Eric King:
“Bill, you wrote about the Fed’s expansion of its balance sheet and the
fact that they (now) own 20% of the outstanding U.S. debt. You said
there were going to be dislocations at some point, and I’m just
wondering what that will look like?”
Fleckenstein: “Let’s say Ben (Bernanke) comes out
tomorrow and says, ‘We are not going to taper.’ But let’s just say the
bond market trades down anyway, and the next thing you know we go
through the recent highs and a month from now the 10-Year is at 3%. And
people start to realize they are not even tapering and the bond market
is backed up.
“They will say, ‘Why is this happening?’ Then they may realize the bond market is discounting the inflation we already have.
At
some point the bond markets are going to say, ‘We are not comfortable
with these policies.’ Obviously you can’t print money forever or no
emerging country would ever have gone broke. So the bond market starts
to back up and the economy gets worse than it is now because rates are
rising. So the Fed says, ‘We can’t have this,’ and they decide to print
more (money) and the bond market backs up (even more).
All
of the sudden it becomes clear that money printing not only isn’t the
solution, but it’s the problem. Well, with rates going from where they
are to 3%+ on the 10-Year, one of these days the S&P futures are
going to get destroyed. And if the computers ever get loose on the
downside the market could break 25% in three days.
That
wouldn’t be hard at all because it’s only going up because it’s going
up. It’s not like things are better. And the fact that it’s gone up
people are willing to look at the glass and say, ‘It’s half full.’
There is nothing half full about this glass. There is only the fact
that money printing has driven stock prices higher.
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