Somber warnings from proven prophets

The most recent Barron's Roundtable shows that while the market is celebrating, smart money folks who've been right about past busts see the next breakdown dead ahead.

By Bill_Fleckenstein Feb 8, 2013 3:01PM

Gold Bars © Stockbyte/SuperStockThe world's equity markets continued their money-printing-inspired party over the last few days and, in conjunction, a certain amount of recklessness continues to build. However, there is reason to suspect, courtesy of Barron's, that the rally may be about to end.


 (I normally don't buy Barron's, but I did this week because I wanted to read the Roundtable comments from Fred Hickey, publisher of The High-Tech Strategist, and Bill Gross, founder and co-chief investment officer of Pimco).


On the cover of the Feb. 4 issue, the headline read, "Stock alert! Get ready for a record on the Dow," followed by a lead paragraph that modestly reminded us, "We told you so. In October, we predicted the Dow would pass its 14,165 record by early this year. Now we are just 1% short. Expect a breakthrough soon."


I don't recall ever seeing such brazen end-zone dancing by a major financial publication, and if history is any guide, this means the stock market rally is essentially over.


Of course, I would never put any money on such a glib observation, but over the years I have found end-zone dancing -- which is essentially the same as hate mail -- to have an amazing ability to signal turning points. The people who do it are so full of themselves, and so certain they are correct, that they throw caution to the wind, which is what marks the tops of rallies.


A (Gross) margin of safety

Turning to the contents of the Roundtable, I thought it was interesting that Bill Gross's first pick was gold in the form of the SPDR Gold Trust (GLD) exchange-traded fund. He, too, believes that the path we are on leads to inflation (not deflation), which will discipline the bond market, which will in turn ultimately discipline the Federal Reserve. In short, he sees a variation of what I refer to as the "funding crisis" in our future, in which the government has a hard time selling bonds to finance debt, though he does not think it will happen in 2013.


As for money printing, Gross said, " . . . it will continue until inflation exceeds the upper end of the central banks' target of 2.5% or, by some miracle, we get real economic growth." Another Roundtable regular, Felix Zulauf, summed it up later in the article, ". . . the Ponzi scheme continues until inflation becomes a problem," to which Gross responded, "That's right. Ultimately, that is what will cause investors at the margin to desert bonds."


That makes three of the smartest panelists on the Barron's Roundtable -- i.e., Gross, Zulauf, and my good friend Fred Hickey -- who are all bullish on gold.


In the long run, I think the slow-to-evolve recognition that (1) the "deflationary accident" fear trade has ended and (2) we are on our way to inflation (and ultimately a funding crisis) is going to cause more and more people to own gold. And when gold does finally move, at long last, it is liable to be wild. There will be an intense scramble (thanks to price action) as people finally "understand" the arguments and rush to join the party.


But in the short run, none of the arguments in favor seem to have mattered to the gold market.


Just the tipping point of the iceberg

It is not just Gross who sees a funding crisis in our future. In a recent interview, Kyle Bass, the founder of Hayman Capital, revealed that he sees the situation the same way, as does Seth Klarman, the founder of the Baupost Group.


Out of respect for Baupost's intellectual property, I don't want to quote too liberally from its content. But there was one description from the group's year-end letter of the problem regarding the reckless, out-of-control spending in America, and the Fed's funding of nearly 100% of the federal deficit with the money it prints up that I feel I must share:


"It is dangerous to need constant access to the capital markets for such staggering amounts of financing. An unknowable tipping point looms over the horizon. When we reach it, outsiders and U.S. citizens alike will become suspicious of our creditworthiness, causing interest rates to rise and the dollar to plummet. Holders of greenbacks will rush to spend their money while it still has some value, causing the prices of goods and stores of value (like gold) to surge. No one knows precisely how much debt is too much, or at what moment the tipping point will be reached. It's like driving a car with a faulty navigation system along a steep mountain road at night while wearing a blindfold. Sooner or later, you're going to plummet over the edge."


Gold keeps obeying gravity and defying logic

As for the current psychology, it is certainly very pro-stocks and anti-metal, and nothing illuminated that better than a week ago, when Fed head James Bullard (who runs the Federal Reserve Bank of St. Louis) said that if unemployment got to the low 7% range, the Fed could curtail its bond-buying quantitative-easing program a bit early, albeit by a measly $10 billion.


The stock market looked at that comment, laughed and then soared, while gold sold off like a frightened sissy.


At some point, the gold market won't fear the Fed; it, too, will laugh in its face because the Fed is such a joke. When that happens, it will also signal that the bond market is in real trouble. Yet as long as the metals fear the Fed and act as though it has credibility, markets can't really get out of hand. It is when the Fed "loses" the bond market, which I suspect we will be able to tell by the action in gold, that financial markets will get really dicey.


The bond market is radically mispriced because it has effectively been a bubble, though without the euphoria and behavior-warping strategies that are typically part of bubbles. (Arguably, given the fact that the bond markets have allowed governments to live beyond their means, the economy has been warped.)


In any case, though there is plenty of short-term obliviousness and denial, there does seem to be a growing recognition of where we are headed, at least among folks who have incredibly great track records and haven't been wrong about our prior bubbles -- unlike most of the people who are currently wildly bullish about stocks.


At the time of publication, Bill Fleckenstein owned gold.


Feb 8, 2013 11:08PM

You said it, Bill


The ONLY way this is going to end is with massive inflation, thanks to the FED.


I don't know exactly when, but it looks like hard money is going to come back into style. It's going to be a long, hard road and many people are going to get hurt becuase they've believed the government's lies for the last 100 years, since the FED [illegally] went into business.


I hope I live to see the day



Feb 8, 2013 10:03PM
Feb 9, 2013 8:00AM
Inflation is alive and well, it is before us and no one, not one admits it is a problem, in fact it is much much higher than official figures suggest.  In Mich. Gov. Snyder has just proposed the largest fee and tax increases ever on a commodity that drives the economy: automobiles and fuel.  Why are such increases needed?  Inflation has arrived in the form of higher labor and material costs to repair or maintain the basic infrastructure.  All levels of government are suffering under the weight of the "hidden tax", the ever present inflation.  Ask any business owner about operating costs, you will find all indicate such costs are much higher and margins are thinner.  Contrary to what policy makers want us to believe, watering the currency down is cast in history.  Printing money fosters hyperinflation, when will it end??  We will first have high inflation, then deflation as the economy grinds to a near halt.  Our standard of living will deteriorate continually.     
Feb 9, 2013 8:27AM
Will people be able to sue the Cheerleaders at CNBC when you know what hits the fan?  Cramer should be the first guy who loses his Pom poms and is sent to the showers early.
Feb 9, 2013 5:39PM


1.  Obama has added 7 trillion dollars in national debt.

2.  This was NOT unavoidable.  Obama's spending has grown the federal budget from about 3 trillion anually to about 3.8 trillion.  HIS CHOICE!!!!!

3.  Republicans have shouted we need spending control!!!!  Much to their shagrin at the poles.

4.  The Republicans will prove to have been right!

5.  You Obama supporting fools will be to blame.  Sorry, just a fact.


I hate that I/Many have to say "we told you so".  I hate it because I loved this great country, and my neighbors have sold it for a prezel and a beer.  They voted for Santa Claus.  No they votes to steal other people's money and or to borrow money for their gifts.  I hope you enjoyed what ever gifts you got from teh Uncle over that last few years.  And now you will reap poverty.

Feb 11, 2013 10:40AM
Quote  of the day...

“Any fourth grade history student knows socialism has failed in every country, at every time in history,” “President Obama and his fellow Democrats are either idiots or deliberately trying to destroy their own economy.”--------Vladimir Putin
Feb 9, 2013 1:51PM
In a recent survey "small business owners grew slightly more optimistic about the economy in December, but 70 percent still think now's a bad time to expand."  What does this say?  It says that small business owners, myself included, have a much better understanding of how the economy is doing.   We are "in the trenches," so to speak, and much closer to the action than the Wall Street gurus who track the Fortune 500.  Mind you, many or most of these small business owners are entrepreneurial so, at times, are quite risk averse.  That's why when 70% of them aren't "optimistic" about the economic trends, and aren't expanding their businesses, there is a looming problem.   Just my take, but then again, I am in the trenches......
Feb 8, 2013 9:24PM
The Golden Bull will be melted down and formed into the image of a calf.
Feb 9, 2013 12:05AM
So the question is when?  Anybody want to guess?  My guess is oct. 2013-2014.  Or when the government has to pay it's bills in gold and silver.
Feb 9, 2013 12:13PM
The Barron's round table along with Bill are never right about anything. I'll tell you what is going to happen.

Currently the market is singing its hypnotic siren song enticing investors to throw their money at this market. They are leaving the safety of their bond positions convinced the economy has recovered and happy days are here again. They are wrong! Although housing and autos sales have picked up, the economy here and many other places like Europe is incredibly weak. There just isn't enough demand or economic activity to sustain the current rally. We will have a correction that will scare investors back to bonds.

Next everyone is wrong about the Fed creating problematic inflation. There is always price changes due to supply and demand factors, but this is normal in any economy. For the Fed's monetary policies to create the terrible inflation imagined by these pundits would require strong economic activity which in turn would need a return to full employment similar to pre-crash levels. Currently the best estimates of our economy returning to normal employment levels is around 2020. Along with weak job growth, real wages have been declining over the past decade, so consumers don't have the fire power to ignite any inflation.

Thus the Fed can sustain the weak economy by throwing massive amounts of reserves into the banking system without the fear of inflation. Essentially all the Fed is doing is keeping interest rates low keeping the economy on life support. Eventually those reserves will have to be withdrawn, but the Fed has a very keen eye on employment and prices to anticipate when they'll have to act.

Finally a word about house and autos. The average heap has been on the road more than 11 years.  It is more expensive to repair than buying a new car, so the consumers are forced to buy cars. Also gas prices are another factor in their decision. The housing market is strong simply due to pent up demand. These are people who would have bought a home, but they deferred their buying waiting for lower prices and rates. You'll see the housing market slump again as this buying falls off.

Har har har!

Feb 9, 2013 12:20AM
Inflation perhaps at first...but then deflation as all the bubbles pop.  Even gold.
Feb 9, 2013 8:56AM
Life will still go on......................
Feb 11, 2013 12:32AM

we all been taught dont spend what you dont have why is our country led by such greed

and stupidity you dont see gates or buffet spending more then they make what makes washington so different god help us the us is done as we know it please quote me less then 2 years a total finnancial collapse great job obama i hope you will be proud as the president that destroyed america

Feb 11, 2013 10:28AM
The economy, like movies, have parts 2, 3 etc. WE have seen this "movie" before. Circa 1979-1982. Poor economy, soaring gold, silver, interest rates...remember the "Prime rate" at 18.5%, trouble in Iran, hostages, 22.5% on a four year AUTO LOAN ??? I DO...Then came Reagan...WE DO NOT have a Reagan now...we have chosen to stay with "the same horse for four more years". All of that being said, why would we NOT expect the exact same things in part 2 of Obama ? If part 2 is even similar to part 1...then we are done. I don't know when,or what will "trigger this", BUT I do know that now, left unbridled...this "horse" will not allow the USA to cross the finish line STILL IN FIRST PLACE !!! Wake up people there are trillions of extra dollars floating around, and that is exactly what the secular progressives want(ed). How will the average person be able to pay for their average bills when the money we earn is less and the price of our bills like... oh, say... energy "will necessarily skyrocket?" Keep in mind we borrow 40 cents of each dollar we spend, (the FEDS), just a 1% increase in the historic super low rates we currently "enjoy" means an extra $160 Billion in interest on the money THEY HAVE ALREADY SPENT !!! I do not want to even think about the what the numbers at "TRUE" free market value would be, simply because those numbers would (will) mean the total socio-economic collapse of the USA. Note: all puns intended...AND.. if (when) these dominos start to fall, WHO WILL BE THE ONLY ONES LEFT STANDING TO TAKE CARE OF US ??? You guessed it... I'm  here from the government, and I am here to help. May God help all of us.
Feb 9, 2013 11:30AM

I've been hearing this since 2009 when the dow was at 6500 and here we are four years later at 14,000...  I don't get it.    

Feb 10, 2013 11:55PM
Of course he is right. Did any body on the left realize that spending is not o.k.
And that raising taxes and then spending the money will give us a major inflation as we seen in the past. This one is going to be a beaut.

Feb 9, 2013 12:20PM
Nice article, Bill. Here's some more support a lot closer to Earth than the 30,000 foot distance most are at. Bonds: you are well-aware that a bond is a promise that if you fund my project problem situation or need, I will follow this outline until this pre-determined date and give you back your investment plus a set dividend interest bonus, etc. there are two key aspects to every bond-- a stable currency basing it on, and a pre-determined completion date. Almost all bonds outstanding today contain a majority fiat monies in them and since our actual economics have slid... no accomplished completions. My father said-- when bonds cannot return even the dollar originally invested, they are junk and never will. Who can say otherwise? If a bond is a trustworthy item and is bogus-funded, what do you have? As for the "discipline" that will come to bonds and eventually the Federal Reserve, bring the helicopter in lower to realize the CURRENT level of devastation worldwide except New York and Texas. Grasp that- by the time there is resolution it will come after revolution. People gotta eat and they are tired of eating foreign whatever-that-is-in-the-package. It should occur to you that predicting the Dow at 14,165 wasn't analysis, it could be discerned adding up the fiat output of the Fed into the markets. Simply, Bernanke printed us to 14,165, there isn't any actual activity doing it. Based on the same-- would it not be equally magical to claim that the Dow will be at 14,500 by June, 2013? It's not a GOOD direction, it's the dashboard of doom monitoring our reactionary devastation equivalent. The higher you lift the egg, the farther it splatters when it comes down to Earth. I love your articles. I respect you, Bill for being Contrarian when sociopaths want it otherwise. The fact is-- there is now NO WAY to salvage America and perhaps the world without eliminating financial tyranny. That's not going to go well and no Orwellian alternative like a single currency and Big Brother New World Order will do. We haven't seen ONE Emergency Small Business Animator installed in ANY urban or suburban struggling area. Just Financial Pariah who do no one any good. Figure it out... about 96% of the global population already has.
Feb 10, 2013 10:56PM
Is Europe going to dump the Euro for a new currency?  Perhaps a new Deutsch Mark backed by GOLD.  Why else would Germany begin, as they did this Jan 16th, to remove their bullion from the United States? they come. Ya volh, her ober.  To be the new superpower of the  W O R L D ! ! ! (with real value and NOT paper)
Feb 11, 2013 3:35PM

Near zero interest rate and the banks are making money. Soon the tax payers will pay for this sillyness.

Thanks Obama and Ben

Feb 9, 2013 10:05AM
keep buying bonds. there be hell to pay if you don't. think of it as investing in your safety.  debt collapse will lock up the banking system which, lead massive riots and will make all major cites will unsafe. also write to congress man to inact the sequester. 
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Image: Bill Fleckenstein, MSN money

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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