2011: The year of wild speculation

Related topics: stocks, Micron Technology, Microsoft, gold, Bill Fleckenstein

If I had to describe the tendency or inclination of the market so far in 2011 (as opposed to its "mood," a rather squishier concept), it would be toward speculation, as all flavors of weak, expensive, or questionable companies continue to ramp higher.

There is no better example than my well-worn barometer, Micron Technology (MU, news), "the flying pig." For those who don't know, during the late 1990s stock mania, and even for a bit of the real-estate bubble, Micron stock would soar even as the price of its major product, DRAM, was collapsing (which is what the price of dynamic random access memory has always done).

I nicknamed Micron "the flying pig" because I thought that if a stock like that could rally (as it has at various improbable junctures), anything was possible.

Once again, Micron has taken wing -- the stock was up almost 25% before pulling back some recently -- as folks hope that DRAM prices will sprint higher one day soon. (DRAM prices have declined about 40% in recent months.)

That view is held despite the fact that the world is completely enthralled with tablets, which don't use DRAM, and everyone seems to think that PCs are dead. They aren't, and Windows 7 by Microsoft (MSFT, news) will lead to a pretty substantial refresh cycle for businesses. But that won't be enough to help Micron. (Microsoft owns MSN Money.)

To DRAM the impossible DRAM

Nonetheless, Micron's management has apparently once again convinced the dead-fish analyst community that we are going to see a huge rise in the price of DRAM, which ought to be wonderful for Micron.

This is probably the most hilarious version of an old yarn that I have seen spun at least 30 times in the past 20 years. But in today's environment, it is working.

Obviously, crazy things like this happen routinely in markets, and there are countless other wild stories revolving around tablet devices, cloud computing, rare earth metals and other concepts that are in vogue right now. But to me, none represents how speculative the environment has once again become more than Micron.

For the time being, if Micron's stock price can rise -- given that the backdrop for the story has never been worse -- then anything truly is possible, and it just shows how completely futile it has been to try to be short stocks, betting they will go down.

As if to underscore the riskiness of jumping on the speculative bandwagon, last Thursday, those chasing these highflyers were roughed up as one of the lead sled dogs, F5 Networks (FFIV, news) was hammered for 20% after missing earnings estimates, which led to across-the-board selling.

A meeting of some minds that matter

Fortunately, there are still a few sober-minded, thoughtful investors out there worth listening to, and a few of my favorites were cited in the Barron's Roundtable discussion from Jan. 15. The list included Marc Faber, Bill Gross, Felix Zulauf and my good buddy Fred Hickey; the panel covered a number of important issues rather succinctly.

I was particularly struck by a comment from Marc Faber, who said, "I no longer regard the U.S. dollar as a valid unit of account." Those were direct, but not surprising, words from Marc, made all the more pointed by Bill Gross, who followed that up by saying he agreed with many of Marc's views, although he didn't know if we were as far down the road to perdition as Marc thought we were.

Gross did state that the U.S. was "employing instruments and vehicles and policies that smack of desperation. We are not looking at a default here, but at years of accepting inflation, which basically robs investors and labor of their real wages and earnings. We are looking at a currency that almost certainly will depreciate relative to other stronger currencies."

De facto default, thanks to da Fed

Gross continued: "We are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is the default. Ultimately, creditors and investors are at the behest of a central bank that will rob them of their money." Those are pretty powerful words from the manager of the world's biggest bond fund. It continues to astound me that he has not found a way to buy gold in his fund.

Felix Zulauf made an interesting point about inflation (and there was no talk of deflation among these thoughtful investors): "Just as it took several years for the market to see that (former Federal Reserve Chairman Paul) Volcker's policies would lead to declines in inflation and interest rates, it will take several years for the market to realize the Federal Reserve's current policies are highly inflationary. They will lead to a debasing of the currency, which is happening to varying degrees in most of the industrialized countries."

No half measures

As for Fred Hickey, he made several statements about how easy money had contributed to all the good feelings emanating from Wall Street, and summed up the situation as follows:

"The economy has structural problems, and we aren't dealing with them. Money printing won't work, yet that's the prescription we continue to give the patient. If the Fed keeps printing after June, we'll have higher gasoline and food prices and more imbalances until this ends. And at some point it will end, because the dollar will fall apart. What we are doing now makes everything appear rosy. But it is a devastatingly terrible policy for the long term."

He also reminded everyone of the notion that, "A year ago people were talking about an exit strategy." The degree to which that idea now seems quaint really illuminates where we were. There was never any chance of an exit strategy, and now the Fed is on Round 2 of its quantitative easing strategy; the fact that so many folks thought the Fed would be able to find the exit shows how badly they have mis-handicapped the underlying problems.

On a final note, for those who are wondering what meaningful protection from money printing might look like, Hickey noted that, "I have had more than 50% of my assets in gold for the past seven years."

At the time of publication, Bill Fleckenstein owned or controlled shares of the following companies mentioned in this column: Microsoft. He also owned gold.