Rally Pretense

Bill Fleckenstein wrote an interesting article called “A great pretender of a rally.” Here are some excerpts:

Over the last couple of weeks, the stock-market action has been remarkable. The bulls have enjoyed a nice rally. It was precipitated by the anticipation that the monoline insurers would be bailed out. Then anticipation turned into reality: The bailout was nothing more than an agreement by the ratings agencies to pretend that the monolines were still worthy of AAA ratings.

Parenthetically, I would just note that the rating agencies continue to be a farce. How could MBIA – — which recently had to pay 14% to borrow money, and whose debt still yields over 13.5% — ever possibly be considered AAA?

If the ratings agencies are to have one shred of credibility again, ever, they might as well start now. But of course, just like every other aspect of the sanity that some of us might like to see break out, it seems to be politically unacceptable for anyone in a position of real responsibility to act like an honest adult.

The specter of municipal-bond downgrades is a function of a much larger problem: the unwinding of the credit bubble, which had the housing bubble at its epicenter. The credit bubble that has burst is going to continue to shrink the availability of credit, and the housing bubble that has burst is going to continue to unwind. The United States is not going to escape without a serious recession, which is the outcome preordained by the housing/credit bubble.

As to when folks will confront that reality, let me say this: It takes many years for a certain psychological mindset to take root, and resistance to change is always formidable. Yet when the dominant trend finally changes, that new trend remains in place for a long time.

In any case, the determination to suppress the destructive downside of capitalism and ensure permanent prosperity is a terrible idea that will not work. Permanent prosperity, after all, is what socialism was supposed to be about, and we’ve all learned that theory doesn’t work. I continue to find it a sad irony that Wall Street — the alleged bastion of capitalism — would cling so dearly to the hope of socialism.

That’s exactly what the Fed is all about. Its central planners think they can pick the right interest rate with which to run the world, even as the evidence indicates that their efforts over the last 20 years have produced two epic bubbles. This story would strike any sane person as the stuff of nightmare. Sadly, it’s our waking reality.

While I have read a number of Bill’s articles over the years, there have been many I couldn’t agree with. This one, however, hits the nail on the head in that reality and the consequences of the unwinding of the bubble have not been accepted by Wall Street.

This is not a negative view of things to come, simply my realistic expectation that every cause has an effect and this one has not played itself out to a point where a painless turnaround appears to be possible.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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