I don't normally post a paid site's stuff, but today's Fleck should put everyone on notice that we're near the precipice. How near? Probably no more than a few months
Bond Bubbles Burst
By Bill Fleckenstein
Special to RealMoney.com
07/03/2003 02:58 PM EDT
Transatlantic/Transpacific Flight from Fixed Income: Last night's big news was the weakness in world bond markets. Japanese government bonds were rocked for 22 basis points, leaving yields at 1.13%. Recall that barely three weeks ago, the yields were about 45 basis points. Overnight, an auction of 10-year JGBs drew the fewest number of bids since last September. According to a Bloomberg story that I saw, one Yuuki Sakurai said, "The auction results were awful. I would say it's close to a failure." That undermined an earlier rally in equities in Japan and other parts of Asia. Likewise, according to a story in yesterday's FT, there were auction bombs in Britain and Germany. One analyst described the latter as the worst auction he'd seen in his 12 years of following that market.
Meanwhile, our stock index futures were slightly weaker, as we headed into the employment number, which was a bomb as well. Now let's remember two things: (a) This is a lagging indicator, and (b) There's a lot of noise in these reports. That said, the news was anything but good. I won't delve into the innards, as they will be well dissected over the weekend, except to say that we lost manufacturing jobs for the 35th consecutive month. The Liscio Report describes this as "a record with no historical precedent." We've now experienced five consecutive months of job losses -- another statistical rarity, and something never seen in expanding economies.
Al: Overdue for Vision Screening: That brings me to a point I'd like to make about the recent rate cut. How come the Fed, which is supposed to be omniscient, didn't give us 50 basis points? (As one of its rationales for going only 25, it cited some improvement in labor-market conditions.) I'll answer my own rhetorical question: Because the Fed is completely and totally clueless. It never knew anything, and it still doesn't know anything -- except for how to print money, and create massive distortions and dislocations.
In any case, as the market opened for its holiday-shortened day, it was under a little bit of pressure, though not that much, given the size of yesterday's gain and today's disappointing employment number. Perhaps this "mechanical money" from underfunded pension plans was part of the bid. Many of today's stock jockeys don't think. They just react to stock prices. So, if stock prices are OK, bad news obviously doesn't matter (more about psychology below).
On Third of July, Equities Sigh: After the opening weakness, we had a move straight up and through an economic arm-waving number, this one being the ISM nonmanufacturing survey. It just goes to show how the second-half-fantasy crowd will lurch at anything to believe a boom is imminent. Anyway, after that rally fizzled, there ensued a momentary severe dip, perhaps due to a mistaken order sent into the futures pit. The market then basically flopped and chopped during the rest of the session, to close about where it opened. Folks can look at the box scores and see that the major indices saw only modest declines, with nothing too special occurring in equity land today.
Away from stocks, however, was the scene of some real action, specifically in bonds. Our long bond was smashed for a buck and a half, a new low for the move and something I have never seen happen on a day with a sour employment report. I am assuming that our bond market was acting in sympathy with its brethren bond markets around the globe. But in my opinion, this is a very, very big deal. As I have been musing for the last couple of weeks, if the Japanese bond market is finished, for whatever reason, that's going to put pressure on our bond market, because the Japanese have been the buyers of last resort. Obviously, if rates have seen their lows (even without an economic rebound, just because the rates were too ridiculous), that's going to affect housing.
Ominous Enmeshing of Markets: In my opinion, we already had a ticking time bomb. It's just now been upgraded to an even bigger time bomb. Picture the world economic scene as a billiard table. We have a lot of high-powered billiard balls careening around, and many of them are nuclear. I don't see how we can avoid some kind of a serious accident in one of these markets during the second half of the year. If one of them has a serious accident, many of them may have serious accidents.
While my thoughts about that may or may not be correct, the precious-metals market didn't come to that conclusion today, as gold closed down 30 cents, though silver was up 1%. The currency markets were rather unmoved as well, with the yen and the Canadian dollar unchanged, and the euro down 0.5%.
Groundwork for a Walk on the Downside: Turning back to psychology, this maniacal mentality of the stock market telling us the future in an era of momentum/trend-following stock-market operators is a setup for disaster. (While historically the stock market has tended to ferret out the future, there were still a lot of head fakes.) These days, there are a bunch of operators just all reacting to each other's moves. As I have been saying, I think the second half is absolutely binary. The disconnect that I see is the biggest I've ever observed by a mile, and one that makes the disconnect in the fall of 1987 look like chump change.
In 1987, bonds and the dollar were getting destroyed, and stocks kept going up, but it was really just more about speculation. Now, folks have made a massive bet simply because the stock market has gone up. They have ignored all of the mistakes the Fed has made, deciding that the stock market's rallying tells us things are getting better. It has been one giant recursive loop. And that is what has set the stage for, in my opinion, a wipeout sometime in the second half, when the money to bid up stocks has finally been used up, and the fundamentals take over. Once exhaustion is seen for whatever reason, the moves can be rather dramatic, witness the action in Japanese government bonds.
Overcapacity of Umbrage: Finally, in the revisionist history department, an editorial in today's Wall Street Journal titled "The Wisdom of Pollack" is worth noting. As I commented yesterday, Judge Milton Pollack is to be praised for his decision not to bail out speculators for their bad behavior, so I absolutely agree with the Journal on that score. But what I find completely appalling is its attempt to rewrite history, witness the following quote: "All during the bubble in question, this paper and its journalists reported cogently and accurately on the phenomenon as it unfolded. No reader could have failed to understand that Internet valuations were not justified by normal metrics, that prices were being driven by daytraders and 'momentum' investors trying to benefit from public euphoria."
Yeah, and I suppose they didn't try to celebrate the times by capitalizing the "n" and the "e" in "New Economy." Hey listen, we all make mistakes. Why not just stand up and say, we goofed, and move on, rather than trying to rewrite the script?
--------------------------------------------------------------------------------
William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for TheStreet.com and RealMoney, including Mr. Fleckenstein, may, from time to time, write about securities in which they have a position. In such cases, appropriate disclosure is made. At time of publication, Fleckenstein Capital had no position in stocks mentioned, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Mr. Fleckenstein's columns are his own and not necessarily those of TheStreet.com. While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to bfleckenstein@thestreet.com. |
