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.
Fargo144, here is my plan:
Round up an deport ALL illegals, no matter what country they snuck in from, mexico, china, russia etc...
Illegals have stolen millions of contructions jobs for one. Their anchor babies cost states billions of dollars in medical, education and incarceration. California is 16 Bilion in the red.
Stop sending financial aid to ALL foreign countries for a year. Cut them off 100%.
Crack down on people defrauding entitlement programs.
Pull US military out of most foreign countries.
Dude! Show us how SMART you are and propose something that you actually BELIEVE will work!!!!! Your use of the words "criminal" connected to elected officials without your own substantive 'wisdom' borders on moronic ineptitude.
SBart23, Why does the government get teh blame for Wall Street? Well, because the government aka the Federal Reserve Created the housing colapse. Cheap money flooded GREEDY individuals to buy too much house "BEFORE PRICES ROSE MORE", and then whe the "Value" went up they GREEDILY took out Home Equity Lans and then another. Cheap money created by the governent. SEcondly, the vast majority of those EVIL Subprime loans where generated by the GOVERNMENT EX-FACTO Banks Freddie and FAnnie. HMM?? ANd the Democrats Barney FRank etal all said there was nothign wrong with these no money down government loans. A Private bank either followed teh GOVERNEMTN's Lead or they made no loas at all.
So the real question is why does Wall Street get teh blame for Governemnt irresponsibility? And Why do banks get teh blame for greedy individuals buying more homes then they can afford. I mean really, if PEOPLE, if INDIVIDUALs, were not walking away from mortagaes which 90% can afford to make payments on (just don't WANT to pay for an undeerwater mortage) there never would have been a financial crisis. Greed, my friend. Look in the mirror. Alot of people were trying to make money on their purchase of a home.
The economy is heading for a cliff ... "and it's a long way down!" The basis of this next election is the economy, unemployment, the housing mess and the deficit. Who really cares if gays can marry .. if you can't afford to live!!
In a random poll (THIS IS FACT) .... 61% of the people thought Romney was better equipped to work out the economic problems whereas only 33% thought Obama!! Obama is going down ... just like Jimmy Carter went down after one term.
I don't know how you get paid for;
1) Your gloom and doom prophecies
2) Re-hashing previous articles
3) Stating the obvioius
4) Promoting your own website
5) Not providing any investment advice
The Idiot that Read Your Article
I've followed this guy and he has not gotten it right yet...All his columns has this Armageddon ring and usually the opposite comes true. Even if there is inflation it will not become a factor until wages begin to increase...and that's not happening. By the time wages do increase; interest rates will have risen and all the other counter balances will come into play and the cycle begins again.
hey buddy WDF are selling what you are talking about is OLDDDD new alreayd , got something new about whats going on in this country ????? i just wasted 10 minutes reading your **** .
Aw who cares, there is no debt crisis, Right? Keep printing money, the country is broke but as long as we keep spending we will be ok, RIGHT? That's not how the Colonel and school teacher taught me but Obama is "like, really smarter than the rest of us", right?
As long as politicians look at the tax income of this country as their own personal campaign fund to spend on their special interest to maintain their voting base we are PURE-D EFFED (that means really screwed if I am too obscure and southern).
Don't forget, the forefathers saw this coming, that is why there is a second ammendment. Awww, that will never happen says you, well why do you think there is a second ammendment, oh brilliant one? So a government out of control can be removed by an armed populace. There is only so far the conservative non-union working middle class will be pushed, and that point will arrive about the time the debt bomb goes off. So spend away you ego-maniac power mad fools, as long as you support your one key issue you will get that vote, pro choice, pro life, gay, straight, beat your drum on some stupid idealism instead of what is good for the country. We see you, and your time is coming. Too bad the country will pay the price for your lust for power.
So where should we invest our money? Europe is a joke. China is run by communists. The USA is still the global leader and world financial powerhouse.
Your article is like blowing a fart in the wind. Slow news day?
My 401k value also has mostly recovered. There was a home that I lost during that time as well, however. The personal wealth and equity that evaporated there was more than I will be able to recover in the remaining work years that I have. As I said, I cannot personally withstand another "meltdown" and still be able to accumulate enough to survive in my older, non-working years. I have perhaps 10 years of realistic work time left?
Since Social Security is not going to be able to provide the income that my annual statement says they were going to be able to provide, I must find a way to accumulate enough on my own to make it happen, in 10 years or less...
I am just trying to be realistic, doesn't mean that I spend every waking minute worrying about it. It just feels foolhardy to proceed as if things will be as they were. I don't personally believe that is possible.
Is that what they did? I have tried to find out what kind of investment that they had made that put them at that type of risk. Betting on silver going down that much when you controlled that amount seems pretty stupid.
They replayed what Porsche did with VW stock durring the down turn.
Nothing beats having a hard asset instead of paper. You can't eat either but at least you can look at the silver coins once in awhile.
Thanks Bill - you hit the nail on the head; "elected officials who are completely incompetent". The current cancer running rampant is: an economically ignorant, lazy electorate, foolish belief, that the Propaganda of the Radical Liberal Socialist Agenda will actually save their woes with entitlement ponzie schemes which have bankrupted European Countries as well as our own. No where was this more clear when an Obamination was elected to the White House. Look where the Deficit Spending and National Debt have gone since then - on the path to armageddon. We MUST have another Tea Party in November. We MUST remove any & all politicians who have been in office for 4 years or more - and this applies to the State & Local level as well. They have doubled our property taxes in only 10 years. Too many people work as administrators for the School System. Too many people work for the Government. Puerto Rico is on the Right path - why not us? They are indeed smarter than us! There are none so blind, as those, who will not see.
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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.
[BRIEFING.COM] The major averages have continued pushing to fresh lows as sellers remain in control. Seven of ten sectors now trade in the red while financials, health care, and consumer staples remain in positive territory.
The high-yielding utilities sector faced the brunt of the selling pressure as Treasury yields climbed past 2.00% for the first time since the middle of March.
Also of note, the Dow Jones Transportation Average trades with a loss of 0.4% as 12 of 20 components ... More
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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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