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.

148Comments
Feb 8, 2013 10:25AM
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I think Bill is being kind to American investors when he says they must have amnesia about the history of stock prices since 2000.  I would say stone-dumb since a triple top has formed that only a Obama appointee would miss!  Have personally been buying gold since 1997 and silver in size since 2003, and I will be able to retire before age 90 and without having to wear a Walmart Greeter's apron at any time.  THE TURN IN BOND YIELDS IS THE KEY.  Remember from Econ 101 that bond yields are determined by inflation expectations, default expectations, overall credit-worthiness, and maturity to repayment of principal.  These 4 horseman are going to ride into town and behead most of the populace before this Monetary Inflation/Printing Thing is over.  2013 ends in a very unlucky number, and I think the Bernanke-Obama Depression unfolds for all the half-asleep Sheeple to behold this year.  Remember Barack ........ YOU OWN THE AMERICAN ECONOMY NOW!
Feb 5, 2013 2:00AM
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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………

 

Sheesh……………….

Feb 4, 2013 5:56PM
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Bill has been recommending gold and staying out of the makets since 2005. 
Feb 4, 2013 2:46PM
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Is Bill the most pessimistic person alive?  I have yet to read anything from him that is positive.

Feb 4, 2013 2:22PM
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The markets strong start to 2013 tells us that 2013 isn't going to be as bad as the end of 2012 said it would be.  We're still stuck with the reality that we can't have 3-4% growth while reducing are deficits and resulting national debt. There'll be lots of arguments and a few agreements about spending cuts and tax increases resulting in 2% growth and moderate unemployment which Wall Streeters will complain about all the way to the bank.
Feb 4, 2013 1:44PM
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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.

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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.

 

 

Feb 4, 2013 11:31AM
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Bill

 

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..

 

 

Feb 4, 2013 11:05AM
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Around 1965 my dad was talking about equities and the stock market just about exactly as Mr. Fleckenstein has been writing for several years. I said to him: Dad, I'm sure you're right; but could you please give me a timetable because in the meanwhile I'm missing the biggest bull market in the history of the world. I've been reading this from you for years, Mr Fleckenstein; a timetable, PLEASE! Exactly WHEN should I dump all of my equities? 
Feb 4, 2013 10:49AM
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Fleck has been a contrarian since the market started its recovery from 2009.

Feb 4, 2013 10:46AM
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It's very refreshing to see some truth for a change!  The Wall Street moguls buy and sell while we ordinary citizens are faced with inflation which drains our bank accounts.  We all need gas and food but the prices are rising in a very rapid manner.  Also, if you do save, cash doesn't seem to matter since you can hardly find a savings bank that will pay over 1%.  Finally, there are at least 19 million Americans unemployed! None of those FACTS point to a recovering economy.
Feb 4, 2013 9:44AM
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You know ... You don't need to be a math wiz or a stock wiz to stop and think... If I have two credit cards that are maximized out.... the way to get out of the problem is to get two more credit cards and start by just paying the interest on the first two credit cards with these two new credit cards and use the rest on them to spend even more than I can afford. It is going to catch up to us all at some point. If you take a look at the companies of these stocks ... the way they have produced profits are by removing jobs. Many of these stocks are not producing nearly the profit that they did before the crash yet their value in the stock market has returned to the old levels. I have parents that give a great reason for this... They are retired and before the crash they made enough money on interest form their CD'S that along with their retirement income ended up at the end of the year with about $2000.00 more than they started out with. With the interest rates so low they have seen that for the last couple years when they had to renew their CD'S at these low interest rates they were ending the year with less than they started with. I am sure that many have the same problem so when they see money being made at alot higher percentage in the stock market many are tempted to invest where they can make more money. Problem is the stocks are very heavily over inflated to what they make profit wise so it will adjust and the ones I feel sorry for are the foolish retired who were just attempting to create enough income to maintain themselves. I am not talking about the millionaire invetsors who are just looking to make more , I am talking about common everyday people who are just trying to make enough to support themselves in what used to be called their golden years. Last year in October our government purchased 700 MILLION rounds of .40 caliber hollowpoint ammunition for the social security administration division ? Thats two bullets for every American in this country for an office that does not even carry money in the offices and the government said it was an error but the order was not cancelled. Anyone want to try to explain ???   Wake up everyone ....
Feb 4, 2013 8:57AM
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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?”  

Feb 4, 2013 8:34AM
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Bill, enjoy your articles. Is there anyway you could post an updated photo of yourself? This photo dates you back to the 70's.
Feb 4, 2013 7:48AM
Feb 4, 2013 4:29AM
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What to do, what to do with all this fake money I made this year. The only people who got faked out were those buying gold last year. To bad, so sad : (
Feb 4, 2013 2:59AM
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Hey,, this is Bible prophecy 101 in "Revelations" it speaks of one world Gov. one world religion ,one world monetary system. I figure the only way out of such massive world wide debt is to cancel it all. Start from scratch with the same currency world wide. The word of GOD is true ,and happening right before our eyes. Are you ready to meet Jesus?? He's coming back soon. No amount of money or gold can save you. only CHRIST.......USMC
Feb 4, 2013 2:42AM
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please explain the county is beyond bankrupt ,trillions on the hole for many yrs. to come. Fools for leaders and the stocks are going through the roof?? Something is very wrong here. When this comes down we will have a situation that will make the crash of 29 look like a sunday school picnic!! USMC
Feb 4, 2013 2:36AM
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The key to the stock market will be the bond market, once rates begin to rise the bond market will collapse taking everything and everyone with it. This could happen as soon as April of this year. I sure hope I am wrong because what will be left will be default and  ultra austerity measures.
Feb 4, 2013 2:08AM
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Whether it's sports or the stock market, the so called experts cannot and never will be able to predict what happens next. What I don't understand is why the so called market players allow politics, politicians and the news media to control the market. Deficit talks hide your money, Bernanke farts hide your money, debt ceiling hide your money. What does any of this have to do with business or the market? If you want to buy stock in a good company then buy it. I guess if your a day trader it's a little easier to know when to get in and out. But in doing so you inadvertently let them call the shots. Am I missing something here?
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ABOUT BILL FLECKENSTEIN

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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