Going with the flow, down the drain

What could go wrong with a strategy that requires no thinking and for which you have no alternative anyway? Everything, eventually.

By Bill_Fleckenstein Apr 5, 2013 4:04PM

Stock chart © Kick Images, Photodisc, Getty ImagesSeeing as how there has not been much new news to discuss, I thought I might take a moment to expand on the phenomenon of nonsense becoming news.


This is a variation of the old Wall Street saw (that I have noted from time to time) of the stock market action writing the headlines. The reason I bring it up is because Wednesday's Wall Street Journal had three news items that illustrated my point while also being nonsensical, maddening or both.


First off was an article headlined, "Silver bears pounce as manufacturing sputters." The article claims that the reason silver has been weak is because "mounting evidence that the rebound in global manufacturing is stalling has investors worried that industrial demand, one of silver's last remaining pillars of support, is crumbling as well."


The author quotes Andy Rosenberger, a portfolio manager, regarding what he says is a win-win strategy of being short silver.


"If the economy improves, you get more demand for silver but less of a tailwind from the Federal Reserve," Rosenberger is quoted as saying. "And if the economy doesn't improve, you don't get the industrial demand." Hence his short position.


(By the way, Tuesday's sell-off in gold was precipitated by a major dead fish house in Europe claiming that the U.S. economy was getting better, therefore the dollar was going to be stronger, therefore you should sell gold, which echoes the story Goldman Sachs was touting last December.)


As for Rosenberger, in the case of precious metals, his can't-lose "thinking" is that you sell silver if the economy is getting better and you sell silver if it isn't, which speaks to my point about the action writing the news. Since metals prices are down, the news is bearish and all stories are spun bearishly.


The truth of the matter regarding silver and Rosenberger's argument is that if the economy stays the same, or doesn't improve, we will get more quantitative easing from the Federal Reserve. However, if the economy does improve we will get more inflation eventually, which will precipitate more silver demand. Note that this version will be the one that gets tossed around when silver goes on another rampage, but for now the get-short argument carries the day.



On the exact same page of The Journal, an article headlined, "Rare jitters for Japan's bonds," discussed the fact that Japanese government bonds have become somewhat volatile, as we are on the eve of the next Bank of Japan meeting, during which, the consensus is, it will promise to broaden the scale and scope of asset purchases as the bank seeks not just to banish deflation but also to precipitate a couple of percentage points worth of inflation.


This is an example of a market that is maddening, as JGBs have recently been on a tear, making an all-time high in price (i.e., a low in yield), though they have backed off recently.


One would think -- given where rates are, what the Japanese intend to do and what has happened to the yen -- that the bond market there would be under pressure. But that is not the case. At some point it will be, but for now, as in so many countries that are printing money and monetizing debts, more risk is deemed to be painless and financial assets are levitating.


If that "policy" worked so well, however, one wonders why it wasn't the standard policy option for hundreds of years. Of course, anyone with any knowledge of history, or even an ounce of common sense, knows that it will only end in disaster. But, once again, that is a problem that won't matter until it matters.


Well, if everybody's doing it …

Lastly, in an op-ed column (assuming we can consider such as news), Jason Trennert argues in "The stock market and the 'Tina' factor" (subscription required) that negative real interest rates mean stocks are the only game in town as, "... there is no alternative (thus, you can't lose.) ... With the global central banks closing off all other exits, savers are turning into 'Tinas,'" which is his shorthand for stock market investors. Trennert notes that what is occurring is, "... a more modern form of inflation-financial repression," as well as the fact that real returns are negative to the tune of approximately 2% (although that assumes inflation is running at only 2%, instead of a more realistic 4% to 5%).


In any case, his grand view is that, given how central bankers are forcing rates to be negative one must invest in stocks because -- drum roll, please -- multiples on earnings will be higher.


"It is hard to say what would be an appropriate multiple for the broader stock market when risk-free rates are negative in real terms," he writes. "But here is the likely answer: higher than you might think."


The only way someone gets away with writing an article like that is because the stock market has been hitting new highs and people are giddy. Obviously, negative real interest rates are a recipe for disaster for bond markets and, by extension, the stock market. What it is positive for are precious metal investments, but since they have the bad market action, this logic doesn't apply to them (for now), it applies only to stocks (because the indices are hitting highs on printed money).


This time it's the same

I bring all this up to illustrate how, on a regular basis, the stock market action shapes public opinion (though action in other markets can be influenced, as well). It also helps foment an environment where nothing matters until it matters, and then it is the only thing that matters.


Investors are as deluded, careless and reckless as they've been at any juncture we have seen in the past 15 years, including late 1999 to early 2000 in stocks and  2006-2007 for stocks and real estate in America. World bond markets are train wrecks waiting to happen, but until people decide that inflation matters more, the party will continue.


Once again we find ourselves in a situation where the outcome is preordained, but the timing is elusive.

At the time of publication, Bill Fleckenstein owned gold.

Apr 6, 2013 4:13AM

65% cash here. Getting closer to retirement so i am fine with 7 year CD's paying 2.05%. they are out there if you look. 6 years ago I would have told you "You're nuts" if you told me I would be buying CD's long term under 5%. With today’s computer algorithms buying then selling at the hint of a half of a percent increase in a stock faster than I can even keep track of real time market moves....It is rigged against the individual investor. As there is no where else to put your money unless you want to buy a commodity or real estate with it, The market is being flooded now with money that has been sitting on the sidelines as historically low interest rates creep ever lower. .25% on an IRA? .65% on a year CD?? Average 5 year CD paying what 1.45%? Just another way the financially responsible people in this country are being penalized ( low interest rates) by the government to prop up borrowing and spending which is the very thing that got us here in the first place. You would think that Uncle Sam would Know better than to encourage people to borrow more as the Gov is going broke on interest payments itself from all of its borrowed money. Meanwhile the banks make it damned near impossible for the average American to take out a loan at such low rates. Say what you want about keeping cash and losing to inflation but remember that those investing with CD’s and other low forms of interest on cash and hold no or little debt will benefit from the hyper inflation that roars back once the economy gets back on track and AFTER the market corrects itself from today’s artificially high closings because of all the money being dumped into it at the present. There is only so much stock so like everything else, stock prices rise and fall on demand and right now the demand is high due to stupidly low interest rates. I still have a sizeable chunk in the market but no where's near what I had 5 years ago percentage wise. Once prices came up and i got all my money back, i cashed out of those that did well and have slowly been cashing out as companies nit new highs in years such as Boeing last week, Call me stupid but i dumped over 100K of Boeing it hit $85 or higher. Set a target price you can live with, you made money with and take it an run if you no longer have faith in the market or think it is inflated or rigged. There WILL be a correction and a lot of people are not going to like it.

Apr 5, 2013 6:12PM
I'm keeping 80% of my money in cash.  I'll buy the stock market when there  is blood in the streets.  The market is rigged, no question about it.
Apr 5, 2013 10:05PM
As for savers getting no interest. Well, most are probably buying less stuff, only what they need. They are frugal to begin with. I know that's what I do. This action probably more than offsets any gain to the economy from low loan rates.
Apr 5, 2013 6:35PM
Very soon it will not matter what the price of gold or silver falls to or rises above: The old "Golden Rule" will come stormin back, Them that has the gold will make the rules!!!! The Serferdude
Apr 5, 2013 8:31PM
I invested in lead. Yep, gotta figure that fighting with Afghanistan and now gearing up with N. Korea, the price of ammo should be out of this world soon. When was the last time you went to a sporting goods store and asked for a box of rounds? Notice they didn't have what you needed or if they did, the price was atleast twice the regular amount? How about WalMart?? they won't even sell you more than one box at a time anymore. Looks like all those stored car batteries are about to pay off shortly as the recyclers are moaning and bitching about how all the cars are coming in stripped from all there precious metals anymore.
Apr 6, 2013 8:15AM

Financial sales is all about spinning a convincing story around what just happened so that your clients will believe you know what’s going to happen next. . That's the 99% of Wall Street. The challenge these days is to get your story out before the situation reverses itself. Just ask any daily market reporter.


From what I read, the magnitude of the sharp swing in Japanese bonds yesterday was a thirteen sigma event. Statistically speaking, that's something like a probability of one in you can't count that high in your lifetime.


Rejoice, we truly are living in an age of miracles. Good luck to all you Wall Street analysts trying to call the next one of those.   

Apr 6, 2013 1:24PM
And we can do what about inflation? You speak as though the people have a say with what is going on in our government...WE DON'T
Apr 6, 2013 4:34PM
Obviously... the primary lesson must be repeated. Here goes... You were in-- metals, markets, real estate, blah, blah, blah... pick your bandwagon. You are frightened now (emotional decision making) and moving to "cash". Is it? No. If-- 15 to 20 years ago there was a sum total $50 to $60 Trillion in global currencies and now there are THREE currencies- cash, derivatives and debt contracts totalling more than $1 quadrillion, what pray-tell is your "cash" really worth? Lord... but they do drink the Kool Aid, don't they?!!!! Remember the cute story... the German brought a wheelbarrow full of marks into a bakery to exchange for bread. When he turned around, somebody had dumped the money and stole the wheelbarrow. THERE ARE two lessons in that story. If you only grasp one, you're not going to be happy as you lose everything. BTW... the wheelbarrow wasn't sold for more useless currency. Does your head hurt now?
Apr 7, 2013 3:18AM
Bank of Japan is cranking up their printing presses, to emulate helicopter Ben, and the giddy folks are enjoying the equities run.  Inflation for everyone, and cash on the sidelines are going to be left behind!  Price of eggs, bread, cereal, groceries are launching up, up, up.  Energy continues to cost more.  It is only a matter of time for events (geo-political, fiduciary euro surges, and economic demands) to make curves no one understands!  Yikes!
Apr 6, 2013 4:41PM

"And we can do what about inflation?"


Everything. Glass half full or half empty? Inflation comes when the tills run dry in businesses. The cost of goods sold falls behind the cost of overhead. Nearly 100% of today's businesses are platforms, not real businesses. If inflation comes, stop buying. There is no place to house overstock and no buffering to cover overhead sitting on it. Essentially, having Fiat Bernanke print all that useless cash was a ruse to keep business platforms controlling and manipulating as to look solvent. There are no sales and no manufacturing, just maybe some assembling of what gets imported. Don't FEAR inflation, welcome it. Put your i-Phone down and grow something. Take a look at what you value the most, it isn't your flat screen TV. If you rely on an app, your self-sustaining isn't worth crap. Change that. Beat inflation.  

Apr 8, 2013 9:50AM

I don't have a massive amount in cash, but I DO have more cash in my retirement accounts than at any time in my working life!  This market is being manipulated by the FED.

Apr 8, 2013 9:31AM
Bill and others have noted how it's literally impossible to place a date on current markets due to the massive manipulation by Global Governments. If we lived in a true free market, that wouldn't be the case. It's not  a matter of if owning Gold is a good idea as opposed to propped up global stocks. We as a Global Society are already in a Triage Event. The Global Elite have already decided priority one is to save and increase their own wealth. As far as they are concerned, the rest of of us really don't matter. To them, workers are a dime a dozen.
Apr 8, 2013 11:41AM
"Investors are as deluded, careless and reckless as they've been at any juncture we have seen in the past 15 years..."  Bulls-eye!  From the financial page comments, even on sites for market-nerds like Motley Fool or Seeking Alpha,  I've noted how many comments indicate no study of the stocks whatsoever.  It's extremely reckless today to believe most market articles, which are often sponsored by someone like Merrill Lynch and whose motive appears to get investors to think short-term only and churn, churn, churn their stocks.

If you haven't read -and studied- at least one serious investment book you shouldn't be choosing stocks.  My favorite easy-to-read one is Mary Buffett's "Buffettology" which points you to the best get-rich-slow-but-steady stocks.

A generation back, a co-worker inherited $45K - had little other savings - and invested it in "Merry Go Round" clothing stores, over my objections that the company appeared to be in trouble, because "a local guy founded it and the newspaper says it's selling at a bargain."

When the $45K dropped to $30K, his "study" was to go to the mall and count how many people went into that store compared to other similar stores in a 3 hour period.  I asked if they came out with bags showing they bought something.  He didn't look at that!  I asked what was happening with revenues, cash flow, and debt and he didn't have a clue.

When his money dropped to $15K I advised him to sell, but he was so worried about losing $30K he forgot he could save $15K.  Eventually he saved about $5K when he realized the company planned to file for bankruptcy.  A fool and his money are soon parted and that's what you can expect if you invest without a clue about the science of stock market investing - especially if you think you're going to get rich overnight.

If at all possible, do not go into debt.  If you do buy anything, pay cash for it.  You could find a good used vehicle.  Do not fall into the housing trap the Fed Gov't is trying to put over on the public.  The same process of low income people purchasing a home and raising the prices is what set off the 2007 recession.   Pay off debt if possible and put money into dividend stocks which have increased their dividends over the years.  If they do go down in price, it doesn't take them long to come back and you get money for low cost shares that will bloom with a price increase. 


This Administration is non functional for the majority of Americans and I truly believe we will have a relapse into a recession soon. 


Prices are being inflated in a way people are oblivious to their rise.  Check the prices at the stores for yourselves.  They are going up and no one will tell the country about it.  The media is out of touch with the American people and go with the whim of this Administration.


If North Korea makes their horrible mistake to invade South Korea, the market will be trashed, this President will be in over his head and we may have to use nukes to stop the hemorrhaging of the 9 million North Korean foot soldiers that would invade enmasse to the south. 


We are on the brink of something we haven't seen for over 50 years and a police action will not stop it.  Be prepared.

Apr 11, 2013 1:20PM

Whoa! A coven of perpetual pessimists!



Do y'all have a secret handshake or club password?  Not that I want in. I'm thinkin' I'll stick to the sunny-side of the street, just like the Dorothy Fields advised.


If I never had a cent
I'd be rich as rockefeller
Gold dust at my feet
On the sunny side of the street

You know, despite the reams of bad news that Bill has been writing for years the end result is that the world just keeps chugging along, just fine, thanks. My equities went down, my equities came back up. If the Fed is so horrible, and Europe's central bank such a monster, why isn't everyone on the dole?


Comfort yourself. Gold will be back. Some day. And in the meantime, for all the print Bill writes on the subject, you can bet he has the capacity to avoid or at least trim his losses, and is; fact is, Bill is making money regardless.


Quit chasing the Wizard of Oz. Follow your own advice. You can bet Bill is following his.



Apr 7, 2013 8:01AM
QE... It really is just printed money...
It is. Right now, the blogs are full of self-congratulating morons boasting that they just sold out on their stock positions and moved it to cash. Let's validate that... once upon a time and likely during the 21st Century, you bought stock shares. Since post-9/11 brought us redesigned currency and faster printing presses, the likelihood that your purchase was at least partially fiat-money-funded is pretty good. More ensued. In fact, 100% of real time inflation was offset by printed money that went directly into the stock markets, not the primary economy. A split economy occurred. Wall Street made windfalls as up to 300,000 new millionaires were hatched weekly. Main Street shriveled up, leaving the majority of people impoverished or destitute. So... you sold your stock positions now. In a simplified format to explain it... your purchase dollars- if worth 100 cents- inflated entirely because of currency dilution without tangible sales and productivity in offset. What was 100 back then is likely 1 or less now. You made zero profit and likely lost on the deal PLUS, you now own only fake dollars, not stock shares, so, you have nothing. The Three Bandwagons of the Ignorant remain-- stocks, metals and real estate. Each has one or more majority-hoarders who can and will command by price-fixing. The average age of people in these is split as well... retirement age or older, very young, reckless and legitimate-skill-less in urban areas that cannot sustain. It was a bad theory to ignore obvious history and print false economy into a bureaucratic social status seeker society. It has failed already, the delusional just don't feel it... yet. It was an incubator for corruption that is bad now but likely will outscore the 1930s by a longshot. One small glimmer of light-- have you noticed what has happened in Iceland, Greece, Portugal, Spain, now Cypress and the former Eastern Bloc nations? Not much. They have compressed economy so that it functions. Not suppressed people-- financial tyranny. The prevailing currency Index is tied to work that lifts the local, region and nation, no paper or button pushing tolerated. Mexicans are not coming to America, they are fleeing. The actual arrest records suggest Meso-America is running for our borders but not staying long after they find out that we have no economy either. If you will invest, consider shorting the Central Banks themselves but not using fiat currency to do it with. We have arrived at the crossroad. The financiers of the world no longer live in an Emerald City, in fact, there's a mighty big dip in that road. People head down it but never seem to come back up near the city. The other road is less traveled but those on it have wagons full of stuff other people need and will want in days weeks months years ahead. It doesn't dip but its rocky muddy and requires a lot of effort to traverse. Which road are you on? Which should you be on?
Apr 8, 2013 1:07PM
1/3 in cash, 1/3 in gold & silver & 1/3 in short positions
Apr 7, 2013 10:05PM
So apparently when the government prints more money, gold and silver isn't worth more. Since golds peak was 18 months ago and silvers was 23 months ago. And in that time frame trillions have been printed. Or has it? So for some reason cash is kicking gold and silvers as. Imagine that. Or better yet explain that.
Apr 8, 2013 11:44AM

i am 80% in cash as well...and what i do have in the market is only in dividend paying stocks

which average 4%....those who are patient and have cash will end play this by waiting  until

rates go up again which should be by 2016...and cd's will be paying 4% for ten years....

big difference between 2 and 4 for retirees with substantial assets....but buying the market

is a fools errand unless you limit your investment and do it only for income

Apr 22, 2013 8:37AM

And we have some control over inflation? What would you suggest we do as an investor? Trying to keep up with this run away inflation is almost impossible unless you are invested in the market. This government would have us all in the poor house if it can.

We have very little choice but to be invested. It isn't like we have options that make a difference. The average investor is trying to keep his head above the rising tide...Not easy!

It would be helpful in your article if you would write some alternative ways to continue our flotation.

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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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[BRIEFING.COM] The major averages ended the midweek session with slim gains after showing some intraday volatility in reaction to the release of the latest policy directive from the Federal Open Market Committee. The S&P 500 added 0.1%, while the relative strength among small caps sent the Russell 2000 higher by 0.3%.

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