Investors, it's time to face the truth

Our markets have a recent history of missing important warnings. It's no different now as investors deny the obvious and the economy stumbles along.

By Bill_Fleckenstein May 11, 2012 2:41PM

I have been in the investment business for more than 30 years now, so I have grown accustomed to seeing lunacy, naiveté and just plain stupidity more often than one would think possible, given that investing is supposed to be about being smart.


It seems extraordinarily obvious to me that the economy is, in essence, broken because of the stock and housing bubbles we have experienced, and that the Federal Reserve is trapped. It also seems clear that at some point we will have a funding crisis (bond yields will leap and/or the dollar will tank) due to excessive government borrowing. (Click here for more on this funding crisis.)


However, that's not going to occur until certain attitudes shift, so I can see why this is taking some time to unfold. What I cannot understand is how folks don't recognize the fact that, since the economy has been unable to create jobs for three years now, it isn't going to start magically generating them now.


Nor do I understand why there is such denial about inflation. The everyday cost of living has been increasing steadily, and at an increasing rate. Just because house prices have collapsed and certain products that folks buy, especially those heavily laden with technology, are cheaper does not change the fact that we are experiencing inflation, and that the environment is really one of stagflation. It is obvious, as are the consequences.


Nevertheless, to a large degree in the investment community, Goldilocks rules.


Déjà eww


The mindset seemed familiar to me, and about a week ago I was thinking of past moments in time where the obvious was there for all to see but maddeningly few seemed to see it. What popped into my head was the spike in first payment defaults leading up to the housing crisis. When that started occurring, as early as August 2006, it spelled the end of the housing bubble (while at the same time proving it was bubble behavior, since people were missing their first payments).


I actually decided to search my subscription site,, for references to "first payment." Lo and behold, one of the headlines that popped up was "Goldilocksters see oil prices as bullish, up or down," which ran on Jan. 11, 2007 (that is, more than a year before Bear Stearns' liquidity problems came to light). Here are some key excerpts:


"I wanted to share an email from my insider friend in the subprime arena, whom I've quoted so liberally. It's sort of incongruous to read his thoughts on a day when subprime and other financials were going wild, but this (first payment defaults) is a problem that I guess won't matter until the day it matters -- and then boy is it going to matter.


"He wrote: 'We had a loan that was FPD (first-payment default) on a home in So Cal. It is a very nice high-end town that had a section of new homes built, but it was in the low end of town. Normal homes sold for $1 million in value. In this new seven-home development, (homes) sold for $1.3 million to $1.5 million each. The homes you had to drive through to get to this place were worth $400,000 to $500,000. The market topped out, and now most of the seven homes are vacant -- worth no more than $900,000. Thus, all the lenders are sitting on losses of $400,000 to $600,000. This is just one of many that are happening daily.'


"'The commentary I am getting from field and legit brokers is that fraud is an out-of-control locomotive. Stated-income loans are now finished for all the unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding.'"


Note that I received that email on a day when subprime and other financial stock prices were rallying big time, the market completely oblivious to what lay ahead.


Selling yesterday's news


Just as folks were late in figuring out the severity of the housing crisis, I think they still tend to be late in facing current realities. Case in point: For most of this week, it was as if markets in Europe and the U.S. had suddenly realized that the government in Greece was in disarray; that we were about to have a socialist running France; and that Spain, Portugal and Italy are each a teetering financial house of cards, even though none of that should be "news," especially to supposedly sophisticated market participants.


In the old days, markets tended to discount events (that is, they reflected expected negative outcomes through lower asset prices, or vice versa). If that were still the case, markets should have declined into last weekend's European elections as they anticipated the results, as well as other problems. But what we saw were markets that appeared not to have discounted the seemingly obvious news.


I have commented on this phenomenon a number of times over the past 10 years: that only after an important event happens (which was usually pretty obvious) does Mr. Market have a heart attack. I don't really know why that is, although I think a lot of it has to do with how the government's money printing has warped the markets by causing people to expect to be bailed out.


You can see a million trees and still not recognize the forest


Where our current path is taking us has been predictable for quite some time, and I think that continues to be the case. Unfortunately, we have elected officials who are completely incompetent, if not criminal, and the Fed is even worse. None of that is going to change until change is forced upon us (i.e., them) by a crisis. So while events seem to play out at a glacial pace, where we are headed couldn't be clearer.


On the air


I participated in a rather timely interview with Eric King this week. Those who are interested can listen to it here.

May 14, 2012 7:01AM

When I think to myself there isn’t a single investment option that simply guarantees the purchasing power of your money after inflation and taxes, I realize how absurd all the other alternatives to risk and reward are. The investment I just described should be the foundation against which all other investments are compared; not T-Bills, money markets, CD’s, or some overnight interbank lending rate which is controlled and manipulated by the Fed. The failure of our financial system for individual investors logically derives from the simple fact that this basic foundation investment doesn’t even exist.

May 14, 2012 12:02PM
Term limits on every seat in Congress can only help us. Get in (2 terms), get out, and get on with your life so we can get on with ours.
May 14, 2012 10:23AM



The problem with your pontificating (as with so many others) is that it does not go hand in hand with any advice. I am debt free with my 16 year old's college fund in 529's and bonds. I also have a SEP IRA and other market-based retirement tools. Do I stay the course or liquidate and make the best of it? If you are going to jump on a national forum and scream "Fire," have the decency to point us toward the hydrant.

May 13, 2012 9:53PM

As a business major and someone who has always been fascinated with the dynamics of economics, I marvel at how the forces of capitalism have evolved from sound investment practices that operated around a matrix of "fundamentals" that could sustain the blows of volatility to what we have now: sheer speculation that is nothing short of a craps table at a Las Vegas casino. Credit default swaps, CDOs and sub primes - What is fundamental about these "exotic" instruments?

May 13, 2012 9:35PM
Well Bill, tell you investment advisor cronies along with our gov and the media to stop reporting lies about housing starts, existing home sales, inflation, unemployment data, job creation, consumer confidence etc all of which is nothing more than propaganda to make the American public think all is well with our economy whereas the TRUTH is that it is not!
May 14, 2012 2:32AM
At last . . . a voice of reason. Everything this article says makes perfect sense. No one wants the markets to tank but they do . . . sometimes horribly. Bill is 100% correct in everything he says here. The writing is on the wall and it is time to protect. Of course the Government and the Fed had meddles so significantly that most protection vehicles are paying squat. Still, getting a little something in return for your investment is better than losing a huge chunk! If you have never listened before, you had better listen now or plan on retiring when you are in a box six feet underground!
May 14, 2012 10:32AM
Rome burns and all we hear from the media is "Same sex marriage".  I guess there are no more Edward R Murrows'.
May 14, 2012 2:42PM

Fargo144, here is my plan:

Round up an deport ALL illegals, no matter what country they snuck in from, mexico, china, russia etc...

Illegals have stolen millions of contructions jobs for one. Their anchor babies cost states billions of dollars in medical, education and incarceration. California is 16 Bilion in the red.

Stop sending financial aid to ALL foreign countries for a year. Cut them off 100%.

Crack down on people defrauding entitlement programs.

Pull US military out of most foreign countries.




May 14, 2012 9:27AM
What's new today that wasn't just as obvious a year ago?
May 14, 2012 10:44AM
It's called accountability folks.  And no one in Washington seems to have it or accept it.  It's called the "it's not me syndrome, I only tried to help".  Take Barney "Buttf_ck" Frank for example.  He's the top dog for unaccountability.  This obnoxious piece of crap destroyed the economic system with his policy changes to allow the influx of irresponsible and credit baseless homeowners.  That's where the focus needs to be, on these pompous morons who make the decisions for our country's welfare, Obama being one of them.  They need to be removed from their positions and replaced with people who actually work hard for a living.
May 13, 2012 10:34PM
hi i was never in the investment side of the stock market  before 2009,  i have seen the truth 23 years ago  when the first gulf war  ,  the market is set up  to get people to invest   the retirement funds  disappeard  then the 401 k s sprung up  after over 80 years  they changed , that was the end of saving     some one  said sometime ago  that this generation will be the greatest exchange of money from parents to the kids of all time , so the governments of the world  started  letting things slide an  an the stock market  thought they could cash in  on the money with fees  penny stocks , all the books of all the companies are false  , think about it  ceos  walking out the door of a felling company with 5 plus million  why the people who build the company  20  to 30 plus years get nothing  an owners  of companys  take the peoples pension funds  an  big shots  living off something  they did 5  years ago  , there is no money out there  , there is no meat on the bone any more  its all gone  the country an world  an greed has cause this mess  we are in  from banks people  stock market  , i want,  i need , not any more  its give me  , its mine ,  the shell game ,  with a hiddin clause   , its only numbers its not real money , right  when i put the money in it was real  etc , close the market down for good  its not capitalism   its a scam , its how much i can get from your wallet be for you get wise ,
May 14, 2012 2:44PM
I've been quite aware of the problems but what I need are suggestions on how I can best protect myself. None of these articles ever provide that.
May 14, 2012 9:39AM
Time to push the "RESET BUTTON"  Borrow Ms. Clinton's poorly thought out reset button she gave the Russians and reset the system.  Seriously, the US needs to get up tomorrow and reset the dollar to say $5000/oz of gold, reestablish the gold standard and let the chips fall.  Monumtous turmoil, but the first to this game wins.  We need to be first.  In a world where Bank of America, "transfers" 55 TRILLION in financial crap to the taxpayer, and they are only one, we can't possibly repay the debts ever.  My advice is be Argentina not Ireland or Greece.  Controlled default will reset the system to reality rather than watch the FED keep twisting in the wind.  Oh, and lastly, hang most of the the Wallstreeters and Barney Frank from a light pole.  (OR at least confiscate all the ill gotten gains, deserved impoverishment might be a good start on accountability!)
May 14, 2012 10:08AM
Great commentary...unfortunately our liberal President and the liberal media would have us believe that Gay Marriage is the solution to our country's woes!   

God help us all if he is re-elected and continues these destructive economic and social policies.
May 12, 2012 5:36PM
Sicisco, YOU are precisely the problem outlined in the article!

Denying inflation because the iPAD is still the same price, yet food and fuel have rocketed upward.  In 08' the price at the pump was at $4 a gallon, but the price per barrel was over $175.  Today the price at the pump is near $4 yet the price per barrel is BELOW $100!  

And We WERE creating near 200,000 jobs per month, (DOWN to below 150,000 currently), yet we are LOSING over 300,000 jobs each month giving us at least 100,000 job LOSES each month!

The only thing "solid" is the medias willingness to propagandize the usefulidiots!

May 14, 2012 10:59AM

Come on people...Lets keep politics out of this...Both parties are to blame for our condition. Our political system is in large part to blame for this.  Both parties play the game of Emporers new clothes, blame others, and pretend that serious problems do not exist and come up with some effective solutions. No politician wants to be the bearer of bad news, even if it is necessary, because they might get negative press! It is a mess, the American public has  been spoiled beyond belief, rather gullible, and the end truly is near if we do not grow up and stop playing stupid politics and buckle down to figure out how to get out of the hole we have dug ourselves into over the last 40 years or so, we are lost....And anyone just throwing blame on a political party, the press, or an individual just ought to shut up, because you are not part of any kind of are part of the problem......What we need is a strong, truly independent candidate to make the difficult decisions required...And an American Public that is not afraid to undergo some discomfort and make some sacrifices,,,,

May 14, 2012 11:43AM

This isn't about Rep or Dem.  This is about out of control spending on both sides.  Rep's want to spend it their way and in turn, Dem's want theirs.  What should be taking place is downsizing our bloated government before the term 'austerity' begins to be a word associated with American instead of Greece.

This article is right on the money.  Even though a horse with blinders on can't see the fire, it doesn't stand to reason he can't feel the heat.  Sew your money into the mattress people, it's certainly going to get worse.

May 12, 2012 8:13PM
" None of that is going to change until change is forced upon us (i.e., them) by a crisis."

Change is not going to occur until the populace at large accepts that it has to and that it will not be painless.  Good luck with that.  We're seeing this right now in Europe.  The leaders there know things cannot continue but any move toward fiscal responsibility invokes protests and rioting.  People are people (and politicians are politicians) everywhere so I would plan on something similar playing out in the US.
May 14, 2012 10:03AM
Infaltion is ignored because the lamestream, liberal press does not report such bad news for our socialist president and progressive senate. 
May 13, 2012 9:45PM

Socialism has only one end, bankruptcy. I don't see any plan any leadership any understand of economics out there that will solve this crises.

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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] Equity indices extended this week's losses with a broad-based retreat. The S&P 500 fell 0.6% to end the week lower by 1.1%, while the Russell 2000 (-1.1%) finished with a 0.9% decline since last Friday.

Staying true to the theme observed throughout the week, the energy sector (-1.5%) tumbled out of the gate, thus dragging the broader market down with it. Once again, dollar strength and crude oil weakness contributed to sector's underperformance, but the ... More


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