Market at a turning point

Sept. 30 was the end of the quarter, and for once rather than producing a move up, it generated lots of selling. At the time, while I didn't expect to see much relief for stocks in general, I thought perhaps some smaller currency markets, like the Canadian dollar, as well as mining stocks, might benefit by putting the quarter's end in the rearview mirror.

What we got was more volatility, at first to the downside. Monday's decline appeared fueled by folks having flashbacks to 2008, when the financial system was nearly vaporized. However, this is not 2008. American banks are not in anywhere near as bad a shape as they were then. They are not in great condition, but the U.S. banking system is not hanging by a thread, as it was then, massively leveraged on worthless assets.

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However, it is potentially far worse than 2008 in Europe, yet those who are in charge of the euro don't appear to be aware of the size of the problem they face. Oddly enough, even though Europe's equity markets have continued to be pounded over the past week, the debt markets have been a bit firmer, and stocks there rallied even after Moody's downgraded Italian debt after the close on Tuesday.

All eyes on the ECB

The proximate cause for the surge here and in Europe appeared to be the belief that somehow the European Financial Stability Facility will be turned into a vehicle, similar to the Troubled Asset Relief Program, that will be used to breathe life back into European banks. Also appearing to drive the rally was the hope that the European Central Bank will finally get around to monetizing European sovereign debt (i.e., creating euros out of thin air)..

In other words, folks seem to be looking for Europe's "masters of the universe" to respond to their crisis the same way U.S. policymakers did in 2008.

I firmly believe at some point they will take those steps, because if they don't -- as I have cautioned -- European governments, banks and the euro itself will collapse. The only question is how much pressure will be required before they finally panic.

However, if folks continue to be disappointed by European Union/ECB maneuvers (or lack thereof), I expect markets will begin cascading again, and soon (though they certainly took the lack of action Thursday in stride).

On the other hand, if the euro ministers do manage something surprising, the stage is set for quite a rally in world stock markets, as the angst level is extraordinarily high and lots of people are "beared up."

Animal spirits don't play the percentages

I think the odds favor October being something of a disaster overall, but if by some miracle it isn't, there will probably be a feeding frenzy on the upside for a while. This makes it quite dangerous to be short, betting stocks will go down, even though there are many reasons to think that the path of least resistance is ultimately lower.

Bottom line: The pressure is on central bankers everywhere to do what they like to do best -- i.e., print money -- and the only real question is when the Europeans are going to get into the act in spades.

Although the stock market has recovered somewhat since, the action earlier in the week had pundits trotting out the usual "bear market territory" question. Even if downside pressure persists, I just have to point out, for what it is worth, no matter what The Wall Street Journal (famous promoter of the "New Economy" during the tech bubble) and other news organizations say, a 20% move does not equal a bull or bear market. That definition is nonsense.

Bull and bear markets are processes and states of mind that begin once the prior cycle has ended. They are not measured by precise percentage changes, especially when the noise factor is as unusually high, as it has been for a good part of this year.

A heart of someone else's gold

Turning to one of the few financial subjects I find reassuring -- gold -- I found it interesting that in August, Thailand, Bolivia, Russia and little Tajikistan all accumulated gold reserves. It seems quite clear at the margin that the world's central banks want to own gold, and the price rise that month was not an impediment to buying. One can only assume that they have added to those purchases during this nasty downturn in gold prices.

In a related development, British news outlet The Telegraph carried a story on Oct. 2 that the Qatari royal family planned to spend $10 billion buying gold stocks. Whether that is true I don't know, but it is a fact that they bought a 9.9% holding in European Goldfields (EGFDF, news), a stock held in high regard by one of my favorite analysts, John Doody.

Over the years I have mused from time to time that I expected the Chinese at some point to buy all the mining stocks in the world because then they would own the world's production of the one currency no central bank can print: gold. Thus far, of course, that hasn't been the case. But perhaps this move by Qatar indicates that idea is not as far-fetched as it once seemed.

At the time of publication, Bill Fleckenstein did not own shares of any equity mentioned in this column. He owns 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.