With the Dow closing below 17,600 and bonds surged, today one of the greats in the business sent King World News a fantastic piece warning this is only the beginning of a massive global crisis and full-blown panic, plus a remarkable bonus Q&A that includes everything from the chaos in Greece to gold, silver, what investors should be doing with their money and more.
By Bill Fleckenstein President Of Fleckenstein Capital
June 29 (King World News) – As everyone now knows, the weekend saw a trifecta of major news. Obviously, the first piece of news was the calling of the Greek referendum, which basically will lead to a lose/lose choice between chaos and more chaos (more about that below).
Then there was the rate cut and reserve requirement reduction on the part of the Chinese, and lastly, the move on the part of the governor of Puerto Rico, who said the country needed to get out of its "death spiral" and would make creditors take a haircut — something "authorities" and central bankers have been loath to see occur, as they continually try to protect lenders and bond holders worldwide from having to pay for their bad decisions. Besides generalized central bank bad policy and incompetence, not forcing creditors to take a hit has only increased moral hazards….
Continue reading the Bill Fleckenstein piece below…
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Enter the Draggin'
In reverse order, the Puerto Rican news will have many ramifications for muni bond markets, as well as potentially some banks, insurance companies, and hedge funds, while the most important fact about the Chinese news was that it didn't work! The indices there opened higher and then closed lower to the tune of 3% for the majority of them, with the most speculative one declining about 8%. It is a rare development in these modern, central banker-worshipping times to see a rate cut work as poorly as that one. You can imagine what would happen in America if the stock indices lost 20% in a week or so, the Fed cut rates, and the market tanked anyway.
Turning to Greece, as I noted, the referendum basically comes down to two bad choices. Boiling this down to the most simplistic terms, if the people vote no, as Greek Prime Minister Tsipras has advised, then basically Greece is out of the euro (though he thinks they can stay). If they vote yes (on a deal that no longer exists, by the way), they are going to need a new government, and that will be an even bigger mess, given how long that will take. While the Greeks have maintained a preference for the euro, they don't want any part of more austerity.
More Trouble Ahead
They have tried to have it both ways: pursue insane policies, but have a real currency. That jig is now up. My guess right now would be that the Greeks will vote no, because much of the disruption that would in theory occur for them if they headed out of the euro — i.e., bank closures and currency controls — have already happened. So much of the chaos for the average person has been seen (though it has only just begun). If Greece does leave it would force its creditors to take haircuts, bring about a new currency, and runaway inflation, but that sequence of events has occurred many times in the past.
Having said all that, as I have maintained all along, the situation will remain fluid. I suppose it is possible that if the Greeks vote yes, the EU, ECB, and the Germans would find a way to put some sort of a crazy deal together, but I'm not sure the genie will go back in the bottle. Here is why: both sides are trapped, as European leaders think Greece has been "ring fenced," and Tsipras thinks that a "Grexit" will cause so much damage that Europe won't let it happen. However, there is no way the EU leaders can give in to Greece because Portugal, Italy, and Spain will all want less austerity as well.
Honey, I Shrunk the PIGS
As I thought about all of this over the weekend, the markets I most wanted to pay attention to as far as ferreting out information about where this is headed were European debt markets, especially Portugal, Italy, and Spain. As one might imagine, those markets all declined today, though not all that violently, as rates rose 25 to 35 basis points, more or less, on 2%-ish handles. For what it's worth, Greek debt jumped 350-ish bps to 14%-plus.
Obviously, the ECB has been buying European government debt, which has helped drive the price to the ridiculously low yields they are now where no credit risk has been priced in. Not to make too much out of just one day's action, but I think the biggest development in terms of exposing the fallibility of central banks, which bulls worldwide have come to conclude are infallible, will be if weaker European government debt trades lower.
Turning to equity markets, in addition to the rate cut air ball in China, last night saw a sea of red, with Japan losing a couple of percent, most of Europe was 4% lower as America opened, and overnight the SPOOs (futures) lost about 1.5%. But in a show of typical modern-day Fed-inspired bravado, the opening decline in the S&P cash market was reduced from 1% or so to roughly 0.5% in the first half hour (which helped Europe cut its losses in half, briefly), although by the end of the first hour the market was back to where it opened.
Think Of Them As "OOPS" Spelled Backwards
My feeling as I watched these developments was that the whole world was hanging on how the SPOOs were trading. If they rolled over, it would be the start of real trouble right here and now, as a declining U.S. stock market would really add a layer of complexity to what we saw last night. If they rallied, people could pretend everything was OK for a little while (I say "little while" because things aren't OK, and too many negative moving parts are all in motion). Besides, the very best that equity bulls in America have to look forward to is the absence of a rate cut, and that is not the same as more free money. We won't get any more QE until the stock market actually collapses hard.
So in essence the SPOOs tried to continue to play the game of chicken with the Fed, as I have noted for some time, except the odds against stocks winning have increased dramatically. The rapid change in the status quo in Greece just shows how, when you play these games of who will blink first, which the ECB and Greece are playing with each other, an outcome like a Greek default can go from impossible to inevitable in the blink of an eye (as I have tried to point out on many occasions). That sort of dislocation continues to be what I think is in store for U.S. stocks. Remember, there are huge expectations for earnings in the second half that I don't think will be met. Add in all the new macro problems and potential chaos in Europe and why anyone would want to bet that stocks are going higher is beyond me.
Spray and Pray
Nevertheless, folks clearly have tremendous confidence in central banks and to some degree the belief that a "put" exists. While the latter may be true, I believe its "strike" is much lower than people think, because it is going to take at least a 15% to 20% decline to get the Fed to provide more easy money. I also expect at some point the ECB will try to get its fire hose out, though it is trickier for them, and there is no amount of liquidity that can address the insolvency that exists within Greece and other European nations (as well as Japan and the U.S., for that matter).
With all of that information/editorial opinion dumped in your lap, turning back to the action, after the first hour's macho jam-job higher, the market slid the rest of the day and closed on the lows (taking Europe out on the lows as well, with a decline of roughly 4%). The Dow/S&P were 2% lower, while the Nasdaq dropped 2.5%, and my expectation is that losses will now feed on themselves.
Away from stocks, fixed income screamed higher, in a kneejerk response to equity market troubles, which is one reason I have not wanted to be short bonds. I have felt strongly that a decline in stocks would lead to a kneejerk rally in bonds, and it has. How long it lasts and how high it will go will be interesting, but for the time being equity weakness will probably be good for bonds. As for currencies, the euro dropped about 1.5% last night before it reversed and closed 0.5% higher. (The yen was higher all last night and today as well.)
A Chilling FX
Perhaps one of the biggest surprises for most people was the fact that these currencies rallied, but if one made a list of hot-money trades on the planet, long Japan, long SPOOs, long European stocks, and long European debt, while being short the yen and the euro, would probably be some of the favorites. That may explain why the yen screamed and the euro didn't get destroyed, as hot money was forced to reduce positions all over the globe, and I expect it still has a ways to go.
The precious metals made a momentary squirt higher to the tune of 1% overnight, but basically fell back to unchanged in New York during the SPOOs rally, I think for obvious reasons: if the U.S. stock market is bullet-proof, that means the central banks are still in control and people can still fantasize that a rate hike is coming, and so on. By day's end, gold had gained 0.4%, while silver lost 0.2%. Essentially, they went nowhere, but their time is coming as soon as a few more people begin to realize that the central banks can't save them. Of course, they are, in fact, actually the cause of all the world's mispriced assets and financial troubles.
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: Bill, I have heard 2 different commentators on TV this morning say that US stocks will be looked at as a safe haven. What am I missing?
Answer from Fleck: "The fact that so many people have such confidence in the central banks and that they don't understand how dicey things are."
Question: Bill I'm very confused on the gold and miners action today. I thought this Greece panic would be constructive for the gold complex but if anything it's been negative at least for the miners. Do you have an opinion why? I know emotion can cloud judgment in equity trading but it just seems as if nothing is constructive for gold anymore. If this Greece panic is not the type of scenario that erodes faith in central planning then I don't see what could.
Answer from Fleck: "Gold has been in the penalty box, thus it's sort of simple really. At midday Monday the SPOOs are hanging in. In other words, people still feel all is well (even though Europe has rolled back to near the lows). Once the SPOOs start to slide for real, then I think U.S. buyers will emerge. Foreign buyers may already be active, but there is so much motion that damage control is the priority for most people, probably. If gold had already been running, THEN it would have gone nuts by now. Anyway, that is my explanation. Hope it makes sense."
Gold Will Fly Because Chaos Is Coming
Question: Bill, how surprised are you by gold flatlining today after the weekend we just had? I was reading Fred Hickey's tweets over the weekend and I agreed with his optimism on the metal 100%. I am shocked that gold couldn't catch a bid on all of this news, as I imagine Fred is too. Thanks for all of your advice and help.
Answer from Fleck: "No I'm not shocked yet (though I'd have obviously preferred for gold to just get it over with and scream higher). IMO, it is all about the SPOOs. They recovered as I type (early Monday) from -38 last night to -15 now. If they roll over and get ugly, which is what I think will happen, then gold will fly. But if they can hold the tape together, bulls will say everything is contained, who needs gold? Regardless of today's action, chaos is coming. It is just a matter of a short amount of time, despite any "macho-ness" we may see today." ***To subscribe to Bill Fleckenstein's fascinating Daily Thoughts CLICK HERE.
***The remarkable audio interview with Michael Pento has now been released, where he discusses the coming carnage in global markets, what investors can do to protect themselves, and what to expect from gold and silver, and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***KWN has also now released one of the most important and powerful interviews that Dr. Paul Craig Roberts has ever given. Dr. Roberts discusses why the Greek tragedy is one of the most important and pivotal crises that the world has ever faced, as well as the desperate moves being made by Western central banks in global markets ahead of the resolution of this crisis, and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***ALSO JUST RELEASED: There Is No Escape – Unprecedented Worldwide Panic And Economic Collapse Is Dead Ahead CLICK HERE.
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The audio interviews with Michael Pento, Dr. Paul Craig Roberts, Rick Rule, Nomi Prins, Gerald Celente, Bill Fleckenstein, Stephen Leeb, Andrew Maguire, Eric Sprott, Robert Arnott, David Stockman, Chris Powell, John Mauldin, Egon von Greyerz, Dr. Philippa Malmgren, Marc Faber, Felix Zulauf, John Embry and Rick Santelli are available now and you can listen to them by CLICKING HERE.
