On the heels of the panic in China and the Nasdaq falling over 100 points, today King World News is pleased to share Bill Fleckenstein’s fantastic first wrap to start 2016!

By Bill Fleckenstein President Of Fleckenstein Capital

January 4 (King World News) – The new year has begun with fireworks in many markets as pent-up complacency fractured across a broad front. It took almost no time last night for Japan to lose 3% and China to drop 4% to 5% before its markets were halted, thanks to circuit breakers, which only managed to make matters worse. A point I have made often in the past is that while in theory circuit breakers ought to calm things down, when there is real panic all they really do is foment more of the same. As a consequence, a couple of the indices in China closed around 7% lower…


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As for Europe, equity indices there lost 2% to 3% while here in America stocks lost over 2% in the first half an hour, and there was a bit more negative macro news as the ISM Manufacturing Index was reported at 48.2 versus expectations of 49 (obviously the fact that is below 50 is indicative of a recession). I think it is a powerful signal when markets gap, in either direction, after a three-day weekend. And I think it is even more potent given that stocks gapped lower at a moment in time when theoretically stocks should go up thanks to “seasonality” (i.e., more money finding its way into the stock market).

O, What a Tangled Web We Unweave

So I think the information in today’s action is extra powerful and I expect folks will be stunned at how fast the stock market unravels. The only real question in my mind is how long it takes for psychology to shift as far as the central banks being invincible and totally in control. Once that happens it is going to have very big ramifications for stocks, currencies, and precious metals.

When psychology changes, problems that had been shrugged off will start to get a life of their own. For instance, it will be interesting to see what sort of ramifications the default in Puerto Rico has on the muni bond market, as many state governments have monstrous unfunded liabilities that they will have a hard time closing.

Then there is the Sunni-Shiite Islamic war, which was ratcheted up a notch this weekend when the Saudis broke off diplomatic relations with Iran after their embassy was attacked in retaliation for the execution of a Shia cleric. (Though it is not politically correct to say this, I am glad to see the biggest protagonists and financiers of this conflict taking each other on directly. Enough of the proxy wars. Let’s let these two have it out.) In any case, that is one more negative wild card that is in play at the moment.

Turning back to the action, after the initial rout the market kind of hung in there, down a couple of percent, as a battle was fought at around the 2,000 level on the S&P for the rest of the session, which is about where it closed, off 1.75%, below the lows of November/December and continuing the break that started late Thursday through the 200-day moving average. The market is starting to build the case for lower highs and lower lows, which is the very definition of a bear market.

When First We Practice To Undeceive

I saw lots of headlines blaming this decline on China, as if the U.S. wasn’t the epicenter of incredible speculation. The market is going to decline this year for lots of reasons, but primarily because money printing doesn’t make the economy grow, it just misallocates capital, and now we will have to face up to that reality.

Away from stocks, green paper was mixed and the yen was quite strong as the euro and other currencies were weak, while oil lost 0.5% in the wake of the Iran-Saudi confrontation. Fixed income was predictably strong in the face of all the chaos, and the metals were higher, with silver gaining 0.3% to gold’s 1%.

Hunting Season

As for targets on the short side, as I have noted many times in the last couple of months, I think the Apple suppliers are uniquely vulnerable, as are virtually every chip and chip equipment company. The stocks are expensive and the businesses are going to be forced to puke up some pretty bad news, so for the moment that is my favorite pond to fish in, although the way the market is set up I think it is basically all one trade, as everything is liable to go down together, for the most part.

King World News - Bill Fleckenstein - The Longer A Mania Goes, The Worse Off Everyone Will Be When It Ends - The Aftermath Of This Is Going To Be Extremely Brutal, Plus A Bonus Q&A

Included below are three questions and answers from today’s Q&A with Bill Fleckenstein.

Bonus Q&A

Question: Fleck, Happy holidays. If it weren’t for the global central bank Ponzi scheme to manipulate the bond market and interest rates, where do you think the 10 yr yield would be? My opinion is that they would be AT LEAST 200-300 bps higher. If the 10 year ever gets back to those levels, I think we go below the 2009 lows in the SPX. Your thoughts ?

Answer from Fleck:  Interest rates are a price, and they should reflect expectations (though expectations could be wrong) of inflation (or deflation) over the term of the loan, as well as a real rate of return.

Those prices are not being set by the market, but they are manipulated by the Fed and other CBs. I suspect you are correct, they would likely be higher by 200-300 bps. But then again, the world without what the idiots at the CBs have done would also look totally different.

As for the S&P, that depends on what else happens.”

Question: Hey Fleck, I have been reading about your belief that a violent move in stocks is possible any day moving forward. I wanted to mention the bollinger bands on the monthly charts are wound tight, I think at their tightest level since 1995. 

In August, the weekly and daily bands were wound tight and the move resolved to the downside very rapidly. So I just wanted to mention this to you since you mentioned the feeling of a possible downside move, my guess is the bands will again resolve to the downside with an expected trajectory of 200-400 handles to the downside in about 90 days. 

Its on a monthly chart, so there should be plenty of opportunity to trade it if the move is indeed to the downside; although its hard to imagine the bollinger bands can squeeze out a 200-400 handle move to the upside at this stage. The indexes have violated the multi-year upward trend line starting at the beginning of the year and the DOW Transports have massively diverged from the DJIA, thus never confirming the current rally, which are two additional advantages for the bears at the moment. Thought I’d share that.

Answer from Fleck: “Thanks. That all fits with what I am seeing and my gut feeling.”

Question: Proof that history does rhyme and often repeats itself…

“NEW ECONOMY STOCKS” of 1999-2000 = “UNICORN Businesses” of 2014-2015

One can only hope The Fed’s enabling of capital mis-allocation will finally lead to a “fool me once-fool me twice” moment when trust in the central banks is permanently discredited in favor of free markets setting interest rates.

Answer from Fleck: “They have already been fooled twice. This is the third time.”

***To subscribe to Bill Fleckenstein’s fascinating Daily Thoughts CLICK HERE.

***To hear legendary Art Cashin’s stunning 2016 predictions CLICK HERE OR ON THE IMAGE BELOW.

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***ALSO JUST RELEASED:  Stock Collapse In China Fuels Worldwide Panic CLICK HERE.
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