printing other governments will see that the dollar is of no more value than their own currencies. When that moment comes, the dollar reserves that most countries hold will be shed as fast as possible. This will super heat both the quantity and the velocity of dollars in circulation. When the dollar dump begins it will escalate very rapidly, no one will want to be left holding the bag and they will rush to the exits trying to unload their dollars before the dollar's value reaches zero.

 

Throughout history every fiat currency has fallen to its intrinsic value, and so too goes the dollar. 

Jul 15, 2012 5:15PM
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"Hell is coming soon. Europe will collapse and the rest of the worlds economies will follow. Better stock up on food / water /medicine and survival supplies."

 

Not just any food, water and medicine. Ever since we went 'global' the quality of contained goods has dropped off completely. Better to wean yourself off reliances and start figuring out how things got done before this era. Grow a garden. Add a glassroof addition to your home or garage (with global warming the growing seasons are blended now). Buy quality containers for your water and keep some bleach handy. Most importantly... look in the mirror and ask yourself a sober question- can you survive a day without devices. We had a massive power outage here a few years back. Quite the experience. Last of all, remember- it won't be Hell but more likely the End of the Wall Street. We will survive it. They won't. Where do you go after screwing the whole globe?

Jul 15, 2012 8:00AM
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"Recently, the Fed has sent signals that it is getting ready to do more easing of the money supply (beyond extending Operation Twist), and many other central banks have taken steps toward easier money as well. (We've seen this from China, Brazil, the European Central Bank and the Bank of England)."

 

We go down completely when they do. 15 years ago or so, there was $50-60 Trillion in currencies outstanding worldwide. Today, including contracts-- give or take $1 quadrillion. That suggests that more than 90% of financial contracts in existence are holding us in this awful stagnation pattern, not the instrument of currency. Printing more that get absorbed instantly into the Black Hole that Central Banks have created merely deflates what is trying to circulate. We don't need more fiat currency, we need consolidation and forced-loss of value for instruments. Lopping zeroes off contracts that have priority because some bankers say they have it, would begin the healing. Gold will never be the answer, Bill. The fly in the ointment is the global shutdown of banks involved in the LIBOR scandal. Manipulation of the Index voids all contracts based on it (bogus performance). If you want a great investment strategy, look out your window and around your hometown, because complex financial instruments can't yield what they never actually gained. Reconciliation, straight ahead.

Jul 14, 2012 11:05PM
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Look at Iceland...or just keep your head in the sand.
Jul 13, 2012 9:07PM
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rothschilds still have all the gold???

 

Jul 16, 2012 8:57AM
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"V_L is a platiinum "plant" .... he is that obvious and can refute him right down the line."

 

Red-blooded American and I post when I can and work hard when I'm not. Nobody pays or plants me, our voices have few forums these days and I choose to use mine. I'm not a member of any party or group other than my family. My positions: Romney is not a candidate for POTUS, never was. Obama hasn't addressed the Middle-aged Middle Class plight because he supports Tech but can't see it is a major catalyst in this train wreck of an economy. He thinks degrees are more important than ability or experience and he is wrong. Financiers are the losers we all have had to work with or for that work to avoid work or get out of it, rather than have ethics, character and resolve. Wall Street has to go... the Fed can lead them there and we need a new currency STAT. We need to abolish incorporation and force every hired-in executive and Board Director to buy the business they currently operate. We need to tax imports that can be made here, but create an exchange for goods globally so that there is no shortage or opportunity for greed to manipulate the supply and scalp the demand. We should freeze the markets TODAY and reconcile every stock and bond for legitimacy. Anything that cannot be matched to a genuine currency unit that is not buried in derivative formulation-- is gone. I wholly believe in Capitalism that begins with work and rewards for effort not administration of effort. We should be banning the brand and validating the hotdog stand (small business). We should be reconciling retirement... working to undermine the nation is crime, not investing. If you're in it to win it and "it" is stagnating or suppressing us-- leave in a barrel, leave your assets here.

 

See... nobody owns me. I was born here and I pay my way. Tread on me and I'll kick your asss in every possible way I can. BTW... I am not in the publically traded markets. I own commodities that anyone can buy. I know margins, supplies, demands and connectivity markets.

Jul 15, 2012 12:07AM
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It don't matter what you do.  This country is doomed.  The Mexicans want it.  Give it go them.  Its going to be funny when the freebies run out and they go up to the free clinic line and the sign says closed.  Like feeding a bird in the winter.  They die when you quit feeding them.
Jul 15, 2012 11:50AM
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Id like to know what happened to the scandal at MF Global and its executives; no charges there????   Now we have a new villian to attack Diamond from Barclays;not that what happened their is okay with me and possibly illegal . But what happened to John Corzine and what beach is  he laying on right now;I guess it helps to bundle a nice donation to the sitting Presidents re-election campaign if your gonna screw your customers out of a billion dollars. I guess some fat cat bankers are okay with Barry

 

Barclays???????????????   he what happened to MF GLOBAL!!!!!!!!!?????????

Jul 15, 2012 7:16AM
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The sky must be very far away... its been falling for what feels like forever.
Jul 14, 2012 1:38AM
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Central Banks continue to issue negative rate loans (Denmark, Switzerland, France, etc.) to keep playing/postponing currency weakness with low productivity in economies.  Banks loaning money to take guaranteed loses?  Yikes!  Good article Bill.

 

Jul 13, 2012 11:11PM
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Gold won't take off until inflation takes off.  Inflation won't take off until the true recovery is underway.  There won't be any real recovery until the debt crisis (both US and in Europe) is resolved.  The debt crisis won't get resolved without first going through at least one more recession, created by the inevitable huge spending cuts / taxes.  Those won't happen until there is absolutely no other choice for lawmakers, which won't be until the actually US loses it's ability to borrow, which won't be for several more years.

 

I'd say the "buy gold" crowd has a very long wait.  You might get a few speculative bubbles you can try for, but not much else.  QE3 might give you quicky spec bubble, you could try and make some money there.

 

Jul 14, 2012 11:06PM
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I understand the argument gold could skyrocket, and I understand the argument it could do nothing for a while. That it will decrease substantially? Not so much.

 

Even then, it sure looks nice and glittery, and there is always a pretty lady who appreciates receiving it, too.

 

It's a buy - no brainer. Good article, Flecks.

Jul 16, 2012 3:53PM
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I HONESTLY DON'T THINK HUMAN BEINGS CAN BE THAT IDIOTIC AND STUPID.  I THINK THE PEOPLE IN CHARGE OF THE FED AND THE CORPORATE ELITIST BANKERS THAT RULE THE EARTH KNOW THAT THE ONLY WAY TO BRING HUMANITY TO ITS KNEES IS TO IMPLODE THE WHOLE SYSTEM.  THEY NEED TO DESTROY THE INDEPENDENT AMERICAN FAMILY, AND THEN DISMANTLE THE AMERICAN SPIRIT AND ECONOMY.  SOON WE WILL BE IN A WORLD WAR TO DEPOPULATE THE EARTH AND SEIZE RESOURCES.  AFTER THE WAR THEIR WILL EMERGE MORE OF A SINGULAR CURRENCY AND FEWER ECONOMIC POWERS.  IT WILL BE SOMETHING LIKE CHINA/ EUROPA/ AND THE NORTH AND SOUTH AMERICAS... IF NOT TOTAL WORLD CONTROL PROVIDED BY A 1 WORLD GOVERNMENT OR SINGULAR CURRENCY.  THESE ARE INTERESTING TIMES...  DON'T LET THEM TAKE GUNS AWAY FROM THE MASSES...
Jul 15, 2012 5:05PM
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"What in Gods name are you talking about????? You might want to go back and do your homework!!!"

 

Hey AI... gee, don't you know your economics? 15 years ago puts us pre-Gramm Leach Bliley Act. That's when loans were made with valid collateral in offset. Therefore, all of the currencies in the world were dollar-like. Enter Wall Street, JPM Chase, derivatives and other prioritizations like- preferred stock and shorts. All of these things have some sort of currency value even though 99% of the globe have little to access to them. One thing is for sure though, we will owe once Wall Street blows it and the holders of phony paper claim that prioritization right. You know, just like JPM Chase did with Corzine's Scam Fund (MGF).

Dumb or close-minded people just see dollar signs. Everybody else can see that global was a no-no and all it did was open an exponential stream of Risk. Don't believe me? It can be validated by reviewing the loss figures on JPM's investment. Jamie claimed $2 billion, then $6, then $9 BILLION. This week it should be $14 and climbing. Wall Street owes the globe, my friend. Sadly, this is history repeating itself once again. YOU should shut the radio off and read a good book. How about: Fiat Money Inflation in France by Andrew Dickson White? No big words, so you should get it the first time through.

Jul 15, 2012 8:30PM
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Central bankers remind me of Romney. Totally out of touch, clueless, and full of hubris. Then their is the ignorant economic dolt, Obama. In colnclusion, ordinary Americans are going to get crushed even worse than the current economic bloodbath in 2013 and beyond.
Jul 15, 2012 7:49AM
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WELL know that we no we are are all doom GO HAVE FUN WE ARE ALL GOING TO BE SLAVES SOME DAY SOON.BUT I SAY BUT ITS TIME TO PRAY AND TALK TO GOD.

WE WILL SURVIE IF WE JUST TRUST HIM.JUST LIKE THE JEWS DID.LIFE HAS ITS HARD TIMES .

GOOD TIMES WAR TIMES NO JOB TIMES.TRUST GOD HE WILL ALLWAYS BE THERE FOR EVER.

 

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ABOUT BILL FLECKENSTEIN

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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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