Bill Fleckenstein on the Irrational Markets

From KWN (Bold emphasis is mine):

“The stock market still believes that the Fed is going to be able to taper to somewhere near zero and not have an accident.  The stock market is wrong.  There will be an accident....

“A tapering is a reduction in the amount of easing but people need to keep in mind that the Fed is still easing.  In any case, the Fed is totally misreading the economy because it’s not as strong as they think and housing is rolling over.  There are also other signs of weakness.

So the Fed is in for a rude awakening about economic strength and they are also going to be in for a rude awakening about the amount of inflation they are going to be able to engender because it’s going to be a lot more than they want.  Today’s announcement was exactly as expected and I doubt Janet Yellen is going to say anything of any consequence in her press conference.  The stock market is continuing it’s game of chicken and the metals are trying to decide if they want to get going to the upside or not.”

 “The miners have acted much better in the last week or so.  Look, at the beginning of June there was a breakdown in the price of gold from the $1,280 level.  A lot of the gold-haters thought that the gold price was going to go test $1,250, then $1,220, then $1,175, and then we were going to trade at $1,000, $800, $500, $200, and then zero.

Well, that hasn’t exactly played out.  The so-called breakdown didn’t turn into anything.  This gives strength to the argument that the gold market might resolve itself to the upside sooner rather than later.  The miners have acted unbelievably well for some time now and this is just an extension of that.

Today the miners are really strong with gold being just flat.  That could be an indication that we could be about to have a big pop in the price of gold.  Usually when the miners diverge, the direction of gold stocks is the direction that gold goes.  Arguing for higher prices has been somewhat futile in the last few years for gold but I think that’s going to change pretty soon.”

Fleckenstein added:  “The Fed bought $1 trillion worth of paper last year.  Their balance sheet is $4 trillion now.  That doesn’t include what the other central banks have done in terms of the upside pressure on major markets they have exerted because of their operations.

The global stock markets are where they are because of the unfathomable amounts of monies that have been printed.  That is why this fall we will have a crash or some sort of dislocation.  At that point there will be so many people with expectations so high they can’t possibly be met and they will all be stuck looking at each other and then the market will hit an elevator shaft.

What we are talking about is a change in psychology but the question is, when does psychology change and what makes psychology change?  I don’t know what will be the tipping point but anybody who thinks there isn’t a fair amount of inflation or believes in deflation is in denial.

In 2007 the very first payment defaults started in January.  That was a sign that they had found the marginal buyer in housing and they were sending the keys back to the bank.  Meanwhile, the stock market didn’t figure out that mattered for another seven or eight months.  So psychology is a big component and when psychology changes there will be plenty of profit opportunities in different directions for years to come.”

 “They have to take a step back.  Last year the Fed printed over $1 trillion and they are still printing money.  In 1999 the liquidity injection for Y2K was about $40 billion and that was enough to blow the top off the stock market.  So anyone who believes that one plus one makes two has to be frustrated. 

The reason they are frustrated is because you can’t own stocks, you can’t own bonds, you can’t trust the dollar, and if they try to make an investment in the metals that hasn’t worked in the last few years.  So rational investors are understandably frustrated, just as they were in 1999 and in 2007.

I will say that this period of impossible things happening has gone on longer than most anyone anticipated.  But no one has seen what happens when the world’s central banks print this much money and we don’t have a currency that’s anchored to anything.  No one has any experience in this because no one has ever seen it.  It’s never happened in history. 

So the reality is we are all flying blind and it’s impossible to have any decent kind of handicap as to when things will begin to matter.  We know these policies will lead to destruction but we don’t know when.  And now more than ever we don’t know when, we just know that a day of reckoning is coming and there will be hell to pay.”