Thanks for that news paul. Of course gold responded right on cue to this surge in demand. We watch this new gold market together, yes? : - ). Can we say manipulation? It's sorta like saying the markets rallied because the president admitted to lying under oath. We watch this new politics together, yes? Anyway, I burned all my books today, and the smoke actually sank into the earth as opposed to rising. Go figure.
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One On One With Bill Fleckenstein
SUSIE GHARIB: Well, the markets might be rallying this week. But our guest this evening sees a bear market that he says is worse than most people think. Bill Fleckenstein, he is president of Fleckenstein Capital. It's a small fund with some big clients including Microsoft (NASDAQ:MSFT) chairman, Bill Gates. The fund is based in Seattle and specializes in short-selling stocks. Hi, Bill, and welcome to NIGHTLY BUSINESS REPORT.
BILL FLECKENSTEIN, PRESIDENT, FLECKENSTEIN CAPITAL: It's a pleasure to be here.
GHARIB: All right. Well, we have interest rates unchanged. We have the markets rallying today. A lot of confidence. And you're still bearish. Why?
FLECKENSTEIN: Well, because I've been bearish for awhile. I think that the root of the reason to be bearish is that we have created not a normal bull market, but a bit of a bubble. And those are rare historically. We had one in the '20s. We had one in Japan. And I think the aftermath of a bubble is far more dangerous than people think of a normal bear market. And the fact that interest rates are low and inflation is low doesn't preclude us from having a recession or a bear market, if we have had a bubble.
GHARIB: The counter argument from the bulls is that exactly. Inflation is low. Interest rates are holding steady. A lot of money is being poured into the market. Consumers are confident and they're spending money. So what is your counter argument to that?
FLECKENSTEIN: Well, most recessions that we've seen have been started, bear markets have been started by rising interest rates. However, the '20s ended and Japan ended without rates going up that dramatically. And it was because we created too much capacity. My belief is, the reason bubbles have burst all over Asia and places like that is we've created too much capacity. And so we will start to see economic weakness as a function of too much capacity, and not as a result of the Fed raising interest rates. And that is going to be the surprise for folks is that the Fed's not going to cause this by being too tight. They will have already caused it, in time gone by, by being loose enough to create this bubble. The bubble gets you the bust. Not rising interest rates.
GHARIB: How much of a bust are we going to see? How bad is this going to be according to you?
FLECKENSTEIN: Well, first of all, I don't have a crystal ball, I don't know. But, historically, 3 percent dividend yields or the kind of price-to-book ratios or P/E ratios that go with that, that have been expensive in the past, would have, would be 40 percent lower from here. Now, is it going to go ...
GHARIB: You said 40 percent lower from where the Dow is now at the 8700 level, so ...
FLECKENSTEIN: That would be a 3 percent dividend yield, which used to be considered a dangerously low level of yield. So if we had a typical correction back to what is an expensive price, you could have a bear market of 30 or 40 percent. Will we? I don't know. Could it be worse? Possibly. You know. Could it not be that bad? That's also possible. But, I think the risk reward in owning stocks is particularly dangerous, and I think people need to be careful.
GHARIB: And you're a short-seller in this market. Your whole fund is shorting stocks. What are you shorting right now?
FLECKENSTEIN: Well, I think the biggest area of danger for the average investor, and which means the biggest area of opportunity for my fund is in technology. Because technology stocks are GDP- sensitive, world growth is slowing down, there are no drivers, there is no new software coming, Windows98 has kind of come and gone. It's not that big of a factor. WindowsNT is going to be late. You have no hardware drivers. You've got economic weakness. And you've got Year 2000 disruptions. So, technology-we were already seeing layouts by Intel and important companies before the economy got weak. If the economy gets weak on top of that, with these prices where they are, companies at 5, 6, 7, 8, 10 times sales, you've got a real recipe for disaster.
GHARIB: Bill, what are some of the technology stocks you're shorting then?
FLECKENSTEIN: Oh, stocks, you know, bigger stocks like Applied Materials (NASDAQ:AMAT) or Intel, Gateway (NYSE:GTW). PCs, semiconductors, semiconductor equipment, those kinds of stocks. That's where the real surprise is going to be for people that think that the good times are around the corner.
GHARIB: All right. You've given us a lot to think about, and it's a little bit scary listening to your forecast.
FLECKENSTEIN: Well, it's no fun being bearish. But it's the way it looks to me. So I've to go with it.
GHARIB: All right. Thank you very much.
FLECKENSTEIN: It's a pleasure.
GHARIB: We've been speaking with Bill Fleckenstein of Fleckenstein Capital.
Nightly Business Report transcripts are available on-line post-broadcast. The program is transcribed by FDCH. Updates may be posted at a later date.
The views of our guests and commentators are their own and do not necessarily represent the views of Community Television Foundation of South Florida, Inc. Nightly Business Report, or WPBT.
Information presented on Nightly Business Report is not and should not be considered as investment advice.
(c)1998 Community Television Foundation of South Florida, Inc.
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