Related topics: stock market, investing strategy, gold, economy, Bill Fleckenstein
Tensions have exploded recently in several Middle East countries, but they have done little to dampen what I see as the market's increasingly speculative mood. Political unrest in that part of the world is yet another macroeconomic negative, but it will have to get in line, especially given the number of economic and financial issues we are already facing.
In the long term, the upheaval could turn out to be a positive if the repressive administrations fall and somehow democracy takes hold. However, in the short run, it is quite possible that violent, anti-Western, al-Qaeda-harboring, Taliban-like regimes could emerge, and I can't see how that would be bullish.
I don't know the future, and neither does anyone else, but I suspect the risk of volatility and headlines moving the markets will increase, and thus we will still be forced to deal with that unknown.
Taking it to the Street
As for dampening speculation in the market, it appears it will take more than protesters in the streets to do that, as the market has continued its steep climb from July lows. Nevertheless, I continue to believe that the stock market has been running on fumes and is almost certainly headed for trouble sometime in 2011, although I have no feel for the timing at this point.
Bill Fleckenstein
We simply cannot print our way to prosperity, and the consequences of worldwide money-printing have produced inflation, which is one cause of unrest -- and not just in the Middle East, but in other countries as well. Rising prices are going to be a problem here, too, even if we pretend that inflation is supposed to be calculated excluding food and energy (which obviously isn't the way it's done in the "developing" parts of the world).
I just can't get over the fact that so many people seem so willing to speculate again so soon after the massive financial losses and economic problems created by just that kind of behavior over the last decade. Although I should point out that the current speculation strikes me as more a function of the wild behavior of "professional" investors who have become inebriated, thanks to money-printing on the part of the Federal Reserve (and other central banks), as well as the belief in a Ben Bernanke "put," (i.e., if things get bad, the Fed chairman will ride to the rescue with more liquidity).
It is a different situation from the days when nearly everyone in America thought day trading or flipping houses was a good idea, as was the case during the equity and real estate bubbles. But it is still disturbing to witness, nonetheless.
The Fed's favorite musical instrument: The squeeze box
Somehow, although I can't explain exactly how the hipbone eventually connects to the sternum, money-printing ultimately foments lunacy and distortions in financial markets and the economy. It also precipitates inflation, sometimes more than at other times.
During the stock mania, all the money seemed to stay pretty much in financial assets, and during the credit bubble it washed into real estate and related assets. This time around, of course, commodities are roaring, but instead of everyone feeling like they are getting rich, most people feel like they are being squeezed to death. That is part of what's fueling the riots we're seeing, as people with very little money are finding it too expensive to eat.
How long this speculation runs, and how much wilder it gets here in America, I can't say. I just know that it will end badly and the "police" coming to break up the party will be some form of discipline from either the currency market or the bond market, i.e., the funding crisis I've mentioned before, in which the government has trouble financing its debt.
Clearly, that hasn't been a factor yet, even though both the dollar and the bond market have been weak recently.
Goin' to the mattresses?
I think it makes sense for people to analyze how much risk they have and set aside some cash reserves in case we get some variation of last May's "flash crash", which I could easily see. There's a problem with that strategy, though: Paper money is a depreciating, if not worthless, asset.
Another wrinkle is that, to me, the current environment is nearly the opposite of what we saw in late 2008 and early 2009. Virtually nothing seems to be on sale now, except perhaps real estate, which has much further to sink. (I don't put gold or gold stocks in that category, as I don't feel gold is particularly risky, although it is very volatile and could get smacked at any time. As for gold stocks, it seems to me they have had a good deal of risk wrung out of them.)
Nevertheless, I feel strongly that at some point this year there is going to be a scary decline or two in the stock market, and perhaps having some flexibility to take advantage of such an outcome will turn out to be a good idea.
At the time of publication, Bill Fleckenstein owned gold.
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.
