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.

By Bill_Fleckenstein Feb 1, 2013 3:01PM

Statistics arrow in three dimensions © Polka Dot, Jupiter, GettyAs 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.

155Comments
Feb 2, 2013 12:24PM
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All you non believers that stayed on the sideline for the last five months and missed out on some big gains. Now like Bill your praying it tanks so you can get back in. Since March of 09 I've more than doubled my money and all I hear is how the market is going to crash and we're going into another recession. All you bears stay out and hope you make your 1 1/2%. For me I just made my goal and hit the 1 Mil last week. And I know most of you are going to say your going to lose it but you know what that's what all my friends that have less than $100,000 in their 401K's have been saying for the last 20 yrs. I bet all of you that back in 2009 Bill called that the Great Fake Rally of 2009!!!
Feb 2, 2013 12:02PM
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is anyone serving champagne w/this bubble-
Feb 2, 2013 12:01PM
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great article- the truth w/ a splash of humor- it is crazy to see these numbers and then look at unemp ticking up and govt officials say we are on the right track- well look out for the head-on colllision
Feb 2, 2013 11:59AM
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Take your money out while you still have any. That's what the rich will do as soon as they see the slightest dip.

Feb 2, 2013 11:53AM
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As to the Fed "not having much choice in the wake of a financial meltdown" -- there, in this one sentence, is the lie... and the catalyst for the 'invented' and now 'necessary'... solution.

 

If you start with the wrong premise -- one will always come to the wrong answer.

 

We tend to speak of the "financial meltdown" as though it were something that "just happened" due to some metaphysical and mysterious series of events, that was out of the control of man.

 

Nothing -- certainly nothing in the world of men -- just "happens."

 

Our government does not spend 1 Trillion dollars per year more than it takes in...by accident.  The figures are carefully gone over and looked at beforehand -- then they go ahead and do it anyway. (As a note -- even this crushing, accumulated 16 Trillion debt was at 9 Trillion even before the "financial bailout." So...even that was not "the reason")

 

The laws preventing investment banks from going on a free-for-all were not removed...by accident.

 

Predatory lending to anyone with a pulse was not engaged in by accident, or "circumstances beyond our control."

 

Credit default swaps were not engaged in... Just because...

 

All of the events above -- and many hundreds more, are all carefully engineered to bring about the desired result.

 

Once the "problem" has been carefully created -- then, of course, there "is no choice but to..."

 

This is where our Government (elected or no) --- stands by with the ready "solution" that now must be engaged in -- to bring about the desired result.

 

...and, why is our current mess the "desired result?"

 

Instead of disbanding the Fed and printing our own money, as called for in the US CONSTITUTION...

 

Is this the conclusion we come to, to now realize our our terrible error, and return to the supreme law of the land, the US Constitution?  Well, not exactly.  However we do come to the exact conclusion that was engineered from the beginning: "look how much we need the Fed" to save us from this terrible disaster that "just happened."

 

 

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if the market is going to crash why would anyone want this garbage whats the deal Fleckenstein

Feb 2, 2013 10:50AM
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Buying stocks is like playing roulette.  The market is shaped by the media and ultimately the government.  The only safe bet, long term, is investment real estate.  I don't give a crap what someone tells me my properties are worth right now, they still make the same money when they were "worth" 40% more. Buy yourself some property, find a good property manager, and then go fishing. Life is short.
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here is a man that has lost his tail in the market and i bet he went the wrong way on his options

the fool here is bill why people let these fools invest their money i will never understand

 

Feb 2, 2013 10:46AM
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I've been listening to guys like this since we were at 6500 three years ago...  but the dang thing keeps going up up up...  wish i would of not listened and jumped in back then...oh well.  
Feb 2, 2013 10:33AM
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So blah blah blah. Just what are we supposed to do? I guess I should have stayed out of the market and not had the 200% gains I received over the last four years because the market is being manipulated. I agree the fed pumping money into the economy is what caused dow 14k but so what. The new game is buy stocks, take profits, watch them drop then buy again. As for metals I don't hold gold I hold lots of silver I bought at 16.00,again whats the difference I have made the money,taken the profits and now am waiting for the 20-30 % correction that I am sure is coming and then I will buy again. The  money in the market now is stuck in dividend producing stocks and when the correction starts I will go all to ca**** always been a game it just has new rules now.
Feb 2, 2013 10:17AM
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THE GREAT FAKE RALLY. buy april there will be recession due government spend cuts. I hope congress has the guts to do it so usa will in better footing.  also people be more willing to buy our bonds if trying to get our financial house in order. hard part being a economist that you know triggers for x events but do not know the timing. like if Greece defaults then global economic collapse will happen but if Greece does not default then no collapse. the cost of buying greek bonds is less than the chaos economic collapse. some with hoarding the dollar put in safe out side to reduce inflation so people still use of world reserve currency cost less  than the chaos cause by the run on the  dollar. import test of economist is not just know about economic bubbles but also how defuse them before they pop so less damage is cause.   gold sliver are hedges against inflation but other metals will do as long they are easy to sell and worth less than silver. Few people want to steal use aluminum cans.    
Feb 2, 2013 9:17AM
Feb 2, 2013 8:43AM
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The "Great Fake Rally" indeed!
This is not going to end well.
Watch the collapse in real time here >>> http://www.dailyjobcuts.com/
Feb 2, 2013 7:20AM
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You know when the end has come to the market's rise. It's when all the retail buyers decide they don't want to miss out so they buy high, watch the market tank, sell low, and then vow they will never do that again. Time to take money off the table.
Feb 2, 2013 4:05AM
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Why do so many Americans live in The House Of DOOM, is it the preacher on TV crying were living in the End Times, is it the radio shock jockey's that claim economic Armageddon is near, is it news stations that whine the government wants your guns and freedom. The simple fact is that fear drives people to spend money, the more scared you are the more guns, ammo, gold, seeds, dehydrated food, survival gear and prayers from that TV evangelist you will buy. Take time to enjoy your profits, stop and smell the roses, let someone else be the " Sucker Born Every Day "
Feb 2, 2013 2:29AM
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Fleckenstein, get a haircut you hippy!!

STOCKS are the place to be long term.

If short-selling was banned, we would all be wealthier and you wouldn't have a column.

If this column is meant as entertainment only, I am not entertained. There is no science

or business or any insight to this column other than doom and gloom.

Feb 2, 2013 2:24AM
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OH SWEET JESUS, BIG RALLY EQUALS MSN MONEY SHORT-SELLERS COMING OUT OF THE DARK CORNERS SCREAMING ARMAGEDDON because they lost money AGAIN betting against America !!!!

 

Sorry Mr. Bill, you screwed up again. When are you, Mayhardari and Jubak gonna learn not to short the market during a BULL RUN? Notice that Bill owns gold too. What happens to gold if we hit DOW 17,000? That's right - gold gets punished. MSN Money shouldn't be a bully pulpit for short-sellers to influence us with false information that helps them with "their" investments. MSN Money is supposed to be helping the reader!

 

Bill Gates, I know you are sitting on your island reading these posts and laughing. The sad thing is you are the scion of a losing company. Nobody wants windows or a windows phone. Also, you have let MSN Money go to the dogs. Fire all of these losers and go find 2 young Harvard Business School grads and 2 MIT grads and let them start analyzing the market. I get absolutely nothing from these columns that I can profit from. Fleckenstein, you suck.

Feb 2, 2013 2:20AM
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Anthony gives a better argument for a break in the market by critically examining its fiscal, monetary, and political issues. Bill on the other hand doesn't provide much more than an emotional basis for his view which is essentially the Fed's monetary policy will create uncontrollable inflation resulting in bond and stock prices plummeting. His advice is to buy Gold. 

It's too bad that you clown can't understand the Fed doesn't have much choice in the  wake of a financial meltdown but to create money. Without the Fed's actions unemployment would have been much worse, and business failures greater. The Fed has helped banks and others by buying toxic assets to boost the health of their balance sheets. The Fed's main help to the economy has been to keep interest rates essentially at zero to support it. 

The main fear in a financial meltdown is deflation as economic activity decelerates. Somehow all the debt that was built up has to be resolved. It is either paid back , forgiven, or written down. It takes time for this to happen, and the only thing the Fed can do is inject lots of money into the banking system to try to reflate the economy. 

Currently the state of the economy is a mixed bag. January was a positive month, and market lore predicts that 2013 will be a great year. Don't bet on it. Right now the market is in a happy place, but this could change very quickly. The economy is still very weak probably economic growth measured by the GDP will be 2% or less for 2013 and longer. 

My view is one won't go broke by selling into a bull market. Right now I'm 30% in cash. Maybe my portion of cash will miss a great run up in the market, but I doubt it. A strong economy is 5% GDP which isn't anywhere in sight. In the meanwhile, I can see a lot of things that can turn this rally into a bust very quickly.

What should one do? Always take advantage of the current situation and stop whining about how you think things should be. Money is cheap. It has never been so cheap. Borrow as much as you can and build a new home or take Bill's advice and buy some Gold.  Another idea is to buy solid companies with good revenues and growth. 
Feb 2, 2013 1:32AM
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Ya know. I'm not in any way super smart about money, but I watch the stock market and the DOW-JONES and S&P 500 and such. I see Americans buying stocks and raising the markets and investing money again,. Then All I read is the Speculators and Hedge fund jerks shouting and jumping that the market is in a "false rally"? Really? a "false" rally? What jerks! They make money on selling "doom & Gloom" and when there is a little hope, they cry because the investors won't react to their will, to the way they want them to act, where they want the money to go to. Yes, talk about what's going to ruin our markets? Its the damn Speculators! They run the oil and gasoline markets, now they want to make money driving up wholesale prices on the selling of "doom & gloom" to that market!  Its all about market manipulation and selling that **** to a gullible news media.
Feb 2, 2013 1:31AM
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If, in fact the whole system implodes, lead and powder will probably be a better investment than gold. Gold is an investment, just like stocks, with little real value or utility when it comes to basic survival.
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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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