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.
As 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.
I don’t get it. How is it Obama doesn’t see this……..short answer – he does and doesn’t think it’s the huge problem it is……..he thinks his policies will be the answer/cure /solution. How can that be? How can you be that blind but have ascended to the office of president? It’s like the movie Being There coming true………
Is Bill the most pessimistic person alive? I have yet to read anything from him that is positive.
Can't disagree with a lot of the Article...But I also take some contrarian veiwpoints of investing...
But on top of all else...I believe you have to diversify..
That precludes nothing...And includes anything you feel comfortable with...?
Not to have investments only in Wall St. equities, but commodities along w/others, ie; Gold & Silver.
Real estate and Land, and other Collectibiles or tangibiles.
And of course cash or cash-like, safe instruments.
Pretty much Bernanke is now saying what I have been saying for a while.
The Federal Reserve money machine is breaking down and is not working anymore
With China now trading with everyone but the US in yuan that has pretty much sealed the US economic fate. And not for the better.
We going to totally collapse this year 2013. And as we are importing 40 percent of our food and after the collapse we will not be able to afford to import food and the super rich buying up food to sell for even higher prices to the poor. Many more Americans will have to get food stamps.
You have seen those third world country scenes of stravation. Get ready to see them in the USA after the collapse later this year.
Is the glass half full or half empty? Is that a light at the end of the tunnel or another train?
Good article. I like to think the glass is half full, but I'm pretty sure that's another train coming at the end of the tunnel.
I'm sticking with my Guns and Gold Plan with a tiche of high quality stocks and select food, water, commodities and oil companies that pay covered but increasing dividends. Beyond that I just dumped some mutual funds that finally got back above where I bought them.
We need to get out the Guillotines for the clowns in Washington and start a revolution, figuratively speaking. They aren't using their heads so lets cut them off and vote them all out..
Fleck has been a contrarian since the market started its recovery from 2009.
It was seconds before the market crashed, when Nick, the Wall Street dealer shouted over the phone to his biggest equity trading client. In one simple statement he crystalized the reason and the cause; “Hey Bob, I think we just ran out of Muppets?”
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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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