Waiting for the recognition

As the Dow reaches a meaningless milestone that's divorced from fundamental economic strength, the Fed's money-printing continues to force investors into risk assets.

By MSN Money Partner Mar 8, 2013 2:42PM
Money Puzzle © Glowimages, Getty Images
This week was a perfect example of the old investment saying, "The market writes the news." By that, I mean that market action oftentimes creates opinions as to why said action occurred, when in fact there is no specific reason or catalyst at all.

 

Thus, there were plenty of stories as to why the market has behaved as it has, but there really was no proximate cause for why it reached record highs this week. 

 

The Dow Jones Industrial Average ($INDU) hitting a new high has created excitement and a certain amount of pressure on investors to join the party, which has created a bit of a feeding frenzy.

 

It is difficult for people to accept that markets do inexplicable things all the time, and that it is often just the collective twitching of hundreds of millions of participants.

 

However, we do know the real reason markets are levitating, and that is because the world's central bankers are printing money in a fashion never before seen or even contemplated. When all of that money meets a little bit of positive psychology, markets can go anywhere.


They just need a little time to unwind 

Of course, when you have stocks that have been buoyed by easy money and excited crowd behavior, they can also get smashed rather easily at some point, particularly when you have computers operating as they do, although none of that means the market will decline immediately, let alone when those of us who believe it is dangerous think it ought to. (The same was true during the housing bubble.)

 

This is another reason why I have continued to say over the past four years that it is risky to short stocks (and why owning gold is a preferable antidote to central bank policies), as being short would have been very, very costly over that time.

 

As it stands, we find ourselves in another period where logic and fundamentals mean little, as price action rules the day. The only intelligent course of action for those who are long stocks generically is to ease out of them as they see fit, and eventually there will be signs to suggest it is time to get short once again.

 

But until such signals emerge, it is definitely not yet that time. (Remember, when short selling, it is always better to be late to the party, i.e., let the market make a top and roll over, than to try to guess when that top will be reached.)

 

Gold price not so malleable

As for my preferred asset, gold, it has fared poorly for some time now, but that weakness may be ending. Jim Bianco of Bianco Research noted this week that the SPDR Gold Shares (GLD) exchange-traded fund has liquidated about 3 million ounces since the Feb. 20 lows but that the price of gold itself has not gone lower, which he views as a sign of strength, since all that selling was absorbed without any more price damage.

 

I had not thought about it that way, but I think it makes sense, as well as possibly indicating that physical buyers are now quite active and that the recent lows may be as low as gold is liable to go. That is just speculation, but we will have a better idea if that thesis is correct when we see how the market responds to Friday's employment report (unfortunately, after this column has been put to bed).

 

Set phasers to 'Are we there yet?'

Meanwhile, on the subject of the consequences of money printing, i.e., inflation, my good friend Fred Hickey's newsletter, The High-Tech Strategist, was emailed out on Tuesday and I encourage everyone to read it. For those who don't subscribe (shame on you), Fred highlighted two important points. First, he explained how he deals with periods when markets don't behave as you expect and your investments go against you (which I think would be useful for readers to understand in terms of managing their own psychology).

 

Second, he discussed Murray Rothbard's book on inflation, "The Mystery of Banking." The book describes the three phases of inflation: the beginning, where folks are worried about deflation and believe that rising prices are temporary; the middle or recognition phase, where people see inflation as a problem; and the third phase, when people begin to fear the tremendous financial problems that inflation creates.


Fred made the point that we are not quite to the second phase. We can't really know in advance when the recognition phase will occur, but it will. I had not thought about inflation in just that way before, as I had viewed the current environment as being in the "sweet spot," where money printing had pushed asset prices higher and made folks feel better while they ignored inflation.

 

Whether you want to call it the sweet spot or the interlude between phases one and two, that is where we are. Thus, one thing we can be certain of is that the recognition of the problem is still ahead of us, and when it arrives the metals complex will go wild.


At the time of publication, Bill Fleckenstein did not own or control shares of any company mentioned in this column. He was long gold.

117Comments
Mar 9, 2013 1:18AM
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I've been fortunate to be involved with my 401k and retirement for the last 30 yrs. I've been investing in the stock market for the last 25. I'm just a lowly flight attendant, but have done quite well, by keeping my eye on the ball, and comparing funds, almost on a daily basis.  I didn't lose any money in 2008-2009, as I moved all of my money to the safest part of Vangard.  As of last week, I'm totally debt free, and completely happy and still investing in stocks, which, I started up again, in the latter part of 2009. I don't use a credit card for anything, I always pay cash.  Today, I applied for a long term care policy, which is costly, but might help in the future, if I'm ever disabled in any way. The stock market is a crap shoot, but there are certain trends that are worth following once in a while.  I don't own any gold and I'm not interested in owning any metals. I'm not rich, but I'm very comfortable, and I've learned not to spend beyond my means.
Mar 9, 2013 9:29AM
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The stock market is like a giant money vacuum cleaner.It sucks up as much as it can,and then the insiders empty the bag into their pockets,and install another bag to fill.
 Pure and simple.
 If you can ride the wave up and get out before they empty the bag,lucky you.
If not,you get screwed.
It didn't use to be this way,but once all the insiders figured how to manipulate the market and bring all their political buddies along for the free ride,it has been nothing more than a money making machine for the ones with inside information,or just plain lucky investors.
So much for saving money or even getting a little return on hard earned income.
You put it in the bank and they give you nothing.
You put it in the stock market and you risk everything.
 I guess I'll just keep putting it into cans and converting it to gold. 
Worst case scenario,I can melt the gold into bullets.


 
Mar 9, 2013 8:49AM
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The whole market ramp we are experiencing is a charade produced by Fed money printing. If the Fed were to withdraw the funny money it has injected into the economy (sorry, I mean financial markets) in the last five years, the stock and bond markets would instantly fall below where they were when the Fed started printing.

 

What I find interesting is how the Fed once referred to these stimulus measures (aka wealth transfer from the poor and middle class to the rich) as temporary. Really? Five years and counting is a long time for temporary. That was obviously part of the big lie too, particularly since the wealthy soldiers they must implement their actions through, i.e., the too-big-to-fail banks and financial institutions, see their horizon as 30 days, the long term as 90 days, and a year as infinity.

 

We really should just paste a huge “Failure” label on the front door of the Fed and move on as best we can without them. They are the worst risk managers of the millennium can’t possibly make it any worse than they have for the average citizen.

Mar 9, 2013 1:16PM
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I think the reason stocks are climbing is because there is nothing else to invest in.. bond yields are crap, CDs and savings accounts.. please..  Metals, commodites likely too complicated for most.. so whats left?? Stocks.. only game in town for the average guy.
Mar 8, 2013 11:27PM
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While I think everybody’s portfolio should be 3% in gold, there are some things I don’t understand about it. All the refined gold in the world would fit in 2 Olympic sized swimming pools. It has very little industrial use and is not even used to fill teeth anymore. So what happens when the one tenth of one percent end up owning all the gold in world? Do we all become indentured servants? Would democracy die? The other problem- an ounce of gold only costs $800 to mine and refine into pure gold. If the price gets too high, mining and smelting companies will increase production and drive the price lower. I think pure water and agricultural land and a house and art-work and well run companies making things we need and that pay dividends are better investments.

Mar 9, 2013 3:38PM
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Hard not to go up when the administration is putting in 2 trillion a year we don't have through deficit spending and money printing. When all that stops and the artificially held low rates on our debt payments go back up to normal we are gonna get smoked. I fear much worse than 2008. Just do the math, our soon to be 20 trillion in debt at a 30 year average of almost 5% debt interest is about a trillion a year in interest payments alone. How is that gonna work for you?
Mar 9, 2013 7:39AM
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The price of gold is double of the 2007 price. The dow and such would have to double to be of same value as 07. Beware of propaganda from mainstream media that forms your opinion and government agency's that tell you what's good inflation? Deflation is bad? Really? The bubbles in tech housing and now bond's where did they go bust. Watch for the dollar collapse coming soon.
Mar 9, 2013 12:06PM
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Any market analyst could tell you the big dark secret. Lately we have seen the term 'mom and pop" investors more frequently in economic news, mostly pertaining to the ideas that these investors find the markets safe and profitable. These droves of new investors are being sold lies by their banks. They're told to invest and they do, what their not being told is that with every market there's and ebb and flow. These high tides, have investors down on the beach sunning themselves in the sand and dipping their toes in the waters for the first time. With every high tide comes the following receding low. We're at that extreme high now. The market surges are nothing more than a tactic of squeezing every last dollar out of those mom and pop investors. As the markets stabilize over the next few weeks, only the banks will come out with "heads" above the waters. Everyone one else will be sucked away. Increase the precious metals portion of your portfolios and ride this one out. Dudes! 
Mar 9, 2013 1:41PM
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If you were being propped up and supported with $85-Billion dollars per month you would go down?
Mar 9, 2013 1:44PM
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The elites little game of crony capitalism completely failed in 2008 and they lost the game. So they rewrote the rules of the game so they can never lose and then announced best two out of three. As part of the new rules, the government is obviously involved in an asset price control scheme. They just can't stand to see asset prices ever come down, yet prices come down for a good reason. Because that's what the assets are really worth! Circumventing this completely distorts the economy and we now live with the consequences in some kind of a mad max bizzaro luny world of another financial dimension.

Mar 10, 2013 11:13PM
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I worked for a major market trader for many years.  If anyone in the investing community thinks the equity markets are not controlled by the computers, is sleeping.  The small retail investor doesn't have a chance today.  As many have said, the pros and computers are now dragging in the "dumb money" small investors, then they will find a reason to sell, and get out before the dumb money does.  This is a pattern that's been going on for years now....but the "dumb money" folks have not figured it out.  Wall Street is totally corrupt.


Mar 8, 2013 9:04PM
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Hang in there vb, The miners are making money. If anything add to those positions. Oddly enough the biggest obstacle faced by mining interests right now is inflation. That being said they're still very much in the black overall. It's always good to buy beaten down sectors, and short high flyers like Apple. Which isn't quite so high as it was.

As far as inflation goes people have been seeing it for sometime already. A poll question during last years election asked , "What is your biggest concern about the economy?". By a two to one margin the number one answer, "Inflation".

The FED has primed the pump with huge or should I say HUGE increase in the monetary base. Now a one two punch of better economic data and inflation fears may drive inflation's other driving factor, the velocity of money up. Once that happens a spiral effect can occur. You'll be very glad to own hard asset producing companies, and the luster on any hard asset will be all the brighter.

Mar 9, 2013 3:49PM
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The situation with the stock market and the overall health of the economy and disparity between the rich and the poor mirrors the situation in 1929.  The American economy relies on the consumer to keep it going and the consumer is not in a position to do it.  The stock market reflects wealth without a real cash basis, meaning that the only thing keeping the value of stocks is the belief that it will still go higher.

 

If there is even a small ripple in the investor's confidence, the market could easily crash.  The fundamentals are not right to support the current rise in the market.  I hope that a correction will happen that does not cause the market to have a major crash as we had in 1929.  The stock market crash did not cause the depression but it helped reduce the confidence in the capital market and caused credit to shrink by 90%.  With no credit, the economy became a cash or barter economy and the economy could not support large and active businesses anymore. 

Mar 8, 2013 7:03PM
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I got in the miners early.  I just keep telling myself " you don't lose money unless you sell".  So I wait and hope that you are steering me in the right direction.  Only time will tell.  I just hope the dividends are not coming out of my original investment.  

The stock market will crash.  Why?  More people are retiring and people are going to put less into their 401K plan to offset taxes and less hours worked.  Not to mention people are not stupid.  They see a bubble and they won't get burned again!
Mar 9, 2013 2:27PM
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the market is like a rollercoaster ----- up up up it goes to hit the peak THEN

watch it come down the other side with NO safeguards and no more tracks.

 

 

Mar 9, 2013 5:25AM
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GOLD. now theres an interesting phenom. Who is buying all this s___. And what's with all these sleaze bags on T.V. buying all of grannies jewlry. And the hole in the wall shops in strip malls BUYING GOLD, GOLD,GOLD. Anyone out there know whats going on ???
Mar 9, 2013 5:37AM
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I was looking back through Bill's articles and in his August 26th 2011 article, he says quote, "I would note that the gold market was due for a correction at some point, and it is now getting it. I say, let's get it over with to clear out the hot money. Once the correction has passed, I think gold-related stocks may begin real outperformance, as people's post-correction expectations of future gold prices might be far higher than they have been." 

 

Since his article, GLD has traded pretty much sideways and now exhibits the "cross of death."  Did we get all the hot money out of gold at $1482 per ounce? While I think Bill will likely be right in the long-run, I do think gold is very overspeculated.  I equated this when I saw 'Buy Gold' stores popping up on every corner in SoCal.  I believe the shift of assets is out gold and bonds and back into stocks. Why be the lone fish trying to swim upstream?  I tried to do that shorting the market in 2010-11 not accounting for all the political money in the market.  TBT and DUST are breaking out, and we will know very soon (within a week or two) gold's fate for the short-term.  If gold breaks $1480 per ounce, look out below.

Mar 9, 2013 12:08AM
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Hey Bill.....Your picture puzzle of Hamilton doesn't line up right when you put the two largest pieces together. What the heck?? i can't sit here all day reading about the B.S. overinflated market while doing an unsolveable puzzle! come on, fix it, cause i know Obama can't.
Mar 9, 2013 2:04PM
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Some interesting comments about gold. Keep in mind gold cannot be replicated by man therefore it would stand to reason it's harder to devalue (there's only so much of it in the world) All the refined gold in the world would fit into 2 Olympic sized swimming pool's, how many pool's would it take to fill all the paper money the feds are  printing on a daily basis?  Screw bond's  screw stocks screw the dollar and the Euro. Gold will always be gold.
Mar 9, 2013 1:04PM
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It is not a matter of "if" the market will crash....it is simply a matter of "when".  The market still has quite a bit of upside due to the devaluation of the dollar.  I look for a high of close to 20,000 before we see the crash...but, that's just me.  Play at your own risk....
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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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