Keeping Your Sanity

Bill Fleckenstein wrote a column that I read regularly in the mid 2000's in which he often described how the easy credit in the mortgage industry was going to lead to a disaster. At the time, I thought he sounded like a perma bear. In 2008 he was proven absolutely right. Though less famous than others, who made hundreds of millions, he was right never the less. So when he writes about the next coming disaster I listen.



Below is from an interview with KWN:

 “It’s very difficult to keep your sanity these days because if you are trying to do something to protect yourself from what the Fed is doing, i.e. owning the precious metals, all you do is get hit in the face with a shovel every day....

“If you don’t want to speculate on a momentum-oriented stock market, you are not making any money.  You can’t own bonds because it’s a complete fool’s game and you know that’s never going to work.  So, it’s one of those periods where it seems like there is nothing you can do but sit and be tortured or frustrated.

That’s the way it was in the late 1990s for any sane person.  From, say, the fall of 1998 through early 2000, it was a very trying period if you thought 1 + 1 equalled 2, and what the Fed was doing was wrong.  Similarly, from 2005 to late 2007, the same was true in the real estate mania.

So, the last 25 years are sort of unusual in all of financial history in that we’ve had this whole world on a fiat currency regime.  And we’ve seen three bubbles here in America -- the stock bubble, the real estate bubble, and the bond bubble -- where the Fed has forced the bond market to trade in a place that is so wrong, so massively distorted, that it’s like a bubble, even though there is no real euphoria. 

The suspension of disbelief is at work though, and it’s very difficult to try to stay sane in this environment.  But you have to remember that you’ve seen this movie before.  As frustrating as it is, you can’t start doing stupid things, and you have to know that this is a Potemkin village, but the chickens may not come home to roost for a while.  That’s the frustrating part.

All you can do is wait for sanity to break out because we’ve got these complete maniacal central bankers that have made us all try to operate in a world that makes no sense.  And they are doing it (creating bubbles) again, but I think this will be the last hurrah -- the last go around.”

Fleckenstein added:  “The reason people own precious metals is because they don’t trust the monetary stewards, or they don’t trust the government.  For a long time that was part of the reason that the (Gold) ETF kept taking in a lot of ounces was a lot of more mainstream type of investors said, ‘We’re not sure what’s going to happen.’ 

At the margin they (mainstream investors) bought gold and we had a new buyer, and that helped push the price (of gold) up.  I think when people finally realize that the Fed is doing the wrong thing, these policies won’t work, that they are trapped and they are going to print forever and inflation is going to pick up, when that psychology changes there will be an enormous run in the metals.

Part of what’s happened is there have been huge transfers as metal (gold) has moved out of G-7 countries, towards Asia.  I don’t think that metal is going to come back.  So, if you put Western buyers on top of the Asian buyers, and then you take the shorts out of the market, and the momentum starts to the upside, and you bring in more money on top of the investment money, I think there will be a very powerful and large move higher in gold and silver and these mining entities.  I don’t see how it can’t happen.”