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.
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.
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, www.fleckensteincapital.com, 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.
For years I've read Bill Fleckenstein's "the sky is falling" articles, ignored them, and made money in the market. He might be right this time, because as they say, even a broken watch is right two time a day......,
Change is not going to occur until the populace at large accepts that it has to and that it will not be painless. Good luck with that. We're seeing this right now in Europe. The leaders there know things cannot continue but any move toward fiscal responsibility invokes protests and rioting. People are people (and politicians are politicians) everywhere so I would plan on something similar playing out in the US.
To SSG K:
I opine the markets oughta
Keep the sheepies safe from slaughter
Else they'll have mutton overruns
And no wool to warm their buns.
I am reading alot of denial and confusion down the page. Also the blame game appears to have started here because the author didnt have answers you all seek.
Its an easy answer but many parts. Build America. support america. I was reading an article about how it was so smart to go and retire in another country because of a bit of cheaper products. They did skirt just exactly what was acceptable in medical technology not leaning towards some countries that were 50 years behind us in technology. Still did you know that many people will never consider their health and they will move right into those countries collecting american money and spending it like it was water there.
As hard as it is to understand for some it is really not difficult when you have huge blogs on this idealism for both retired and unretired.
In the end the property here will be king.
Also I would address another idealism. I am well over 50 and a DIY guy. I go by the home repair places alot. I have many projects going on. Just an observation that probably occurs in more than one person in line at the checkout. I am standing behind this guy who is probably at least three years younger than me. He is a bit shaped like a bell and you can see his hands have never done manual labor but I am thinking what the heck maybe the six gallons of paint he is buying will put him back in shape because he will most likely die right after his retirement if he doesnt start now. The wait was definitley gained long term sitting on his butt lol.
Anyway I make a freindly comment with positive tones about him getting in there and getting it done. He never turned around and looked at me until he was leaving but his comment was that of such a spoiled individual I was amused. He first boasted on how he had graduated from that kind of work many years ago like it was embarrassing. Then he stated he was about to retire presumably before the legal age because he was not much over 50 if he was even 50. I let him off the hook on the graduating from that kind of work many years back by not commenting that it was obvious from his appearance. He did finally look around at me on the way out of the store. It was also obvious to me that he had a county government job or something of this nature working in an office. He is a victim but also an example of what is wrong here to some degree. I do salute him for being involved in keeping his property up by hiring someone to paint it however I am sorry for him that he wont be spending his retirement after he passes for assuming that a human was meant to do nothing for physical health "laziness". He probably thinks his appearance is appealing. Denial like ignorance apparently is bliss.
Maybe he was a stock broker :)
end my saturday rant. My dad used to say useless as tits on a bull . My dad had a masters degree and successfully carried on two different careers one of which was working at NASA in the 60's. He did this kind of embarrassing work too.
My money is in very few, and then they will act surprised when the deck of cards collapses. I'm just glad I will be watching from the sidelines instead of trapped underneath ;).
Brokers must have patience here.
As they well know, it takes a year
To grow wool that's long enough
Money is an illusion .. and that some how it can be accumulated and concentrated into the hands of a few, with broad public benefit, is the lunacy, naivete and just plain stupidity that is served up to the American people. Government's can print money until the forest runs out of trees, but if the money isn't circulating in the general economy, it has little value.
It is the free flow of goods and services that reach the maximum number of citizens, across income levels, derived from work and exchange of items of value that is the true measure of a Nation's wealth. Barter and Trade have been around longer than Money .. and in some corners of America it seems to be working just fine for the basics.
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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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Our own funding crisis could very well be precipitated by trouble elsewhere. And there are signs that Japan's bond market may be rejecting the nation's monetary policy.
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