With a volatile opening to global markets to kickoff the year, today King World News is pleased to share a major warning from Peter Boockvar as well as Bill Fleckenstein’s outstanding second wrap of 2016!
By Bill Fleckenstein President Of Fleckenstein Capital
January 5 (King World News) – I was curious to see if last night the Chinese authorities would be able to pull enough levers to get their stock markets to rally, but they were unsuccessful, as equities there were modestly weaker. After the close in China they announced some additional liquidity injections into the banking system and it now looks as though a prior ban on sales by major shareholders, which was due to expire in a few days, may be extended…
In Volatile Markets, Is Wealth Preservation King?
Sponsored
Bill Fleckenstein continues: China is a good example of a market not doing what the authorities want, which historically has happened quite regularly, but has been more of a rare event in the aggressive interventionist central bank era that we have been experiencing for the last 15 to 20 years.
Number Two With a Bullet
Of course, the reason China matters is because it is the world’s second-largest economy and what happens to its economy and market will have knock-on effects elsewhere, but it is not the sole reason for the selloff yesterday nor the one we had in August. Stock bulls and pundits here in the U.S. like to blame every decline on literally anything except the fact that the market here might want to decline (for a myriad of reasons). Though the effects of easy money drove stock prices to the moon, there is a huge component of the investing population that thinks those prices were a natural response to improving economic conditions, rather than a reaction to misallocated capital precipitated by crazy central bank policies.
The fact that the Fed is now on the sidelines and unable to monetize debt until such time as we have an accident in financial markets is why I feel so strongly that the path of least resistance is going to be down, and in violent fashion. My gut feeling is that it will happen pretty soon, but I will be the first to admit that in the era of QE my gut feeling hasn’t really been terribly timely, although it has helped me avoid various mistakes.
Maybe the 6s Really Did Change Everything
Turning to today’s action, the market spent the first half of the session modestly lower, then tried to rally around midday, but was about flat when I had to leave with an hour to go. Beneath the surface, Apple and its suppliers (e.g., Texas Instruments, Analog Devices, Cirrus Logic, NXP Semiconductor, Avago, Skyworks, and Qorvo), which I noted as short candidates yesterday, were all very weak, as the market is begging to figure out that the Apple 6s was way overhyped and overbuilt. We are going to see an inventory correction collide with a recession, which could be exciting. Stay tuned.
Away from stocks, green paper was mixed once again, with the yen being stronger and most other currencies weaker. Oil lost a couple of percent and fixed income was flattish. Silver gained about 1% and gold added about half as much.
A Storm of Value
While I’m on the subject of gold, there is a link in Ask Fleck today to a presentation that a friend of mine, Grant Williams, gave recently that delves into why gold has done so poorly in the last few years. I happen to agree wholeheartedly with his analysis, which is that essentially no one cares, for a variety of reasons, many of which will change. I encourage anyone who has any interest in the metals to see what Grant has to say.
Included below are four questions and answers from today’s Q&A with Bill Fleckenstein.
Bonus Q&A
Question: (This is) from Peter Boockvar:
“This note comes after I’m sure you’ve read a ton of notes reviewing 2015 and soothsaying about 2016.
I’m not going to bore you with another set of predictions as my readers know pretty much where I stand on things and the calendar shift doesn’t change anything. I will though point out AGAIN that it is no coincidence that the markets are struggling AGAIN when the Fed is no longer conducting QE. We haven’t seen thus far the same set of declines seen after QE1 and QE2 ended in the headline large cap indices yet but all one has to do is look under the surface to see similar damage has already been done.
According to Barron’s and quoting Lowry’s Research, at the end of 2015 “30% of the stocks in the S&P 500 index were in bear territory. About 37% of stocks in the S&P Midcap index are down 20% or more, as are 46% of those in the S&P 600 Smallcap index.” Either these underperformers catch up to the upside to the few outperforming mega cap names (you all know the names) or the winning mega cap names succumb to the obvious divergences and a broader bear market ensues. History shows the latter usually happens but in the monetary fantasyland that we are still in, anything is possible.
With respect to that fantasyland and as stated above, the end game to the dramatic asset price influence that central banks have had is clearly waning. I saw Austin Power’s again with my son over the weekend so I’ll say central bankers are losing their MoJo. The Fed was game off of course last year and is tightening policy but the ECB went turbo charged and what did they get for it? Predominantly a weaker euro but the German 10 yr bund yield started 2015 at .50% and ended the year at .63%. The DAX closed up 10% in euro terms but the CAC fell 2.5%.
Bottom line, fundamentals began to matter again in 2015 for better or for worse and I expect that to intensify in 2016 because the crutch of central bank policy, particularly from the Fed, is beginning to break.”
Answer from Fleck: “Peter Boockvar’s assessment of the current landscape dovetails with mine.”
Question: Hi Bill, you said that interest rates “should reflect expectations of inflation (or deflation) over the term of the loan, as well as a real rate of return.” I noticed that you did not mention the word “risk” in this statement. Is there a reason for that?
Although it’s not widely taught (on purpose) in schools, history is filled with examples of governments defaulting on debt. During the 1930s, the majority of European countries defaulted. The ability to print currency has never prevented the inevitable outcome of governments defaulting on their obligations. Just wondering, thanks.
Answer from Fleck: “I left out credit risk as I was trying to oversimplify the example, but you are correct, that also enters into it.”
Question: Jim Grant was on Bubblevision this morning and said the following: “these ultra low rates pull consumption forward”… and they “push into the background business failure or the recognition of business failure because everything is so easy to finance.”
(In 2016, he thinks we’ll see weakened consumption, especially for cars, and the manifestation of business failure that has been masked by ultra low rates.) Just thought it was another good way of framing the situation we’re in.
Answer from Fleck: “Jim is obviously correct. How can anyone think that money printing creates real, sustainable economic activity, given all the evidence we have so far? We get bubbles, unicorns (temporarily), and misallocated capital instead.”
Question: Hi Bill, do you think gold stocks will hold up in the current general market sell-off?My gold stocks did O.K. today. But I always think about those margin calls and how people panic and sell everything.
Will you be adding to your gold stocks anytime soon or wait for the next pullback in the gold miners? Thanks so much for your invaluable and profitable insights in 2015.
Answer from Fleck: “I have been over that point so many times I was hoping I wouldn’t have to do it again, but when the fantasy about the Fed fades, I think gold will do better as the stock market does worse. Miners will follow gold, not the stock market. They have done poorly the last few years because gold has.”
***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.
***ALSO JUST RELEASED: James Turk – The Remarkable Gold And Silver Illustrations Will Shock People CLICK HERE.
© 2015 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. However, linking directly to the articles is permitted and encouraged.
