Bill Fleckenstein
Well, it's been an interesting week, to say the least.
First off, starting with the S&P downgrade of U.S. debt, we must remember two things:
1. The debt is still AA+, not junk; plus it's not like we're about to default tomorrow, or ever, because we have a printing press.
2. The downgrade is largely symbolic, although that doesn't mean it is not important.
Parenthetically, I happened to turn on "Bubblevision" (aka CNBC) Monday morning (I almost never watch it, and even then, usually with the sound off) to see how it treated the news. While I never expect much from that channel, I was appalled at the amount of effort directed at shooting the messenger rather than recognizing the significance of the message.
Shock treatment
Elsewhere, I was happy to see that bond king Bill Gross, of the Pimco Total Return (PTTAX) fund, said, "S&P finally got it right. They are enforcing some discipline. My hat is off to them." His opinion is somewhat unpopular, as the denial crowd continues to want to pretend that none of our enormous problems, which have been a long, long time in the making, really matters.
So even though it is easy to poke fun at S&P for being asleep during the housing crisis -- and who knows what caused people there to wake up and smell the coffee vis-à-vis U.S. debt -- this is an important and necessary wake-up call. If we are to change the path we are on, we have to start somewhere, and this sort of shock is hopefully the beginning of that.
In and of itself, the downgrade doesn't mean much to the markets, though it does impact psychology, which has obviously mattered a lot. But the fact that the stock market dropped about 3% at the first opportunity is more a function of the fact that stocks were already headed lower.
The rally of the last couple of years was built on the unstable foundation of money printing and the violent decline that ended in March 2009. It was never about anticipating any kind of a standard recovery, because we weren't going to have one after we ruined the consumer economy and the financial system. As I have said repeatedly for the last couple of years, all that the Federal Reserve and the government have done is buy some time, during which we mostly did nothing to solve anything.
No free lunch, only free money
After the mayhem on Aug. 8, there was tremendous volatility again the next day as everyone waited to see whether the Federal Open Market Committee was prepared to save the world, and if so, how. In the end, the Fed (only) promised "exceptionally low" rates (i.e., negative real interest rates) "until at least 2013."
Though Fed Chairman Ben Bernanke did commit to using additional policy tools "as appropriate," that really wasn't what the stock bulls wanted to hear, so the market quickly sank and was soon in the red. Though it rebounded and rallied 4% on Tuesday, it lost almost 5% on Wednesday.
Bernanke doesn't seem to understand that he is 100% trapped. Either he needs to spring more quantitative easing (i.e., QE3) soon, or stocks will crash more and he will have to do it later anyway. For a guy committed to printing our way to prosperity, he sure doesn't seem to understand the monster that he and his predecessor, Alan Greenspan, have created.
