Fleckenstein - Why Stocks May Collapse 25% In Just 3 Days

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.

So all of the sudden in a short space of time the interest rates are now higher and equities get destroyed and that makes the economy worse and that feeds on itself.  And how do you solve that?  You can’t print money to solve that.  We are going to that place one day.