A Bull Market In Risk Continues to Rage

Bill Fleckenstein MSN Money February 28, 2011

2/25/2011 11:53 AM ET

By Bill Fleckenstein, MSN Money

When stocks are driven higher by central bank money-printing, they also get riskier. That's exactly what is happening now, and it's sure to end badly.

Related topics: gold, economy, Federal Reserve, China, Bill Fleckenstein

Speculative fervor has continued relatively unabated so far this year, such that four of my six previous 2011 columns for this site have dealt with that topic either directly or indirectly. And I'm now making it five out of seven.

The message seems to be getting through, to some extent. Even the "Heard on the Street" column in The Wall Street Journal managed to touch on it, although the writer of the Feb. 15 column seems to think that reckless speculation is kind of cute, rather than dangerous.

Will rally last through 2011?

In the column, "For Bubble 2.0, Try Security Analysis 1.0" (subscription required), the author basically tells people to do their homework. Of course, one must remember that, back in the tech-stock bubble, the Journal got sucked in enough to deem it appropriate to capitalize the words "New Economy," as it was known among those who didn't understand what was really going on (i.e., mass delusion and speculation).

Bill Fleckenstein

I don't think that we can get to a full-blown stock bubble again -- I certainly hope that we can't -- but if the Journal has any indications that that's the case, it should be yelling at the top of its lungs that we need to prevent such a rerun.

As I noted throughout the equity and real-estate manias, bubbles cannot be cured, they can only be prevented. Obviously, this is a lesson Federal Reserve Chairman Ben Bernanke has refused to learn, as he still thinks the Great Depression was caused by the Fed not easing enough in the 1930s, rather than by the Fed goosing the money supply in the late '20s.

Although I think former Fed chief Alan Greenspan was, from a financial perspective, evil incarnate, it is quite likely that Bernanke will do even more damage with all of his quantitative easing. The train wreck is only going to get bigger the higher stock prices race before sanity ultimately breaks out somewhere down the line.

I know I'm repeating myself (again), but I continue to be amazed by how quickly the madness has returned, whether you want to look at the fact that there are 50 leveraged buyout IPOs waiting in the wings to come public, or the fact that The New York Times recently prompted an epidemic of déjà vu with an article headlined "JPMorgan Aims Fund at Investing in Internet." (The Wall Street Journal called this a "new media" fund.) The examples of wild speculative behavior are everywhere one looks.

On the one hand, it is rather hard to reconcile when one looks at the country's inability to create jobs and its massive budget deficits. On the other, when the currency is worthless and the Fed prints money like it has, literally anything is possible. Ergo, speculation is now running rampant. This will end very badly, as all such episodes do. We just don't know when.

Part of the reason I keep harping on this topic is because the consequences are so dire. When stocks are driven to high valuations through "artificial" means, such as money-printing, those valuations are inherently riskier.

They are not built up because of organic growth of the economy, or because companies have made smart decisions, grown market share, cut costs, or increased productivity (Greenspan's favorite magic wand). They go up because all the freshly printed money needs a place to go and something to do. That means that when adversity strikes, and it will, stocks that have been kited higher on speculation are not as resilient as those that rise in a more sober-minded environment.

It's a small world, after all

Of course (as I noted), the Fed is not the only central bank that has been printing money, and the U.S. is not the only country experiencing the effects of such monetary policies. The United Kingdom and China reported their inflation numbers a couple of weeks ago, and China's were deemed to be a relief, but now it is changing the calculations. (I don't know anyone who believes China's data is all that accurate in the first place.)

As for the U.K., inflation was, of course, higher than expected, which is going to be the case virtually everywhere. The only relevant question is whether the government entity that reports the statistics in any given country comes close to being accurate. I suspect most don't.

While here in the U.S., most people have not realized the implications of inflation and currency debasement, that is not the case everywhere. I doubt it has any specific impact on any given day, but there has been an ongoing (since April) development that has boosted demand for gold, the universal protection against inflation.

I am referring to the launch of the Gold Accumulation Plan set up by the Industrial & Commercial Bank of China for Chinese retail depositors. The ICBC has 220 million account holders, 1 million of which (according to recent stories) already have GAP accounts.

Of course, there are other commercial banks as well, so in the end this type of account could be a big deal for precious metals, as it lets the "little guy" basically put himself on the gold standard.

When we see something similar rolled out for average retail depositors in U.S. banks, and they begin participating in earnest, we will know we are in the late innings of a gold bull market. Thus far, however, the attempts to cast aspersions on gold by those who hate it are almost as comical as they are uninformed.

At the time of publication, Bill Fleckenstein owned gold.

This column is a synopsis of Bill Fleckenstein's daily column on his own website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.

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Some of the commenting individuals seem to have a problem with listening to alternative viewpoints such as Fleckenstein's without feeling defensive. Bernanke has been actively stealing money from the responsible portion of society to make up for the federal reserve's stupidity (along with other nefarious characters like the govt. and our master of the universe bankers) that got us to this point. All that Bernanke and Greenspan have been genius at is lowering rates to goose the economy - big deal. The Fed now finds itself between a rock and a hard place after feasting for a quarter century off the good work of the only real adult of any consequence outside of Ronald Reagan during that time - Paul Volcker. The Bond markets make the stock markets look like a poor cousin - and have gone on a tear for the entire period. That time is close to an end unless deflation really takes hold. When this thing went down in sept. '08 while I was on vacation my wife asked me where the market was headed and what was happening. Long story short - Shadow banking system created phony assets to inflate other assets and the market was heading to an eventual 7000 on the Dow (I was a bit off on this). I told her those in charge would stupidly throw everything including the kitchen sink at the problem (wow! aren't we capitalists until things get rough). They would do this not because they knew what they were doing but in hopes that something would stick. I said that those in charge were too cowardly to allow the idiotic concepts powering our economy to be flushed down the toilet and would instead try to reinstate them because it was all they knew. I also said the only end to this would be when people of consequence went to jail. The supposedly responsible leaders of our society only pay lip service to the concept of moral hazard. They know what it is by definition but not by purpose - but then that is why they got us where we are now - their arrogance is sickening. Unfortunate for the decent people of society - many people only seek to benefit from what they see happening in the short run and don't care what the consequences are. Getting back to Bill Fleckenstein. I do not see him as many of the defensive types here do. Whether he is right or not only time will tell, but I believe he is genuine in what he says and an honorable man.

1 0ReportSpamkoremanmusic5 hours agoa better reason to invest in commodities is because the rest of the world is consuming more. India has a population of 380 million who are middle class (yes 380 million middle class, more than all of US) who desire gold, not as a hedge, but to wear. THAT is the reason why commodities and gold are good, not because of some bull that this guy is mentioning. 0 0ReportSpamkoremanmusic5 hours agoBTW, I'm sure he is heavily invested in gold, so that if gullible people take his advice, he will probably make out like a bandit by seeing the increased demand in his recommendation. Don't people realize that these columnists use this scam all of the time? 0 2ReportSpamkoremanmusic5 hours agoSuch typical hogwash - media idiots like this NEED to create another crisis so that their worthless fear mongering columns get read. I am so sick and tired of the world (financial or otherwise) continually being on the verge of collapse because the media needs exciting sensational news to talk about. What an idiot. What they don't understand is that perception is reality and by having a column that will be read by potentially millions he might actually affect the market. We all know how headline risk causes panic, and I'm sure he can find a way to profit - just like another certain person touting the virtues of gold. IF THE WORLD ENDS, GOLD IS WORTHLESS...BETTER TO HAVE FOOD, LAUNDRY DETERGENT, TOOTHPASTE, SOAP, things that great quality companies make the people need,even during a recession - hey maybe that is a good place to put your money.....hmmm....hmm....is that news, or just prudent investing.This guy is an idiot. 0 3ReportSpamWillman9 hours agoThe sky is falling, the sky is falling.... waah.. Get a haircut dude. Do you think it's still the 70's?? 1 1ReportSpamMoney Wise17 hours ago

Hey Bill,

If you are so afraid of bubbles, why are you investing in one-gold. You have no credibility.

3 3ReportSpamT BO Row (tborow) Sat 7:55 PMhere something that may lead to the speculation....what with stimulus and other programs pumping trillions into the market.....( easy money...)Question is how much farther does this take us...?here is some reports, as to how true..who know?10/3/2010...According to a team at Bloomberg News, at one point last year the U.S. had lent, spent or guaranteed as much as $12.8 trillion to rescue the economy..In 2010, total compensation and benefits at publicly traded Wall Street banks and securities firms hit a record of $135 billion, according to an analysis by The Wall Street Journal. The total is up 5.7% from $128 billion in combined compensation and benefits by the same companies in 2009. 1 3ReportSpamnobody9Sat 1:20 PMso says the guy who owns GOLD, the newest bubble de jour. All of these fools that own gold will find out too late about the biggest bubble yet.... 5 7ReportSpammr historySat 7:25 AMOne more thing ; read Rudyard Kiplings The Gods Of The Copy Book Headings it is abvious to me; to many people in positions to do something are only interested in self preservation never realizing they are part of a bigger piicture and they will eventually destroy the very thing they tried so hard to preserve. 10 1ReportSpammr historySat 6:35 AMThey started down this road when they passed Graham Leach Bliley , repealing most of the brakes on the train that were put in place after the last depression. Read F D R s first inaugral address then see if it doesnt sound strangely familiar . Sir Winston Churchill said a country that forgets its past has no future.J F K also said that it takes time to change mens minds and it takes drastic shocks to change the psychology of a nation. The problem is people who were behaving financialy in the great depression were hurt right along with the rampant speculators who started it. 12 1ReportSpamdendlFri 6:44 PM

Hey Bill,

Bernanke and quantitative easing played right into the hands of another Wall St. bubble. Only those who are insane can have a different opinion. Remember the dictum: The definition of insanity is doing the same thing and expecting a different result.

Those who lose on this will get what they deserve.

Chad in CO

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[BRIEFING.COM] Buyers stepped back in after watching the broader market fall more than 2% during the course of the prior session. Although headline risk related to social and political turmoil in the Middle East and North Africa continues, the flow of news out of the region has been less unsettling to investors. That had a hand in dropping the Volatility Index, often euphemistically dubbed the Fear Gauge, for a 9.3% loss. ... More

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Groupon may not be such a great deal

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At the time of publication, Bill Fleckenstein owned gold.

Hey Bill,

If you are so afraid of bubbles, why are you investing in one-gold. You have no credibility.

Hey Bill,

Those who lose on this will get what they deserve.

Chad in CO

Quotes are real-time for NASDAQ, NYSE and AMEX. See delay times for other exchanges.

Japanese stock price data provided by Nomura Research Institute Ltd.; quotes delayed 20 minutes. Canadian fund data provided by CANNEX Financial Exchanges Ltd.

Groupon may not be such a great deal

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