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Posted 12/13/2004
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Recipe for a rough ride in '05
What we face in 2005 spells trouble. Our blind commitment to economic stimulus and faith in a bull market could wreck our long-term stability.
By Bill Fleckenstein
If Rip Van Winkle had nodded off at the top of the bubble in early 2000 and then awoken today, only his outsized beard would be a tip-off that more than a night had passed. He'd be witness to a display of bullishness and bravado that's every bit as arrogant, though definitely not as ubiquitous.
Those who are bullish appear fanatically so, in the face of having been wrong in their economic expectations (if one looks at job creation or retail sales) since the Bush administrations economic stimulus stopped last spring. Therefore, they are obviously confident that the economy is about to get dramatically better.
I often wonder why folks worry about there being too many dollar bears but never worry about too many stock bulls. I guess it's a function of the mindset bred over the last 10 to 15 years -- that stocks just have to go up and nothing bad can really happen.
The bulls have been in a maniacal mood to indiscriminately buy, in one of the wildest demonstrations of "they're going up no matter what" that I have ever seen. Indeed, huge volume that features single-digit dogs and cats (of which there are too many to note) usually occurs at the end of a speculative fling.
Meanwhile, last Wednesday saw diminished ardor for Sirius Satellite Radio (SIRI, news, msgs), my poster boy for speculation, as it got smacked for over 23% on volume of about 600 million shares. Folks should look at the SIRI chart and think about the hype surrounding it to better understand the psychological significance of island reversals. About the only thing I tend to pay attention to on charts are exhaustion formations because they happen to fit with my desire to try to capture inflection points.
2005: Heading for a train wreck
What we face in 2005, in my opinion, will be a whole lot worse than what happened to the country in 1973-1974. (I wasn't in the business in 1972, and perhaps folks then were every bit as rabid as they are now. But I would find that hard to believe.) As speculation continues to build, it means that we continue to head toward a train wreck. For a picture of that potential outcome in S&P land, think of oil's swoon to the tune of some 30% in a month -- or the recent break in one of my favorites, silver, down 15% in two days.
By my reckoning, the only things that really matter are when speculation exhausts itself and when the economic problems shrugged off by the bulls take center stage once again. That's when life will start to get interesting, and groping for that inflection point is what continues to get me to the office early every day.
Debunking talk of deflation
I find it absolutely staggering that every time commodities get beaten with the ugly stick, pundits jump up and say it signals deflation -- never mind that folks have been saying this for 10 or 20 years, and every time, it has not signaled deflation.
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It's further ironic that the commodities market, which is not meant to be a discounting market but rather a price-discovery market, is supposed to be the market that sees around corners and finds deflation for us. Meanwhile, over in stock land, the market that is supposed to look down the road nine months or so is able to see beyond all kinds of bad news, shrugging off a five-month run in the drop of leading economic indicators and four interest-rate increases.
Bottom line: Folks disregard the market that supposedly sees down the road to come to the conclusion that we're going to have deflation because the market that doesn't look down the road is getting drubbed. That line of logic obviously makes no sense.
Now I'm sure that as soon as the stock market kicks into gear to the downside with all the bad news it has been ignoring, the deflation rhetoric will really heat up once again. As I have been saying for a long time, I don't think that deflation is a likely consequence anytime soon.
Stimulus vs. currency stability
Once we have attempted to print our way to prosperity and the currency collapses -- a process that's under way, I might add -- we may eventually get to the point where the Fed is unable to ease, and our equity and housing market bubbles pop. After that, we may experience deflation.
But we're not there yet, and to make bets about that outcome by owning fixed-income securities seems quite dangerous to me. If we're to see the scenario I've just outlined -- the dollar being shredded -- fixed income will face some pretty serious headwinds. Remember, when these bubbles start to pop, the response from the Fed will be to print money. That also tends not to be deflationary, as we've seen for the longest time.
At some point, I expect foreigners to take away the punchbowl and stop us from easing. But the present group of Fed heads and our administration will continue to opt for stimulus over currency stability. In summary, I would say that someday we just might see deflation in this country. A lot of things, however, will have to happen first, and not much money is going to be made betting on deflation in the interim.
At the same time, I am not saying you have to make a bet on inflation. But it's one of my pet peeves to see the word "deflation" bandied about when we've not experienced it in 70 years, and when we've got Fed Governor Bennie Bernanke threatening to drop dollar bills out of helicopters. We won't see deflation until after the helicopter's been blown out of the sky.
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