Sunday, September 27, 2009

Fleckie Strikes again

Good Morning All

I am a big Bill Fleckenstein fan and I thought his most recent post was very insightful.

Bill recently attended a conference in NYC where the best and the brightest shared their world views on the economy.

The biggest star at the conference was legendary hedge fund manager John Paulson. IMO, this guy is the smartest guy on Wall St. He made billions betting against the subprime market in 2007.

The returns in his fund are simply breathtaking year after year. According to Bill, Mr. Paulson had some very bullish comments around gold:

"Paulson holds court I don't think I would shock anyone if I said that the day's headliner at the conference was Paulson (though the other speakers were equally fascinating to me). Everyone wants to know what he thinks because he made so much money on the subprime collapse. But it should be noted that he puts his pants on one leg at a time, too, and thus can be wrong like the rest of us.

After all, he wasn't that much more right about what was liable to happen than a handful of others, such as Grant and my friend I often refer to here as the Lord of the Dark Matter (who's quoted, for example, in "The trouble with techs right now" and "Will economy's green shoots wither?").

However, what Paulson did was to take his views and express them brilliantly,which may also have been a function of just how well he understood the situation. Thus, given Paulson's recent track record, those who have a bullish viewpoint on gold naturally want to know what he thinks.

In short, he believes that money printing by the government will ultimately lead to a good deal of inflation.

Parenthetically, while deflationary chatter certainly has the headlines and the upper hand regarding folks' opinions in the short run, I see quite a body of sharp investment minds coming to the conclusion that in a social democracy with a fiat currency, essentially all roads lead to inflation.

In any case, Paulson is convinced that gold will be a very good way to protect himself from the eventuality of currency debasement (i.e., inflation). He observed that if one thinks about gold in a three- or five-year time horizon (instead of hour to hour, day to day or week to week), the probability increases of gold being higher over time -- and, most likely, much higher.

I had not thought about gold from that point of view, but that is exactly right. Consequently, if folks have positions that are reasonably sized, it makes volatility -- especially when it's downward, as was the case last week -- much easier to accept. "

The Bottom Line

Food for thought. It appears that the things we own(housing, cars etc.) are dropping in value while things that we need(fuel, food) are becoming increasingly more expensive. This makes the inflation/deflation argument a tough sell for both sides.

This is hardly the recipe for a strong economic recovery. Let's not forget that we will also eventually be forced to deal with our soaring budget deficit. In short, this means much higher taxes for everyone. The politicians are lying when they say they will only tax the rich.

If we see the healthcare reform bill pass I predict the tax rate in this country will be 50%. Canada's tax rate is 51% in order to pay for this. Take a look at any of the westernized countries that have national healthcare and you will see a similar tax rate.

I advise everyone to read Bill's article. The mood at the conference he attended which included the best and the brightest was extremely bearish. My contacts on the street have been telling me the same thing.

Be careful with your money folks. Please diversify your nest egg in order to protect yourself from the nasty storm we are about to sail into.


CT-Hilltopper said...

This is where people with no economic background get into a world of trouble.

They hear a television full of world class economists on their televisions, half are screaming "inflation", half are screaming "deflation", and poor Joe Six pack has no idea that what he should be doing is preparing for both things at once.

This is where the financial channels like CNBC do armchair investors a great disservice.

getyourselfconnected said...

great find on the Fleck article. Very interesting indeed. If China is really getting into gold then the chance of a huge move down becomes small. I still think people have no idea how small the gold market is; China buying can really support prices.

Jeff said...



I agree. I bet that there are far too many J6P portfolio's that don't hold gold as an inflation hedge.

Unfortunately most investment advisors have no clue either.

I can't tell you how many freinds I have that have been advised by their broker to go "all in" on equities.

Jeff said...



Yeah I pretty much think John Paulson is a god.

Fleckie didn't reveal everything that went on at that conference but I think he gave us the general theme as to what was said.

I think China is buying anything that is hard and has value. Holding mostly paaper dollars via US treasuries all of the sudden look spretty risky.

The banks are keeping the bond market propped up right now as they buy billions of the stuff and make a nice spread.

I will explain this on another post.

FA in CA said...

I agree with your comment there Jeff.

I'm actually pretty disgusted and concerned with the lack of knowledge on basic economics and what's going on today with several of my office's managers / principals.

It seems like every week I'm getting in a debate with my manager who also happens to head the biggest office here in the Western Regional District.

I've told him several times about dollar devaluation and to start looking at bullion as a dollar hedge but he and several in the office are completely clueless.

Granted only 5%-10% of the population will listen anyway when it comes to gold talk.

In addition, people have no critical thinking skills these days and the patriots of old simply just don't exist.

As a Series 66 RIA, I've probably lost more potential clients talking about dollar debasement and going to gold / silver bullion as a hedge.

As much as I hate to say it, there are a lot of blind, ignorant, and just plain stupid people out there.

Good luck all.

FA in CA

Jeff said...


Great insights. Thanks for sharing them with us here.

I hate to say it but I am not surprised although the fact that your regional is clueless is pretty shocking.

I am sorry you lost some potential clients as a result. Something tells me they will be looking for you as the dollar continues its decline.

The 25 year bull market has made many money managers greedy and stupid. This will change when the market rolls over.

Good luck and I hope you take your managers job someday!

Peter said...

Very nice find Jeff. Inflation/deflation, who knows.

To predict inflation one has to predict what the government is going to do, and that is impossible. All we can focus on is the here and now, which is deflation. With the current policies the government is powerless to stop it.

The question becomes will the government take the next step and debase/monetize? They will want to, but can they? Assuming this is assuming that we the people can not change things. That the revolution/protests are destined to fail.

Right now there is no need for the government to start printing. The market is up, green shoots are strangling us, economists and government officials have declared an end to the recession. Taking the next step now is not necessary and would signal panic. They have the sheeple calm, why rock the boat.

So my answer is we have deflation until we do not. You continually speak to the treasury auctions, and that is most likely the place we will be warned of inflation, probably by the Chinese not buying.

When that time comes we will have an answer. Either we monetize our debt or the citizens of this country refuse to allow that and force the government to shrink by 50% resulting in an immediate economic collapse but potentially saves this country.

getyourselfconnected said...

Great discussion all. While it is great to find some thinking moinds out on the "internets" it's kind of sad that mainstream media misses so much.

Do not hit the panic button! When you are the champs everyone plays you like it is the Superbowl, and thus a few losses spring up!

jeff said...


Steeler nation is sad today while my Raven neighbors glow at 3-0.

Peter great thoughts.

imo, the Fed already is mildly printing. This is definately one of the reasons the dollar has weakened and the market has soared.

Regarding bonds, I read some interesting insights on why yields are low.

The borrowing for next to nothing and buying treasyuries at 3-4% and pocketing the spread.

Richard Russell was explaining this and it makes a lot of sense.

I am going to get into this more when I get a chance.

I have another crazy week next week so I will get to it when I can.


jeff said...

oops I meant above the banks are buying treasuries.

Sorry for the typo.

Peter said...

Jeff, makes sense. That just works as a carry trade then. Plus the banks are now getting interest paid on their reserves. So I believe they borrow from the Fed at 0% and then give it back to the Fed and get paid 2% interest.

Uh, can I do that. I'll just start with a billion please.

Read a stat that the Fed bought roughly half the Treasuries issued last Q. The problem is that other than getting the government to spend they can not get the money flowing through the system and leveraged up through the consumer. They are as impotent as Ben's ridiculous beard.

Scott D said...


I'm a long time lurker now commenting for the first time. I was reflecting on your food for thought, that our necessities are increasing in price while the consumer items (*cough* garbage *cough*) decrease in value. I was wondering if you have read much Charles Hugh Smith over at He offers great insight on a regular basis, not so much in the technical investment arena, but rather it falls into both economic theory and social implications.

Anyway, he consistently talks about what he calls the FEW resources (food, energy, water) as the things that will increase in value, price and scarcity over time. I think that is what we are seeing now, the marginal utility of the junk we buy has pretty much gone to zero. The consumer "rush" of going to the mall and spending is gone, the only things people are concerned with now is putting food/water on the table and keeping the house cool/warm.

I think we are seeing a fundamental shift in how Americans and the world in general value their environment, their lives and their possessions. Thanks for the continued insights, rants and all the other stuff, you are always a good read.

Jeff said...

Scott D

Thanks a lot

Sorry i didn't get a chance to respond to you sooner. things have been very busy.

I really enjoy Charles. He is a great read and I check in often.

I couldn't agree with you more regarding consumer spending habits.

It's time to survive versus buying $400 I-phones.

I am not a very techinical guy either when it comes to trading.

Personally trading has become another sham if you ask me. You might as well go to a casino because I think the odds would be better.

Thanks for your support!