ROB THEM OF THEIR MONEY

by Bill Fleckenstein on Tue, 18 Jan 2011

In case anyone missed it, the Chinese raised reserve requirements over the weekend yet again, and that market was pummeled for about 3% on Sunday night, with no bounce last night. The rest of the world was essentially unperturbed by the action in China, however, and today Europe was higher, led by Spain, as once again folks continue to act like the problems with the PIIGS are in the past (color me skeptical).

As for our market, the futures were knocked for a loop due to Steve Jobs announcing his leave of absence, and Apple dropped about 5% early in New York trading. Nevertheless, the mood of the bulls stayed true to recent form as they decided, naturally, that Apple was company-specific (which it is, as Jobs is obviously only capable of impacting Apple). Thus, an hour into the day the indices had recovered their losses and were slightly higher, led by the Dow.

On the subject of Apple, it releases earnings tonight. I see no reason for the numbers to be disappointing, nor would I expect the guidance to be. On the other hand, if AAPL isn't able to rally on the good news, thanks to lingering concerns about Jobs, and the stock is sold, perhaps that might dent the psychology behind folks brazenly buying all manner of speculative and momentum-oriented stocks. I'm not saying it will, but I will be looking to see how AAPL responds to tonight's news and if that affects psychology anywhere else. To my mind, the market's behavior is purely a function of bravado that has been essentially created by Bernanke's money printing, which thus far has only had upside (assuming no one bothers to eat or drive), and folks have forgotten about all the lingering problems that still exist.

A MEETING OF SOME MINDS THAT MATTER

I know Rap readers are probably quite familiar with the state of the world and its issues, but I thought the Barron's Round Table discussion this weekend, which included Marc Faber, Bill Gross, Felix Zulauf, and my good buddy, Fred Hickey, summed things up rather succinctly. Normally, I don't bother to read Barron's, but this discussion is worth the price of the publication, even though I was already intimately familiar with the facts.

I was particularly struck by a comment from Marc Faber, who said, "I no longer regard the U.S. dollar as a valid unit of account." Direct, but not surprising, words from Marc, made all the more pointed by Bill Gross, who followed that up by saying he agreed with many of Marc's views, although he didn't know if we were as far down the road to perdition as Marc thought we were. Gross did state that the U.S. was, ". . . employing instruments and vehicles and policies that smack of desperation. We are not looking at a default here, but at years of accepting inflation, which basically robs investors and labor or their real wages and earnings. We are looking at a currency that almost certainly will depreciate relative to other stronger currencies."

DE FACTO DEFAULT, THANKS TO DA FED

Gross continued: "We are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is the default. Ultimately, creditors and investors are at the behest of a central bank that will rob them of their money." Those are pretty powerful words from the manager of the world's biggest bond fund. It continues to astound me that he has not found a way to buy gold in his fund.

Felix Zulauf made an interesting point about inflation (there was no talk of deflation among these thoughtful investors), "Just as it took several years for the market to see that Volcker's policies would lead to declines in inflation and interest rates, it will take several years for the market to realize the Fed's current policies are highly inflationary. They will lead to a debasing of the currency, which is happening to varying degrees in most of the industrialized countries."

As for Fred, he made several statements about how easy money had contributed to all the good feelings emanating from Wall Street, and summed it up as follows:

ANOTHER ROUND OF "DOSE ECCLES," AND PUT IT ON OUR TAB

"The economy has structural problems and we aren't dealing with them. Money-printing won't work, yet that's the prescription we continue to give the patient. If the Fed keeps printing after June, we'll have higher gasoline and food prices and more imbalances until this ends. And at some point it will end, because the dollar will fall apart. What we are doing now makes everything appear rosy. But it is a devastatingly terrible policy for the long-term."

He also reminded everyone of the quaint notion that, "A year ago people were talking about an exit strategy." That really illuminates where we were. There was never any chance of an exit strategy, and now we're on QE2; the fact that so many folks thought the Fed even wanted to find the exit, let alone would be able to, shows how badly they have mis-handicapped the underlying problems.

NO HALF MEASURES

Lastly, for those who are wondering what meaningful protection from money printing might look like, Fred noted that, "I have had more than 50% of my assets in gold for the past seven years."

Turning back to the (non)action, the market meandered around the early highs all day, which is where it closed.

Away from stocks, the dollar was weaker, as was fixed income (perhaps bond and fixed income investors read Barron's this weekend as well). Oil was flat, silver added 2%, and gold gained fractionally.

Positions in stocks mentioned: none.