On the heels of an absolutely wild trading day where the Dow fell more than 1,000 points at one point, before closing down almost 600, today one of the greats in the business sent King World News a fantastic piece discussing the chaos in global markets and warning that the crash-prone markets are headed considerably lower, plus a bonus Q&A that includes questions on the action in markets and real estate.
By Bill Fleckenstein President Of Fleckenstein Capital
August 24 (King World News) – Asian markets lost 4% to 5%, though China lost 8.5%, Europe fell 4% to 5%, and within a half-hour of opening the S&P had lost 5%-plus. Those declines underscore the point I have been making about the crash-prone and brittle structure that exists in the markets today….
Continue reading the Bill Fleckenstein piece below…
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Obviously, China has had a full-blown crash already and last night blew through the prior lows, so it is a real basket case. As for our market, I was stunned at the stories I read over the weekend that were incredibly complacent. I even managed to tune in to Bubblevision to see what was emanating from that source of misinformation, and it seemed like it was a mix of “don’t worry, it will all be fine” to outright bravado.
Stop, Drop, and Roll
Amazingly enough, after the opening shellacking, by midday the S&P futures — just to pick one liquid reference point — had rallied to show a decline of just 24 points, i.e., 1%, versus the 120 points that we saw in the first half hour. From a risk management trading standpoint, I took off a lot of my short positions and puts into that opening puke and am looking for a spot to reload somewhere between right now as I write this and the next several days.
Markets Are Headed Considerably Lower
I have no idea how this is going to play out, other than I know we are headed considerably lower. The fact that so few seem to understand what the actual problem is makes me even more confident about that point. It would seem that everyone is using the easy answer and blaming China, but that was just the catalyst. The market has been trading in a heavy sideways fashion for some time, expectations are way higher than can be met, the technical action has now deteriorated, and bad news actually matters at the same time that speculation has run rampant. As I have stated many times (and also noted the reasons why), you couldn’t create a more crash-prone environment if you specifically set out to do so.
A Shadow of a Doubt
Given the fluid nature of what we are about to deal with, trying to have a big opinion about what might happen in the short run is very, very difficult, but folks should know that the start of the questioning of the Fed is now upon us. At what rate psychology changes I can’t say yet, but I think anyone with an ounce of even-handedness would have to ask if Fed policies really work.
The answer is they don’t, which is why so many markets have dislocated. Most everything was where it was based on the false premise that the Fed knew what it was doing, would be able to solve the economic problems it created following the 2008 collapse, and we were on to a recovery and everything was more or less going to be OK.
That thought process infected not just the S&P, but the dollar and everything else (as I have noted continuously). That is a false reference point. The Fed’s policies do not work, they cause capital to be misallocated, and over the course of the prior two bubbles have basically broken the economy. To think that the last round of massive QE was going to have a dissimilar outcome would have been silly, but it went on for so long it caused people to become demoralized, lose their conviction, and make investment decisions they are liable to regret.
Living On the Fault Lines
In summary, the Fed’s policies are the problem. They created a bubble, pursued the same policies again after that bubble burst, which created an even worse bubble, then pursued the same policies yet again, which created the mess we are dealing with right now. Money printing doesn’t work, nor does central planning, which is basically what the Fed is doing. They think they know the right interest rate with which to run the world and refuse to learn from their mistakes. Nonetheless, most all of the discussion I have seen in the mainstream media does not touch on any of that as the real problem. So while that is what the markets are dealing with, that isn’t the way it is being described in the press.
Turning back to the action, after the ramp job described above, the market began to leak. While the rally was underway, I kept wondering if they could actually get the market green for a day — after which it would tank again — or would it roll over today. As the afternoon wore on, it began to look like the lows could be revisited, and with 30 minutes to go, the tape was a horror show beneath the surface, while the indices themselves were back to being over 4% lower. From there a small bounce ensued, which cut the losses to just under 4%. Regardless of what transpires in the next few days, the damage done has already been immense and it will result in much lower stock prices in the coming weeks.
Away from stocks, green paper was slaughtered, for reasons that should be obvious, fixed income was higher, though not as aggressively as one might have imagined, as the noise level is extremely high as well. Oil lost 6% and the metals were also weak, with silver losing 3% to gold’s 0.75%. We can’t be very far away from the moment in time when Fed policies are called into question. Perhaps that will be as soon as when the September rate hike is off the table officially, or not until QE4, but gold will be the big beneficiary of that thought process once it gets rolling.
Included below are two questions and answers from today’s Q&A with Bill Fleckenstein. The questions are from his subscribers and they get to read Fleckenstein’s answers every day.
Bonus Q&A
Question: Fleck, the dollar got hammered Friday except again the Canadian dollar which has been one the worst of the major currencies for a long time. I’ve bot the FXC at .85 a number of years ago, rode it up to 1.04 and now down to 75.43 and compounded my error by buying more on the way down.
How do you envision the Canadian dollar performing vs. the U.S $ going forward?
Answer from Fleck: “I think the USD has gone further already than it ought to have, so I’m not a dollar bull. Thus, the CAD should do better if I am right. But I’m not buying any colored paper these days. I’d rather own precious metals.“
Question: Fleck- You called it and it came. Congratulations. Is China’s problems important to all this, as the pundits say?
Answer from Fleck: “Not sure what exactly I called, but if you are talking about the stock market, China is just a catalyst. The underlying problems have been there all along, just ignored.
THE ENTIRE BULL CASE IS A FALSE PREMISE, i.e., that money printing will work in restarting the economy (and that the Fed’s policies are the right ones; they are not).“
Question: Hi Bill, should my wife and I buy a house now, wait six months, or wait a year? I very much appreciate the ‘Ask Fleck’ column and have been reading it daily for several years. I’ve gathered there’s a chance the cost of housing will go down as other markets go down. I’m glad we closed on the sale of our home a couple weeks ago!
My wife and I decided to downsize and move to Phoenix. We’re renting for Aug., Sept., and Oct while we look for a new home. Today we discussed whether to wait or buy now, since there’s a chance the price of housing will go down.
If we buy now and the price of housing goes down, we lose money. If we wait, how long should we wait: rent for six months, rent for a year? Is there any way of knowing if and when the cost of housing will go down? What should we base our decision on? Thanks
Answer from Fleck: “I can’t tell you how long you should wait, but I happen to agree with your strategy. Let events start to play out and then you can decide, and you will have more data as well.“
***To subscribe to Bill Fleckenstein’s fascinating Daily Thoughts CLICK HERE.
***KWN has now released the incredible audio interview with Egon von Greyerz, where he discusses the worldwide collapse, chaos in China, what investors can do to prepare and protect themselves, why gold and silver are headed to new all-time highs and much more, and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***ALSO JUST RELEASED: Crash Trading In Effect As Worldwide Fear Levels Skyrocket! Here Is What To Expect Next CLICK HERE.
***KWN has also now released the incredible audio interview with Stephen Leeb, where he discusses the chaos in global markets and China, what investors can do to prepare and protect themselves, why gold, silver, and commodities are headed higher and much more, and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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