Investors, it's time to face the truth

Our markets have a recent history of missing important warnings. It's no different now as investors deny the obvious and the economy stumbles along.

By Bill_Fleckenstein May 11, 2012 2:41PM

I have been in the investment business for more than 30 years now, so I have grown accustomed to seeing lunacy, naiveté and just plain stupidity more often than one would think possible, given that investing is supposed to be about being smart.


It seems extraordinarily obvious to me that the economy is, in essence, broken because of the stock and housing bubbles we have experienced, and that the Federal Reserve is trapped. It also seems clear that at some point we will have a funding crisis (bond yields will leap and/or the dollar will tank) due to excessive government borrowing. (Click here for more on this funding crisis.)


However, that's not going to occur until certain attitudes shift, so I can see why this is taking some time to unfold. What I cannot understand is how folks don't recognize the fact that, since the economy has been unable to create jobs for three years now, it isn't going to start magically generating them now.


Nor do I understand why there is such denial about inflation. The everyday cost of living has been increasing steadily, and at an increasing rate. Just because house prices have collapsed and certain products that folks buy, especially those heavily laden with technology, are cheaper does not change the fact that we are experiencing inflation, and that the environment is really one of stagflation. It is obvious, as are the consequences.


Nevertheless, to a large degree in the investment community, Goldilocks rules.


Déjà eww


The mindset seemed familiar to me, and about a week ago I was thinking of past moments in time where the obvious was there for all to see but maddeningly few seemed to see it. What popped into my head was the spike in first payment defaults leading up to the housing crisis. When that started occurring, as early as August 2006, it spelled the end of the housing bubble (while at the same time proving it was bubble behavior, since people were missing their first payments).


I actually decided to search my subscription site,, for references to "first payment." Lo and behold, one of the headlines that popped up was "Goldilocksters see oil prices as bullish, up or down," which ran on Jan. 11, 2007 (that is, more than a year before Bear Stearns' liquidity problems came to light). Here are some key excerpts:


"I wanted to share an email from my insider friend in the subprime arena, whom I've quoted so liberally. It's sort of incongruous to read his thoughts on a day when subprime and other financials were going wild, but this (first payment defaults) is a problem that I guess won't matter until the day it matters -- and then boy is it going to matter.


"He wrote: 'We had a loan that was FPD (first-payment default) on a home in So Cal. It is a very nice high-end town that had a section of new homes built, but it was in the low end of town. Normal homes sold for $1 million in value. In this new seven-home development, (homes) sold for $1.3 million to $1.5 million each. The homes you had to drive through to get to this place were worth $400,000 to $500,000. The market topped out, and now most of the seven homes are vacant -- worth no more than $900,000. Thus, all the lenders are sitting on losses of $400,000 to $600,000. This is just one of many that are happening daily.'


"'The commentary I am getting from field and legit brokers is that fraud is an out-of-control locomotive. Stated-income loans are now finished for all the unemployed people around. We will quickly see cash-out loans curtailed. This vicious cycle has yet to play out. We are in the second inning of the unwinding.'"


Note that I received that email on a day when subprime and other financial stock prices were rallying big time, the market completely oblivious to what lay ahead.


Selling yesterday's news


Just as folks were late in figuring out the severity of the housing crisis, I think they still tend to be late in facing current realities. Case in point: For most of this week, it was as if markets in Europe and the U.S. had suddenly realized that the government in Greece was in disarray; that we were about to have a socialist running France; and that Spain, Portugal and Italy are each a teetering financial house of cards, even though none of that should be "news," especially to supposedly sophisticated market participants.


In the old days, markets tended to discount events (that is, they reflected expected negative outcomes through lower asset prices, or vice versa). If that were still the case, markets should have declined into last weekend's European elections as they anticipated the results, as well as other problems. But what we saw were markets that appeared not to have discounted the seemingly obvious news.


I have commented on this phenomenon a number of times over the past 10 years: that only after an important event happens (which was usually pretty obvious) does Mr. Market have a heart attack. I don't really know why that is, although I think a lot of it has to do with how the government's money printing has warped the markets by causing people to expect to be bailed out.


You can see a million trees and still not recognize the forest


Where our current path is taking us has been predictable for quite some time, and I think that continues to be the case. Unfortunately, we have elected officials who are completely incompetent, if not criminal, and the Fed is even worse. None of that is going to change until change is forced upon us (i.e., them) by a crisis. So while events seem to play out at a glacial pace, where we are headed couldn't be clearer.


On the air


I participated in a rather timely interview with Eric King this week. Those who are interested can listen to it here.

May 14, 2012 12:23PM

The situation looks bleak to me. I don't see how our current system of elected, corrupt leaders can fix it...ever.  The special interests control the show (whoever's special interests) and since they are "companies" rather than individuals, conscience is lacking in the decisions that are made.  Economic armegeddon is a possiblity. I am not sure what form that would take as it has not existed in my lifetime.

I just know that I plan to know a bit about gardening and learn to hunt for my own food.. before it happens.

May 14, 2012 12:16PM
The financial markets have been rising since 2009 due to international investing, speculation, and the media geared to produce the numbers. They are making big money off of investing in emerging economies such as Brazil, Mexico, China, India, and the Philippines while making money off of the US economy with consumer credit being the support legs. If it weren't for credit, the US would had tanked years ago. Notice that there aren't the jobs, but credit is flowing to keep supporting stagflation. It'll be some time before before the Dow loses a few thousand points. I was so sure it would keep tanking since I placed my bet using a bear ETF in July 2009 down to $700 from $8000 due to a 4 thousand point gain and reverse splits. It's common sense you should always go half and half with bear and bull ETF's like TZA and TNA so you have something to sell at a profit more times than not. It would really take a severe 4000 point loss to break even and then they probably wouldn't react 5X more powerful than the original shares before the 5X reverse split. I'd probably only still get $2000 back out of it in that case. Lesson learned to sell before a reverse split and to not put all your eggs in one basket.
May 14, 2012 12:16PM

We are in end game in this financial cycle.  30 years on this financial incarnation post Bretton Woods and that is all you can expect.  Fed creates money out of thin air and buys bonds on a country, insures it with hedges/derivatives that really do not exist other than to to do what it has done in Iceland and Greece and whoever is the next to fall.  Then the banks hold that money created by the Fed and loan 90% based on the fractional reserve system and creates more money when loaned out and then that fictional currency is paid back with interest on the sweat of labor and people think that is a economic system that can sustain beyond this level of Debt.  No chance.  It is coming to the crisis point now and it is a war between humans and banks to control the government and we are losing badly. 


The sad thing is we are the only ones with any real power and that is to take back control of our government and all things we created by the popular vote and demanding true transparency in all facets of government.  this game should have never been put in play but it is 4th and goal and time is running out on a game we are losing.


The power is in uniting of humans, all equal.  End to war, end to predatory business practice and focus on bettering the human species.


Read some James Rickards, he will explain it much better than anyone I have ever read, but he is not the only one trying to tell you what you won't believe.

May 14, 2012 12:13PM
Bill's comments are always super-negative.  Sometimes he can be right, but often times he is wrong.  The markets, while going through current turmoil, are not as bad as he likes to paint them.  If you're a long-term investor, chances are that if you're in the market now, you will be better off for it 10 years down the road.  I know buy and hold is out of favor right now, but it doesn't stay that way forever.  All things economic ebb and flow -- sometimes on their own terms. 
May 14, 2012 12:10PM
I just sold all our Wells Fargo stock. Their out!!
May 14, 2012 12:10PM
After the bills every month most Americans don't have any money to invest! Why trust anybody else to make invests for you anyway?  Tuck away an emergency food supply, water, whatever cash or silver coins you can save, guns, ammo and hope you never have to use it. If things get really bad you can't rely on the gov.  
May 14, 2012 12:09PM

There is nothing I hate worse than a Monday morning quarterback.

Was this so-called expert doling out Simon treasuries like there was no tomorrow back in the

Reagan days? 

Hey Bill, if you hate stagflation so much....try anarchy!

The build up to the housing bubble burst was generated by the view that the rapidly rising housing values provided an equity that could be tapped to over-spend for things that people had no business buying.  The outlook was "well if I can't make the payments I can always sell my house and cash in on the high (synthetic) value". This is not a political phenomena though democrats like Barney Frank were pushing "home ownership for everyone" including those who could not afford it.  You wonder now why more people are not concerned about the way the federal government is operating.  The same people that bought into the rising value housing bubble 4 to 8 years ago cannot see the risks in the federal government effectively doing the same thing now. Spending more than they have or take in without any long term consequences. 
May 14, 2012 12:04PM
The J.P. Morgan story is a bit of foreshadowing for what is about to be released in the banking world. JPM says an error in their derivative trading caused a 2 bil loss. What they don't talk about is their exposure to the Silver market. JPM shorted the Silver market at about $24.00 an ounce. They are leveraged up to 550 million ounces. If the market stays in the 26-30 range JPM will be totally bankrupt destroying the company and what's left of the economy, leading to QE-3. Jamie Dimon claims he wasn't involved in these trades which is nonsense, he is trying to save his job and stay out of jail.
May 14, 2012 12:02PM
Term limits on every seat in Congress can only help us. Get in (2 terms), get out, and get on with your life so we can get on with ours.
May 14, 2012 11:55AM

So Wall Street is now inventing financial instruments that they themselves don't understand or know how to use safely. The best of the best and the brightest of the brightest get burned by their own product.


I just want to jump right in and invest in the market, I'm so confident right now!

May 14, 2012 11:51AM
CRISIS 101... History if not learned WILL B repeated with a VENGENCE...
May 14, 2012 11:48AM

Why does everyone think Obama has anything to do with this?  He has no control of the money supply or it's value.  He, and all presidents, are just puppets dancing on a stage to draw your focus and absorb misplaced anger while the puppeteers reap the fruits of your indentured servitude. 


This farce is over, the music will stop again and so many more people are going to find them self without a chair to plop their blind self into and will be on the outside of the game angry and frustrated wondering where it all went wrong.


This is our last chance to wake up and take responsibility back but unfortunately humans have proven that fear and laziness will lead to more apathy and blindness in this abusrd worship. 

May 14, 2012 11:44AM
Well, you know the old saying "Success has many parents, but failure...has two daddies!" 
You are blathering idiots. How would being AGAINST gay marriage help the economy? The President is elected to deal with social as well as economic issues. Would you have him ignore everything BUT the economy. Get real! 
The point, as at least a few here were sharp enough to understand, is that the "gay marriage" issue is a totally manufactured ploy to distract from the Obama administrations utter economic failure.
May 14, 2012 11:44AM

I'm a wannabee Republican. I don't think the Republican Party is fiscally conservative anymore. President Bush started 2 wars without raising taxes to pay for it, yet I don't hear any criticism from the  so-called conserative party. It seems like the Republican strategists want us to get into a fiscal crisis so they can eliminate gov't ? I don't know, it doesn't make sense, but what scares me most is that I don't hear this criticisms from Republicans. Whernever I hear from regular Republicans, they are looking for the gov't to help them.


I'm old enough to remember Barry Goldwater. I don't understand the Repubs anymore.

May 14, 2012 11:43AM

This isn't about Rep or Dem.  This is about out of control spending on both sides.  Rep's want to spend it their way and in turn, Dem's want theirs.  What should be taking place is downsizing our bloated government before the term 'austerity' begins to be a word associated with American instead of Greece.

This article is right on the money.  Even though a horse with blinders on can't see the fire, it doesn't stand to reason he can't feel the heat.  Sew your money into the mattress people, it's certainly going to get worse.

May 14, 2012 11:42AM
Not a bad article. BUT, we are still in the credit default swap mess. The Fed and SEC refuses to put any constraints on the "Too Big to Fail" banks, that continue their greedy ways. You have Jamie Dimon taliking to the high rollers in Texas, stating that everything is fine and then the next day his bank posts a 2 billion dollar loss!!!! When Obama had the chance, he did nothing. Watch "Frontline< Wall Street, Money and Power" on PBS and you all might begin to understand this mess. We should VOTE them out and be very vocal to those we put in office. We, in my opinion, will never get out of this mess. It is too late. Circle your wagons and take care of your own! Get out of debt and live modestly.
May 14, 2012 11:42AM
by the way...I'd love to point you in the direction of the fire hydrant, but they turned the water off and it won't help.
May 14, 2012 11:41AM

Lets first remember, Obama did not put us in this mess we are in! 


I think we should all look in our garages at the beautiful imports we are driving.


While we crave for imports being for status, luxury or price etc. We are  helping 

create a deficit as well as unemployment, without ever considering that our jobs will

be next (Until it hits us)


Lets stop blaming government or others, and do our share in creating the America

we want!!!

May 14, 2012 11:39AM

Points well taken. We are in a Big Mess....and Obama does not have a clue on how to fix anything.  All he does, is want to raise taxes on everyone....We need someone in the Presidency who knows how to run a business.  Governement regualtions are killing Jobs...

Obama's love for the Right, is killing good jobs, like the Canadian Pipeline !!  Obama, only wants jobs for school teachers and cops....Why ?? Keep the Union Vote....He never cares

about average hardworking Americans....only His Base !!  It is time for a President, who knows what he is doing....and will stand up for America.  That is Not Obama...

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This column is a synopsis of Bill Fleckenstein's daily column on his website,, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.



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