Like the last time I commented on a Fleckenstein interview, I think Bill is absolutely correct in his direction but that his explanation of the situation is not completely accurate. I don't know if he's just giving a polite version of what he really thinks or if he hasn't made the connections yet. Somehow I have to believe the former given how smart that guy is. But let me give some examples from the article. I quote (italics and bold emphasis are mine), "Over and over and over again we see people who do not understand how the economy really works. They don’t understand these Fed policies only misallocate capital and create inflation. These policies don’t create any sustained economic activity, and yet they keep making the same mistakes.
A lot of those people want to
believe that everything is going to be OK because they want to believe in the
silly concept of ‘Goldilocks.’ So all of these people were rooting for the Fed
to tighten today because they believed it would have meant that they were right,
when it doesn’t. So, now there are a lot of people that were wrong."
What's really happened is that most people have given up thinking for themselves. They wait for the fed's guidance and then they form clever strategies around it. The fed has been burning up the good faith and credit that the US earned over the past 100 years in pursuit of achieving stated fed goals. Meanwhile, the moneymen who have been listening to him, almost worshiping him, have been patting themselves on the back for making gains by "not fighting the fed". And the fed has appeared to have been right for a long time. So why should the herd not follow it? After all (they think), how can the fed be wrong when it has the entire economic resources of the US taxpayer to use as a bludgeon against anyone who doesn't toe the line?
Well, this is the nature of a con. It seems to be true for soooooo long that people actually believe it is true from an emotional standpoint even though their calculating side knows that something isn't adding up. The real problems start to pop up when the wizard behind the curtain is finally exposed as a conniving little con man who has only looked good by cooking the books and playing on the backs of the American taxpayer's ability take on debt. You can tell that time is running short for the con when the promises made by the con man start to not come true. I can guarantee you that a lot of money managers got strung out on high leverage hoping to make a quick buck by betting on the "sure thing" that the fed would taper today as per its earlier guidance. Getting into an overleveraged position is not hard to do. The use of margin and credit and derivatives make it pretty easy. But today, that took a bite out of a lot of people. As Bill said, so now a lot of people are wrong. They lost money betting with the fed. You don't get too many Mulligans with the finance crowd. It adapts to the new reality very quickly (or it dies).
Another aspect of what Bill said is that people want to hear good news even if they suspect it is BS. People want to be lied to. If this were not true then no con man would ever have gotten to the level of Madoff (or of the federal reserve). The herd likes to huddle together in its belief system, rejecting anything and anyone who exists outside of those core beliefs. So Bill said basically that the fed does nothing of value for the economy but that it has been successful in selling a false sense of control to a lot of willing money manager patsies. Bill is talking about the art of the con. Maybe he knows it, maybe not.
Fleckenstein goes on to say, "Today is truly shocking to the people who have had it dead wrong. This is shocking because the Fed had been laying the groundwork for tapering for so long. But, remember, in 2009 the Fed was talking about ‘exit strategies.’ Now we are just talking about cutting back on a part of the stimulus and they can’t even do that. So, one of these days people are going to realize that they are totally trapped. I just can’t tell you when the crowd is going to change its mind.".
Well, he's got that right. At some point the herd will, in near unison, figure out what a fracking scam the fed is, how right and honest Ron Paul has been all these years, and yes, what a bunch of flipping fools we've all been as a nation and a world to be taken in by the greatest Ponzi scheme of all time. Literally, OF ALL TIME. When you consider this, is it really so strange to find the police and feds practicing urban pacification drills, buying MRAPS (bomb proof military vehicles) for local police departments while outfitting them with military assault type weapons and tactics...? Trust me, the money powers running this con are far above Bernanke's pay grade. He is just a pawn, a front man for the illuminati. A willing, traitorous, shameless pawn, but a pawn just the same. The money powers have a lot to lose if people break free of this fractional reserve, wimpy promise system. And the problems are indeed so great, so structural, that there is no fixing it. There is only massive reform of some type coming.
Bill goes on to say, "
This should be a major turning point for gold because so many people have hated it for the wrong reasons. Since gold peaked in the fall of 2011, the Fed has printed another $1 trillion. So gold has a lot of catching up to do. This ought to be gold’s moment, right here, right now. Gold should start a huge leg higher. Certainly the gold stocks have a pretty good setup from a risk/reward standpoint, from where they are today. You certainly can’t find a more hated group on the planet.”. Again, absolutely correct and in fact just today I provided my opinion that gold miners, as a group through the GDX ETF, are a screaming buy.
Fleckenstein finishes with, "Since April, the 10-Year has gone from about 1.6%, to as high as 3% recently. Now we have to see when this rally in bonds stops. The bond market will then roll over and then the Fed won’t have the tapering as an excuse. It means the bond market has ceased to price in the scenario that the Fed wants, and the bond market is not responding to the Fed’s moves in the short-run. In the old days we would call that ‘losing control of the bond market.’ And if that starts to happen, all hell is going to break loose.”
For those who do not follow such things, below is a recent chart of an ETF which closely tracks but which is not a direct match for the 10 year treasury interest rate (the ETF managers decided to track the 10 year bond interest rate with a 100x multiplier in order to give it a higher share price). So what Fleckenstein is suggesting is that the recent increases in interest rates were a false rally based on the promise of tapering. Now that tapering has been exposed as a very difficult choice for the fed, it
will still be printing plenty of money with which to buy treasuries and that will bring the interest rates down again. This is not what the sheeple money manager's strategies had planned on!! Doesn't Bernanke know how long it takes to slip into and out of large positions for pension funds, insurance companies and the like? So, Bill is saying that springing this new direction on the markets all of a sudden will detract even further from the fed's now declining credibility.Now, if Fleckenstein is correct, and he well may be, we are going to see another big round of deflation (low velocity of money and high cash hoarding) as the markets unwind their "we expect tapering" strategies. That is modeled by the black wave down. But after that, I don't know where interest rates have to go but up.
In other words, if Fleckenstein is correct then perhaps the TNX chart is tracing out the E wave of an ending diagonal as shown in black above. When it gets to the E wave, the herd (money managers) will have gotten their money printing game back on. But that means the entire herd will be all on one side of the boat and as a result the boat will begin to capsize. So I expect that after the E wave plays out there will be a massive rise in interest rates. I dare not speculate on what could cause it. I think that if E plays out then the next step is shown in blue.
The reason I don't care to speculate is that when the con is in the very final portion of the collapse as it will be when the blue line is in play, I expect old norms to no longer work. I have stated this belief and made this prediction many times in the past, it is not new thinking for me. In other words, money managers will say "condition A was supposed to mean I do action B" and so they will do action B but it will prove exactly the wrong thing to do this time and it will cause havoc as a result. In fact, I predict that the market will do whatever it has to do in order to fool the maximum number of patsies because the value they think is there for them in the system is not really there and in fact never was. Behaving unpredictably is how the market will likely balance the books.
Well, the next step is to see if the bond market yield rally is indeed over as Fleckenstein suspects. Now that I look at this chart, I'm inclined to agree with his views on this.
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