After a wild start to 2016, a famed short seller warned stocks to tank worldwide and debt problems will explode along with FX wars.
By Bill Fleckenstein President Of Fleckenstein Capital
January 27 (King World News) – Overnight markets saw a wild ride, with Japan losing about 2.5% and China dropping around 6%, while the SPOOs traded slightly lower in sympathy. But as we approached the wee hours preopening, the SPOOs turned green and never looked back, as the market gained about 1%-plus through midday, with the Dow a bit stronger and the Nasdaq slightly weaker…
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I am sure there are many theories as to why today’s rally took place. Some may postulate that it was because we are going to get good news from Apple. I don’t really see how that can be the case, though it is conceivable that the quarter and the guidance might not be worse than expected. However, if I had to bet worse or better, I’d take the former.
Most likely today’s rally was prompted by the fact that those “in the know” already have some sense that the Fed’s verbiage is going to be as dovish as possible. Granted, that is not the same thing as free money, and despite all the gallons of ink that have been spilled about how this rate hike may have been a mistake, the real errors are all the quantitative easing and the Fed’s policies over the last 20 years.
Fed Motto: “We’re Easy, to Please”
I will be most curious to see how they torture the English language to say that they have done everything right, but they can’t possibly tighten, and most likely will need to ease. Obviously, that outcome would quite likely be unfriendly to the dollar and friendly to the metals, and while I don’t think it will be good enough to sustain a market rally, we could see a short-term pop as a result, although whether that pop is measured in hours or days, we’ll just have to see. At any rate, that is enough speculation, because we will have the facts soon enough.
Turning back to the action, in the afternoon the rally stalled and the market closed about where it had been at midday. Away from stocks, green paper was weaker across the board, oil rallied 3%, fixed income was slightly higher, and the metals perked up, with silver gaining 2% to gold’s almost 1.5%. The miners actually put in a halfway decent performance as well, making the recent breakdown look like some sort of aberration/head fake.
Included below are four questions and answers from today’s Q&A with Bill Fleckenstein.
Bonus Q&A
Question: As the FOMC meets to discuss the state of things, we are hearing on a daily basis from some very smart people that the Fed is making a huge mistake if they hike rates again this year, let alone 4 more times as the dots predict. I completely agree that a soft economy combined with major market dislocations, aka weakness in credit and a spreading bear market in stocks, usually coincides with rate cuts, certainly not hikes. That said, the biggest mistake of the Fed was not the December rate hike or maybe a few more this year. The biggest error was the extremity of the easing via multiple rounds of QE, twist, and ZIRP for 7 years which made ANY unwinding of this a highly disruptive process.
I believe it is mistaken to think that with all the excesses built up under the auspices of Fed easing that there will ever be the right time for a reversal of any kind. After all, we’ve seen multiple instances of what happens after the Fed ended previous rounds of QE and now we get to see the panic after one measly rate hike.
We are past the point of being able to avoid a recession and a major market downturn when the Fed starts removing accommodation. It’s too late, the Fed went way too far and therefore the only question in my mind is do you want to get it over with now or later?
Either way, let’s all hope that this is the last episode of modern day central banking where the desire to please markets and avoid recessions at all monetary costs still results in market busts and recessions but with an unfortunate massive debt accumulation that has became global in scale and a dead weight on economic activity in many places of the world. As the Grateful Dead once sang, “Seldom turns out the way it does in a song” or in an econometric model.
Answer from Fleck: “I assume the Fed will choose to get it over with. They will never reform themselves.”
Question: Head shaking to see stories today about how QE4 is coming and it will push the DOW up to 25,000. What happened to the idea up something going up because of it’s business? What ever happened to the idea that you could save money and get a fair return? Insane.
Answer from Fleck: “Agreed.”
Stocks To Tank Worldwide As Debt Problems And FX Wars Explode
Question: Dear Bill, semi-retired fund manager. The extreme readings of many historical valuation indicators, along with the non-stop machinations of the Central Banks, have kept me in a highly defensive investment position for a long time (probably too long, I am sure, in the opinion of those who rely on me for investment direction). I underestimated the ability of world-wide Central Bank coordination to power-up a serious inflation in financial assets starting in 2009.
However, for all practical purposes, based on things that I look at, I believe the average stock actually peaked sometime during the last 2 to 3 quarters of 2014. It already is a 12 to 18 month bear market for many stocks. This long topping process, and the two recent precipitous declines (Aug 2015, Jan 2016) help reinforce my conviction that historical valuation relationships do tend to mean revert, or at least head in the direction of that reversion.
One thing I learned early in my career is that buying early in a bear market (no matter how good prices on selective stocks might look) can be very painful. Yet, even with that knowledge, I find myself getting tempted to ‘nibble’ based on prices (and the implied valuation) I see for some companies. I need to walk away from my computer and remind myself that we are early on in the bear market.
So, Bill, my question references your answer to an Ask Fleck question concerning El Erian’s characterization of the market’s correction as an ‘overshoot.’ You stated that it is not some silly overshoot, and “…this is going to be really brutal before it is over.”
It would be very useful for me, and hopefully your readers, if you could explain in a bit more detail (even take a wild stab at quantifying), what you are envisioning when you say ‘brutal.’
Answer from Fleck: “Brutal = stocks tank worldwide, the world economy slides into recession, and debt problems explode along with FX wars. And people finally realize that the central banks, despite their policies, can’t fix things.“
Question: Dear Bill, semi-retired fund manager. My sincere thanks for your depiction of “brutal’ regarding your stock market outlook. I was not looking for confirmation bias, but I found it anyway.
Fleckenstein: “Brutal = stocks tank worldwide, the world economy slides into recession and debt problems explode along with FX wars… And people finally realize that the central banks, despite their policies, can’t fix things.”
Wow, Now tell us what you really think! 🙂
Answer from Fleck: “Next time I won’t sugarcoat it. 🙂
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***The KWN Special Round Table on the global chaos in 2016 is available now and you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
***ALSO JUST RELEASED: 50-Year Veteran Warns We Will See Hyperinflation, Chaos And Civil Unrest Everywhere CLICK HERE.
***The remarkable KWN audio interview with Gerald Celente, providing action plans and strategies on how to survive and thrive during this collapse, how deep the panic will strike, who will suffer the most, how to avoid the economic catastrophe and turbulence, you can listen to it by CLICKING HERE OR ON THE IMAGE BELOW.
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