When today’s guest expert appeared last on this channel, he warned about a potential moment when the bond market would lose faith in the Fed’s ability to tame inflation, at which point it would start pushing yields substantially higher.
Well, long bond yields have indeed surged over the past few months, setting US Treasury bonds up for what looks like an unprecedented third consecutive year of losses — something that has never happened before in US history.
Are we indeed at the point where the bond market’s confidence in the Fed has broken?
Or is this an exceptionally attractive time to buy long bonds, as a number of other experts are now saying?
For answers to this important question, we welcome investor and analyst Bill Fleckenstein of Fleckenstein Capital back to the program.
Follow Bill at https://www.fleckensteincapital.com
Bill Fleckenstein 0:00
Been bull markets and bear markets tend to be generational. The last bond bull market was about 40 years, the prior bear market was about 33 or so. So this will be a generation, a generation long bear market
Adam Taggart 0:20
Welcome to Wealthion I’m Wealthion founder Adam Taggart. When today’s guest expert appeared last on this channel, he warned about a potential moment when the bond market would lose faith in the Feds ability to tame inflation, at which point it would start pushing yields substantially higher. Well, long bond yields have indeed surged over the past few months setting US Treasury bonds up for what looks like an unprecedented third consecutive year of losses, something that has never happened before in US history. Are we indeed at the point where the bond markets confidence in the Fed has broken? Or is this an exceptionally attractive time to buy long bonds, as a number of other experts are now saying for answers to this important question. We welcome back investor and analyst Bill Fleckenstein of Fleckenstein capital to the program. Bill. Thanks so much for joining us today.
Bill Fleckenstein 1:14
Thanks for having me, Adam.
Adam Taggart 1:15
Always a pleasure bill. Like I said, lots going on that I think your expertise is particularly well suited to try to try to help us think through here. A lot of questions for you about bonds. But real quick, if we can just start with a general question, I’d like to ask you, what’s your current assessment of the global economy and financial markets?
Bill Fleckenstein 1:33
Well, I, I think we’re slipping into recession. But it’s not going to be quite what we’ve seen in the last 20 years. Both that the recession after the stock bubble, which was over to those that, you know, say late 2002, early or early Oh, two, and the collapse after the real estate bubble, the economic collapse, were were were pretty was very easy to see what would happen when those bubbles burst. This is a quite a bit more convoluted, because of two things. Number one, normally, the equity market begins to discount economic troubles. And certainly, you know, as economy is deteriorating, companies Miss numbers and they go, and they decline rapidly, the indices sync, but with the passive bid warping the market, the equity market doesn’t give this the signal, the forward looking signals that, you know, that it did in the past, in my opinion. So because we know how the past had been works, I’m sure you’ve your listeners to understand if they don’t, they should listen to Mike Green.
Adam Taggart 2:50
This is your giant, mindless robot that we talked about. The flows come in, they have to go to certain parts.
Bill Fleckenstein 2:56
I mean, the 401k still get money. And so then the money goes to Vanguard and BlackRock and they allocate money and they buy stocks, there’s no thought at all. So that I think, is put a bid under the market that, that if we had this, if we had, if passive had the same market share, sorry, if passive today had the same market share it had in 2000, or 2008, the equity market would be lower, the equity market being lower would have people viewing the economic data a little more suspect, maybe companies would be a little quicker to cut back on labor. But if that’s the hammer, we have to play, in addition to because of the inflation and the increase in the prices of so many things, the nominal data looks pretty strong. Even now, in real terms, we might not, you know, we might be we might be seeing negative growth in real terms, depending on what you think the inflation rate is. And while I’m on the topic of the inflation rate, there is no one inflation rate. Every consumer has a similar head sorry, as a has a different or every kind of group of people that are same age, same kind of job. They have experience a different inflation rate then does somebody who’s maybe already has a house and has a lot of assets that’s wealthier. So there’s a bunch of different inflation rates. And the bond markets prediction isn’t a prediction. The tips market prediction is in your prediction, this just math. Okay, that, you know, they derive what they think will be based on the breakevens in the tips. Anyway, I don’t want to go in the weeds on that. What my point is, the inflation rate is is large is not just what the government states it to be. Because the CPI is so phony I described. I took up almost a whole chapter in my book to talk about that. Any case, so I think people have an inflation idea in their head, and it doesn’t change daily, like the like the mainstream media says, you know, you know that the tips widened and therefore inflation expectations changed today or our earlier by the minute, I mean, nobody’s opinion changes that rapidly. That’s that’s nonsense, because it’s a drive idea from a price change. So, in the inflation, the mindshare of inflation is probably the highest it’s been, you know, since the 70s. That doesn’t mean the rate we’re experiencing is the highest, but people are, hadn’t worried about it for the last couple of decades. And now they are concerned about it. And there’s a big battle between, you know, is it transitory isn’t transitory? The pure transitory crowd has lost that argument, but they’re still hoping or expecting that we’re going to see a real amelioration, the rate of change, which we will because the base effect, but the question what happens from there is inflation. Do we go back to the two decades we had prior to say to 22,021? Or two? Or are we in a period where inflation is going to be, you know, in the three to five range? If not higher? For the, for the next group of years? I’m in the latter camp. So the reason I bring that up is because you, that matters to the bond market, but as as as it pertains the economy, the fact that nominal prices are up and there’s this passive bid, a lot of the data looks okay, and the markets doing okay, so there isn’t a there aren’t a lot of there’s not as much angst about a potential recession, as I think the data would ordinarily trigger. That was a long way to try to say that,
Adam Taggart 6:34
okay, but But it’s an important point, you actually, you raise a lot of things that I want to build off of. Alright, so on, on why you expect inflation to be higher going forward. So the secularly I want to dig into that. And if in your answer, you can react to something that Lynne Alden just said, I literally just interviewed her yesterday. Okay. And we talked about how I mentioned this a couple of times on this program, but we talked about how, right now the Fed and the banking system along with it is jamming on the economic brakes, right. But we have the fiscal side of the equation, Congress, the administration jamming on the accelerator with all the deficit spending. And you know, if you do that with a car, you overheat the engine, think the same thing can kind of happen economically. And by jamming on that accelerator, with deficit spending, it’s pretty hard not to expect some future inflation to come out of that. Is that part of your worldview? Here?
Bill Fleckenstein 7:33
Yeah, it’s, it’s complex, because what really matters, in my opinion, are inflation expectations. And there’s no real number. I mean, you know, some of these surveys ask people about their inflation expectations. But I remember vividly in the late 70s and early 80s, people, people believed the inflation rate could not be brought under control. That was a mindset. Okay, that wasn’t a number. And for the last 25 years, people have have this notion that we were one step away from deflation, and we really couldn’t create inflation in these idiots that the Fed talked about not being able to get to their 2% target, which they made up it’s not a it’s not a true it’s not a target in the in the Feds chart, it is made it up. So inflation is far easier to create than it is to break when psychology changes. And so what I believe is psychologists change, and that’s why you see some of these aggressive wage demands from the auto workers play, you know, any place where people have a bit of bargaining power, they’re asking for as much as they can get, because the inflation rates been higher than it’s actually been stated as and people know that. And they, they, they’re trying to take care of themselves. And that psychology doesn’t change easily. As I say that, the main the media writes, like people’s opinions of inflation and all that change by the minute, you know, they’re constantly changing. That’s, that’s complete nonsense. So I think that inflation and this was the part that I was focused on, when they were doing all the things that I thought would create inflation. When the transitory seems that said it would be transitory, I thought we’d created an environment. Part of it was people seeing that you might not be able to get things, this is a good bit of a buy in advance that I just think the fabric of what went what fabric of what went on during the COVID Nonsense, and then the subsequent inflation and what people experienced, I think, have changed psychology for quite some time until such time as the changes and I don’t see what that is yet. Something will come along, I suspect, but we’re in the we’re in the other. We’re in a different world now than we have been for the last 2025 years.
Adam Taggart 9:45
Okay, so in the start of your answer, you said we think we may be slipping into recession. I mean, could they not you’re not necessarily calling for a bad recession, but you feel free to clarify but could a bad recession change that mindset, where it goes from, I’m demanding a higher wage to I just want any wage?
Bill Fleckenstein 10:05
Well, if once they’ve already got if it’s a collective bargaining agreement once they’ve got the wage hike, yes, that company can save money by laying people off. But the people they have, they can’t go back on what they agreed to
Adam Taggart 10:16
share on, you know, if you’re a United Auto Workers who struck a deal, I’m just talking generally, well, general consumer mindset.
Bill Fleckenstein 10:23
Yeah, in general. Yeah, that that, that that will change too. But, you know, another factor that adds to the inflation that doesn’t get talked about is when the Fed over does it on the on the easy money side, and the stock market goes crazy, mostly, most public companies, Grant stock options for their employees. So they may not have a W two that says, you know, says one thing, but then they get stock options added in. So now they’ve got more money. So if you look at the bullish sort of moves in the equity market, that was acid inflation, but there was a component that fed into inflation, which people haven’t talked about forever, right. So I think that the people in general, yes, you’d rather have a job with a little less money than no job at all. Particularly, it’s a decent job. But I don’t think we’re I don’t I don’t think that I don’t think that’s going to change the overall dynamic. At this juncture. Now, we’ll see what what where events go in the market, and that could change but for right now, I don’t see that.
Adam Taggart 11:29
Okay. As an outcome, I need that. Okay. All right. So you said you see, you know, three to five ish, you know, inflation going forward from here, that’s maybe the new baseline. Getting back to what I mentioned in the introduction, right, which is when you were on this channel, last, we had a really long discussion about your concern at that point in time. You know, I don’t think you were saying it’s definitely gonna happen. But you were saying, hey, if this continues sort of on this trajectory, if the Fed proves it shows that it cannot tame inflation, at some point, the bond market is going to say, Well, wait a minute that and then we need to reprice things, buddy. As I said, bond yields on the long end have started moving in the past month and a half. Is this potentially the bond market adopting your view, which is, you know, what, we think there’s going to be higher inflation going forward, we don’t think Powell is going to be successful in getting and keeping it below two. And therefore we want to reprice things, or is there something else driving the current dynamic?
Bill Fleckenstein 12:31
Well, it’s a conflict. It’s complex. And of course, I don’t know, I’m guessing. But that it’s a process. People have lose confidence slowly over time. And then it all at once they say, that’s never going to change. And that’s, that’s, that’s later towards the end or a big contract trend move, but the that it’s a process. And so I think we’re in the early stages, or it’s already begun of the process of the bond market, taking the printing press away. Now, what do I mean, when I say that, that that means that when the Fed does something that they’ve done in the past, like, maybe hint that they’re going to pause? The bond market can’t rally? And and then, and then a version, I think we’ll see down the road is the Fed may cut rates, and not too long after see longer rates rise that we’re not, we’re not to that part of it to the movie yet.
Adam Taggart 13:32
Okay, and sorry, sorry to interrupt you there. But that will be material, because normally, when the Fed cuts rates, you see yields go down, right. So this will be upside down world all of a sudden.
Bill Fleckenstein 13:42
And so I think, you know, that could be that could be if the Fed pauses, it continues to be on the pause that they they’re on right now, let’s just say that they don’t tighten anymore, because the data looks, the economic data looks a little bit softer. It’s starting to be that way. Although, you know, you get stuff that bounces around like retail sales, but there that’s a nominal price difference. It’s not real. So the inflation rate can make retail sales look strong, and they really are. But the fact of the matter is, supply enters into this too, and that’s part of part of the problem. Supply hasn’t mattered, ie the size of the deficit hasn’t mattered for 40 years. So people have become complacent about that. But now we have a situation where supplies enormous and people now aren’t as sure as they were that the investment case for bonds where the 10 year yields, you know, what does it yield today? For 480 ish, is what they want to do. See also because the yield curve is inverted, flat two, flat inverted, was inverted. If you have to have a strong or case two one on bonds? When the curve is normally shaped? You can you can you can you got positive carry, right? So if you’re in a financial institution, you have positive carry. So you might you might give the bond market sorry, bonds the benefit of the doubt, which shall I own or not, because you get positive carry to get positive carry long enough that you just some cushion for prices bouncing around. Now, we have a situation where there’s no positive carry. And all the people who did that plate, you know, we’re in that business banks, they’ve got, you know, massive losses on the held to maturity part of that book, right. So we don’t have, we don’t have the same level of buyers. In the banking system that we, that we, we have in last 20 years, Japanese and Chinese investors appear to be selling, and so and so as the Fed, and meanwhile, the devil is out of control. So you have so if I’m looking at buying a bond for investment, because I’m not making money on a carry, I say to myself, Okay, I got I don’t I see these other buyers aren’t there? I see the bonds are out of control. If I have half a brain, I know I can’t trust the Fed, but a lot of people do. I mean, do I really want to buy him at 489? I think what I’ll do is I’ll stay short, two to three years and get a higher yield Anyway, yes, I missed the opportunity to lock them up if rates are gonna drop. But I don’t think anyone really, I mean, a lot of speculators tend to think that but I don’t think you know, somebody who’s deciding whether they want to invest in bonds, is thinking that. So it takes a more compelling case, or a better rate of return for people to want to step up and buy bonds and sit on them. Right. So that’s, that’s, that’s, that’s, that’s, that’s how the market is starting to work to sort of take the printing press away. Now, people, I think, still believe the Fed. And so if the Fed were to, let’s say that they pause at the next meeting, and it looks like they’re really gonna pause. Let’s say that, let’s say the stock market got, I believe they got some bad data in the q2 and q4, they might hit hint that they’re going to ease if you then saw after a rally, there’d be a knee jerk rally and seven years out and out. But if then you start to see them, you know, bond starting to leak, I yield start to rise again, you’d say, well, well, maybe, maybe people aren’t, they don’t quite trust the Fed. Now, if that happened, and bonds would get worse, and if there was trouble, the economy and the stock market data get worse, and you’d have a bit of it feeding on itself. And maybe bonds could bounce. And this can be can be complicated. But the next data point to to look at is what happens after the next easing. Now. If we don’t get enough bad economic data that may be farther out. So I don’t know. But I think it’s clear that the that the bond buyers aren’t behaving as they did in the prior 20 years, over the last couple of years, and not behaving as they did over the prior 20 years.
Adam Taggart 18:04
Got it? And would you say they’re being much more selective and sort of, you know, demanding payment for risk? Where I would say the past 20 years, they were kind of just like, we’re not worried about anything. So yeah.
Bill Fleckenstein 18:21
You know, the mentality was different, can’t really have inflation. And again, there’s positive carry, see a positive curious, there’s a whole there’s a whole lot of buyers that will be there. No, all those buyers are upside down right now. So yeah, buying Feds not buying foreigners aren’t buying. And I said, So now, you need people to actually say, Hey, do I want to own these? Do I have cash? Let’s have some cash. Do I want to buy the two year three year don’t want to buy the 10? Year? 2030? Well, I think if you do if you have a mindset like I will, I think they have, I think a lot of people right at this juncture would rather choose to buy the short end. And of course, Janet is trying to fiddle the maturity structure. So she just assumed issue shorter paper anyway. So I just, I just don’t think people are eager to lock up rates. Now. You’ll see a lot of specs move money around if they if the data gets weak enough. But I mean, this is going to be this this this this issue and this problem of financing the deficit and and finding trying to find buyers for bonds is going to be with us for quite some time. I think.
Adam Taggart 19:25
So. So let’s talk about that. And then I’m going to make the other side of the argument and let you poke holes in it. But we have what I’ve said often recently is we have a wartime deficit and a peacetime economy. Yes. And there’s folks that had been saying, Hey, we’re sending money to Ukraine and whatnot. Right? Yeah, but we don’t have our, you know, our troops committed. We aren’t reengineering, you know, US corporations to build war materiel, the way that we made the car companies build tanks and planes back then right. So we we haven’t marshaled you know, our economy around a war like we did in World War Two World War One But, but we have, you know, one of the one of the highest debt, sorry, deficits to GDP ratio we’ve ever had. And we’ve never had it here at this level when we’ve had like unemployment this low, right? So we are we are spending like drunken sailors if you want to put it that way. And I imagine, and this is tied to your inflation expectations, but I imagine the bond market is beginning to say, alright, that’s going to be problematic. And so we want higher yields as a result. Yeah, that’s
Bill Fleckenstein 20:31
one of the risks because the unstated risk is, let’s say, push comes to shove, and there’s really, you know, there’s economy’s not doing that, well, maybe it’s clear to see stagflation, the stock market maybe doesn’t do as well as that as well. But again, there’s the passive bid there. So that works it, you know, I, they’re there that people have to be compensated for the risk of massive supply, potential for inflation to not be under control and the potential for the Fed to have to blink, even though it knows maybe it’s making a mistake, because, you know, the financing the deficit could get to be a problem. So there’s a little bit of recursiveness, to the, to the bond supply, making people be extra careful because of that supply. And, you know, so, again, it makes finding buyers and financing deficit damage more difficult.
Adam Taggart 21:26
Okay, so. So I get all those reasons why bond holders would say, I’m going to prefer the short end of the curve than the long, I’m going to demand higher yields on the long when I take it for these risks. Now, let’s flip to the other side of the argument. Right? Were there people who were saying, you know, first off, we’ve never had three straight years of losses in US Treasury bonds, we’re probably going to lock within this year, you know, and they’re probably I think they’re saying the odds of us doing that four years in a row, the odds of us doing it three years in a row were very small, four years in a row infinitesimal. So to a certain extent, there’s just sort of a reversion to the mean, argument out there. Secondly, you know, they’re saying, hey, look, yields going this high, are going to break something. And maybe we’re slipping into recession. But maybe we start, you know, hurtling headlong into one, you know, if if rates really start causing things to break. And so that will activate the number one historical buyer of US Treasuries who has put themselves on the sidelines recently, which is the Fed, right? So forget about everybody else, the the big buyer in the room has always been the Fed, and they’re just not at the table right now. Well, if the Fed comes back to the table, especially if they’re in rescue mode, oh, we’ll probably see a bunch of stimulus that’s going to bring, you know, interest rates down. Or, you know, and this is probably the lesser case scenario, maybe we’re wrong, maybe the Fed does, when maybe it gets inflation down to 2%. And it says, okay, mission accomplished, we’re going to start bringing rates down as well. So, you know, those people are using those arguments to say, Oh, my God, this may be one of the best times ever, to, you know, put some money out in the long end of the bond curve, because when yields go down, prices will go up, and I’m gonna get paid a nice amount, you know, all throughout the way, and it’s a treasury bond. It’s
Bill Fleckenstein 23:16
just just gotten me there in that and absolutely,
Adam Taggart 23:19
I want you to take your chance not to Well,
Bill Fleckenstein 23:21
I mean, that’s the framework that’s that worked for 2025 years, what I’m saying is, we’re fundamentally in a different spot, now, we’re more likely we’re in the 70s, we’ve got this massive deficit, it’s not going to be brought under control. We’ve got this underlying inflation smoldering, and I don’t think they’re gonna get get in under control. If we start to get weakness in the Fed starts to ease. Um, you know, I’m not saying there won’t be a rally, but what is that really going to cure? I mean, you know, people have had this and have had deflation on the brain for 25 years has a Benny deflation. mean the price of goods and services, Marsh Harbor, X, SS X CPI, magic adjustments, that we haven’t had deflation. And yet people act like it’s around the corner, we had rates at zero during COVID. I mean, how insane was that? So you know, from the from the can’t have four years in a row. I mean, well, you know, we had a 41 year bond bull market plus or minus, and now we’re in that ended in book negative rates, I might add. And so, uh, now we’re now we’re starting on to the brave new world as a consequence of the of the QEII and nerve and ZURB that we that central banks precipitated. So, you know, just because the economy weakens, you know, you know me you know, what if we get a situation where nominal growth gets good gets down to two, and inflation is still three or four mean, that’s that’s negative GDP. That’s a recession. Well, You know if the data that coincides with that has causes the Fed to ease a bit, like I say, what are bonds going to do? And that’s going to be the $64 trillion question is, there’ll be a rally for sure. But from there, do they start? Do they behave like people think now, if you give a more positive slate show positively sloped curve, it may help some. But, you know, it’s gonna be a long process. I don’t, I don’t, I don’t see a scenario on the horizon. Although I could make one up, right where you want to own you want to lock up 1020 30 Your paper because it’s so attractive? You know?
Adam Taggart 25:39
Okay. And part of why I’m asking this questions like this bill, is because I’ve had some people on the show, I know, I just get the best time of my career.
Bill Fleckenstein 25:47
Yeah, no, no, no, I understand that. I understand it. It’s an argument that people make, and I should have an answer for it.
Adam Taggart 25:53
Yeah. Well, and hey, and that’s what makes a market, right. I mean, you get smart people looking at the same data having different different forecasts. So if I, if I hearing you correctly, in the in the instance, where something breaks Fed has to step in, I hear you saying, Okay, sure. They’ll probably be some short term rally. But the rubber is going to meet the road after the dust settles there. And I think you’re saying like,
Bill Fleckenstein 26:15
yeah, just look, something broke this spring, Silicon Valley Bank, you know, all the, the Republic bank. So the Fed, the Fed came out with a facility, you know, the BT whatever it is called via FTP. Yep. Yeah. And then, and then they bailed out depositors that Silicon Valley Bank, now if there was ever a financial institution that deserved to have the people that were above the, the, the five, that’s like, FDIC, the FDIC, the FDIC deposit levels, take a haircut, which should have been the depositors that bank. And they probably based on what I saw, they probably would have got that nines at 90 cents on the dollar. So they lost 10%, for being totally for not doing any due diligence. And but that didn’t happen, that was going to be too draconian. And that you got to dig out of bond rally out of it. But now, here we are, and the feds, people think the Feds gonna pause and rates are higher. So they wrote to the rescue like they used to. And now after a rally and twists and turns, rates are higher. So that’s the kind of thing that I expect to happen. When there’s an accident, they’ll try to do an ever look like okay, it’s back to business than the 1995 to 2021. Sort of era. Yeah. And then it’ll turn out not to be.
Adam Taggart 27:38
That’s a really good analogy. And so, you know, I again, I sort of look at your interpretation is, yes, we’ll have these events. And yes, that might make the world work the way that we’ve kind of been used to the past 20 years or so. But then as the dust settles, these guys are going to say, okay, the Fed just intervened, here, inflation wasn’t tamed, we’re still doing a bunch of deficit spending. Now, the Fed stimulating, that’s gonna create more inflation in the future and never think about it. I want higher yields.
Bill Fleckenstein 28:09
Or, or maybe if you don’t think well might not know, but it’s not coming down. In other words, that people become more and more convinced that the era that we were in, that started with Greenspan is over either response is over. Now, they wouldn’t say it that way. I wouldn’t say it that way. But that’s the consequence that people have a recency bias. They think the markets markets work pretty much as they have for last 25 years. That’s not true. You know, they they work different ways in different periods. And we’ve gone through lots of different points in time. Sorry, different environments in the past. But what I think everyone is working from the wrong playbook. And that’s the one they’ve they’ve learned in the last couple of decades.
Adam Taggart 28:51
Okay, so let’s, let’s actually talk about that playbook, the playbook since 1980, and bonds has been ride, the decrease,
Bill Fleckenstein 28:58
didn’t start and it wasn’t in 1980. Because I remember, I owned bonds in 82. And in 84, yields backed up to around 10%. Again, it might have gotten to 12, because people were afraid that Volker had was going to be too easy. And people it was it was the last people thought, oh my god, we’re not really going to conquer inflation. There’s one more lurch back, and that was the last great buying opportunity. It really wasn’t. It really wasn’t until Greenspan got ahold and you know, and save the world after the 87 crash, which was caused by portfolio insurance, which is not so dissimilar to the maniacal madness of massive passive bid. But it was Greenspan in 95, and particularly in 98. Somebody pointed out to me on Twitter yesterday that Saturday was the 25th anniversary of the rate cut that he did on Friday afternoon while the market was open, after the long term capital. I just reread that chapter and what people don’t realize is they’d already been cut Hitting rates. And you can you can read the Fed minutes you couldn’t at the time, but you can go back and read them. And I wrote about it. There was no real angst about the economy, Greenspan did it because he wanted to boost the market. And, and that was the start of the Greenspan put which fueled the speculation that blew the top off in 2000. And we’ve had this, you know, this Greenspan put idea. That’s, you know, maybe it’s been slightly disabused in the last, you know, few years. But anyway, what I’m saying is the, the 80s weren’t like, they were different than then we saw in the mid 90s. To hear that’s okay. So like, differentiation I’m making,
Adam Taggart 30:37
okay. Okay. And now I’m trying to say is for a couple of decades, the trend in bonds was just ride down yields.
Bill Fleckenstein 30:47
Whenever they’re doing, you know, if they’re easing by bonds, if they’re tightening, just kind of hang on for a while, and then, you know, in after they’ve done it for a while, you can get ready for easing again, you buy bonds, right, right.
Adam Taggart 30:59
But the trajectory was one, pretty much a steady steady move down in yields, which means a steady rise in prices. Correct? Are you now expecting that we have we have past some sort of event horizon, and going forward for some period of time, probably measured in years or decades, decades, decades? Yet, it will be the inverse?
Bill Fleckenstein 31:18
Yeah, bond. Fund, bull markets and bear markets tend to be generational. The last bond bull market was about 40 years, the prior bear market was about 33 or so. So this will be a generation, a generation long bear market? I would think that doesn’t mean there won’t be big rallies along the way. And that doesn’t mean that something some accident might be big enough to actually change that. I don’t think so. Because the response is going to be the printing press, until such time as the printing press won’t work. And that’s going to take a few iterations to get to that point.
Adam Taggart 31:54
You got it. You’ve said it’s all about mindset, right? That’s what changes.
Bill Fleckenstein 31:58
Yeah, mindset and behavior and the math, there’s got to be some math behind. Sure. But
Adam Taggart 32:02
what you’re saying is, is it once Pavlov’s dog has been trained to salivate when it hears the bell, it takes a while before you can untrain that, right? So we’re gonna have this mushy period, where people are still expecting the Fed to come to the rescue, and maybe it’ll work for a little bit, but over time, they’re gonna realize, oh, the Fed is not the savior, it’s been
Bill Fleckenstein 32:24
money, allowed the can to be kicked by the government, state, local, federal. And it was asset prices, rose tax receipts went up and all of that, and the Fed was able to finance them, or sorry, the Fed was able to set a scenario where the bonds were easily financed. And that period is behind us.
Adam Taggart 32:49
Okay, so from what I’m gathering from you, it sounds like you’re probably, you know, have the mindset of like, hey, yeah, folks should buy lots of short term, you know, debt, because it’s a great risk reward, right?
Bill Fleckenstein 33:04
You’re paying to park your money, if you’re not sure what to do.
Adam Taggart 33:07
Yeah, so that sounds great. Sounds like you’re saying, I’m not so sure about long term debt, maybe some speculative money, if you want to play that balance that you were talking about, but you’re not making a case,
Bill Fleckenstein 33:17
you got to be a professional to do that. You know, people think they can train the TLT at home. Maybe some people are good enough, but I think that’s a bad way to try to make money. Okay.
Adam Taggart 33:27
And look, you got to you’re very well known for your history as a short seller. Is this a short, rich market on the bond side at this point?
Bill Fleckenstein 33:36
He did. The problem with that is it’s so hard to get what edge Do you have, you know, if you think you’re capable of shorting individual stocks, because you’ve figured out expectations or here realities, here, you’ve got a catalyst that maybe the company started to stumble, you you have discrete variables, you can track and say A ha, my thesis is starting to be bit borne out. And I can now capitalize this. The bunch short, if it’s just if it’s a treasure is a pure macro trade. And, you know, while you might think you have an edge there, you don’t know what might happen. I mean, you know, you know, I mean, world events happen. Look at the, you know, the massacre in Israel over the weekend. I mean, you know, that part of the world tends to produce those kinds of surprises. So we’ll maybe we’re not supposed to be surprised. But we are surprised, you know, and of course, the brutality helps to make it surprising. I’m just saying things can happen that you didn’t have factored in on your bingo card. Right? And so trying to make no I have been short, often on bonds. I didn’t trade it as well as I would have liked because I got chased out near the highs, you know, a couple of summers ago, and I think get back on board. I’ve been short some niches but I’ve never found the right entry points since I got bounced out, you know, because I was getting run over. And okay,
Adam Taggart 34:55
we’ve talked in the past about how the shorts game is really You
Bill Fleckenstein 35:01
gotta be levered to really make any serious money. Unlike stocks, I mean, you know, you can have puts, you can be short, so, so it’s now guys that are good at credit can make money being short bed credits and mess and, and, you know, do arbitrage in the capital structure but I wouldn’t be completely incompetent at trying to do that.
Adam Taggart 35:21
Okay, not so much as an individual investor and gold but but just with your macro head on on that part. How concerned are you about the, you know, the schedule ahead of us have debt coming up for maturity at corporations, many of whom, you know, I can’t remember what the exact estimate is percent of the corporate fleet, that’s a zombie Corporation. But we got a bunch of companies that are sitting on, you know, very low cost debt that they were smart enough to pile on, and they’re kind of hoping to MIT that can make it through before the Fed starts. Or if the federal start pivoting before that maturity rate comes due, but the longer we’re higher for longer. Those companies, it’s a ticking time bomb, right? So how worried about you are on the impact of the general economy of those, those when there’s maturities hits the cost of debt rewriting for corporate America? You know,
Bill Fleckenstein 36:19
it’ll be it’ll be an issue. I don’t think it’s an issue right now. Because you know, that it’s too far out. I mean, it’s a variable, but I don’t, I think it’s a matter on an individual level more, because, you know, depending on the capital structure, you know, if a company has to pay more for interest, they have to pay more for interest that’s gonna hurt profit margins, but it’s not like, done in a wait situation.
Adam Taggart 36:45
Okay. I mean, because for a lot of these companies, it’ll be doubling at least of the cost of their debt.
Bill Fleckenstein 36:51
I mean, some that’s gonna hurt margins, right? And maybe they’ll lay people off, and there’ll be reaction to that. But it’s not like if you say worried it’s not like, Oh, my God, is it a black hole like Oh, eight turned out to be as the banking system was melting down the corporate the corporate maturity structure in need to refinance? I don’t think is, is a systemic event necessarily mean, the real estate, commercial real estate problem, you know, for the regional banks, and some of the insurance companies are is going to be a problem. All these things are problems, and they’ve all been can kicked. And the reason and the reason the problem exists, this idiots. The Fed took the Race to Zero, right? Did it QE. I mean, I’ve been saying this for forever, the Fed creates the problem. Then they create the massive amount of misallocated capital, then they start to, you know, tighten wait too late, eventually, something breaks, they start easing, and everyone treats it like a hero because they they bailed out the problem that they created, they are the problem, we would never have $33 trillion in debt and a budget deficit of whatever the number isn’t between one and a half 2 trillion or wherever it’s going to be, if the Fed hadn’t for for the last 25 years, just wrote to the rescue all the time, and there was never a consequence to being irresponsible, other than you know, for a couple of steps await. So
Adam Taggart 38:17
can I ask you in your reaction there to totally get it totally agree with you? Would you lump fiat currency into the mix as well? Well,
Bill Fleckenstein 38:26
yeah, yeah. That that. Yes. But, you know, Germany did a pretty good job of managing the Deutsche Mark. So while you know, while fiat currencies are prone to abuse,
Adam Taggart 38:39
which doesn’t exist anymore, but But anyways, yeah, that’s because the Euro was created. Right. Right. Which is now appear Fiat, but yeah,
Bill Fleckenstein 38:45
right. Right. Exactly. So I don’t think fiat currency per se, because if you, if you if you have a monitor approach to it, which is what Volker did to break the back of inflation, a policy is his policy, then then you’ve got, there’s only so much increase in, in in credit and the money supply that can be created. If you’re if you’re, if you look at where the abs are gonna go, they’re not a perfect measure. But there’s, there’s there’s a finite amount of growth. And if it gets above that, then you react to it. That’s not dissimilar to what the gold standard created, right? In terms of, you know, find more new gold, you have it on your balance sheet, you have connect, there’s more expansion potential. So I think a monetarist approach might make certain currency sound, no one’s no one’s following that right now. So I wouldn’t say necessarily, it’s purely the fiat currency. That does make it easier.
Adam Taggart 39:39
Right, but it’s an exacerbating effect along Exactly, exactly.
Bill Fleckenstein 39:43
But I don’t think it’s the problem. I think the irresponsibility of the central banks is the problem. And you can look at the Bundesbank days of old look, the Swiss franc used to be a good currency to until these crazies went out and you know, took rates below zero and you know, put apple and all these other stocks on their balance sheet. Now it’s kind of worked out, you know, on the stacks and stacks and appreciate it. But, you know, we’ll see how that how it ends. Okay, you know, as a sound policy either and I mean,
Adam Taggart 40:11
okay. So beyond, you know, central bankers Gone Wild from here. What else kind of keeps you up at night? Like what are the risks that you’re most worried about?
Bill Fleckenstein 40:26
Well, I Well,
Adam Taggart 40:27
there there has an investor sorry, doesn’t say
Bill Fleckenstein 40:31
like, they’re more more worries in finance, when you live in the open southern border we have and, and what kind of bad guys might have led in, they’re gonna cause trouble. But a lot of those kinds of things, the complete dysfunction of my city and other city, you know, so those are what those things keep me up more than the financial marks. Now, some point the passive bid is going to get to a point where it’s a problem. So if we get into the next recession, there’s enough layoffs. You know, I’m just hoping, hoping Mike Green, lets us all know he thinks the date is where it is, and will maybe be able to sense it. So if that past a bit ever starts to unravel, and they gotta go the other way, that is going to be an epic problem.
Adam Taggart 41:10
And that’s, that’s our watch out below problem, right?
Bill Fleckenstein 41:13
It’s a Hutu problem, I need to sell this, go to cupen only, you are an insensitive buyer for the last 15 years paid any price, you know, build these portfolios with prices, companies like Apple with a 3,000,000,000,002 and a half trillion dollar market cap, no growth at a 30 pe. And I give you a lot of other examples. If people if people get out of the drunk phase and have to get back to doing math, like okay, I can get this in a bond like PE ought to be about that which I can change based on I can pay back, Ben a dividend rate out with earnings growth looks like but the moat is around the business how strong the margins are, when people get back to analysis. You know, those those kinds of companies are, you know, are going to be under a lot of pressure. So there are a whole lot of consequences from what we’ve from what we’ve gone through. I don’t think the passive bid would have ever gotten as big as it did. If the Fed hadn’t, you know, rolled the rescue in the bond market and to help the equity market behave as it did No, maybe they would have been able to lobby well enough, and we’d still be in the same place. But I don’t think the securities prices would be anywhere near as high as they are and therefore it’s dangerous.
Adam Taggart 42:19
Okay, I’m lucky. I mean, if and when we hit that point, kind of almost unknowable at this point right now, but what Yeah, it’s on your DEFCON level, right? We’re five is, you know, happy days are here. And number one is we’re about to press the nukes. Where are we on that threat? Do you think
Bill Fleckenstein 42:37
I mean it from from our perspective, I’m not quite clear on the question.
Adam Taggart 42:41
Oh, sorry about the giant mind that robot potentially shifting?
Bill Fleckenstein 42:44
I don’t know, based on what I’ve been able to learn in this what I what I have, you know, in listening, talking to Mike. I think it can’t really happen until we have serious layoffs. So it’s one of those kinds of things that you have to be aware of it. You can’t act based on it, you just have to be aware. And if it starts to occur, then you can react, right? I mean, I didn’t know. So I didn’t know the spring, these banks were going to implode. But when they did, it caused a chain reaction of other things. So you have to be aware of what could happen and know what you think you might want to do if it does happen. I mean, so, you know,
Adam Taggart 43:27
if it does, are you going to cram your short hat back on and start going out?
Bill Fleckenstein 43:32
Probably, I mean, yeah, probably. But I mean, again, you don’t want to walk around with that, you know, with investments based on the fact that that’s going to happen, you know, sometime soon, because you’d be you know, unless you get lucky you’ll be run over. Right? But yeah,
Adam Taggart 43:48
okay, so it sounds like I’m gonna
Bill Fleckenstein 43:52
it’s just something to be aware of, and potentially here
Adam Taggart 43:54
at DEF CON three or four, like, you want to be aware that you might see it, but you’re not
Bill Fleckenstein 43:59
going to take any action. I mean, look, you have a day like today where the I mean, this is what today’s Tuesday, the bonds are down hard. And after opening lower the markets, you know, modestly green and expensive, stocks are floating higher. So and then people people start to think that the passive bid comes in and you got to other Structured Products thing. You know, guys like SEM, Jim croissant is very good at talking about that. They’re the guys, Chris StudioLive. All handful of people in that world that have talked about the fact that the structured products, when combined with the passive bid, make the market look artificial. I mean, like, you know, but on any given day, this there’s there’s no rhyme or reason to how its raised has nothing to do with fundamentals anymore, never used it not have that much relationship on a day to day basis, but now it’s totally disconnected for the most part.
Adam Taggart 44:50
Okay, and you have been in the game for a long time. So that really is saying something about the current situation, by the way is you’ve been talking I’ve written some notes. One is to get Mike Greene back on to the Hold off at this conversation now you really should, he has done need to tell you he is one ferociously smart guy. And then Jim croissant, I’ve had a couple other people pick me to say, hey should get their guy on the show. So it was great, great. Reach out to him is really great.
Bill Fleckenstein 45:13
He’ll open people’s eyes to a world vide, they may not be able to really understand and know how to navigate unnecessarily. But they’ll just be aware of why you have to, you have to know the game you’re playing, if you took an investor from this 70s or 80s, or 90s, even knew it and brought him in, in today’s environment. Without having watched what’s going on and understanding about the things I just talked about. Maybe lost finance, because fundamentals have nothing to do with it. The disconnect between fundamentals and prices is way bigger than it used to be. And it was just an act. But
Adam Taggart 45:50
can you imagine that conversation? You they come out of the Time Machine? They’re now here, you sit them down? Right? You say, Okay, here’s our current debt levels, right, here’s the money supply, they would say no way, like has voted down,
Bill Fleckenstein 46:04
which is another way of saying that people have been trained for the last couple of decades, for a way for for the fact that it no longer exists. And they have to learn how to play the game as it was played before. And not that many people, you know, have have have seen it. I mean, you are? Yeah, you have to kind of be my age to have been in the business then.
Adam Taggart 46:26
Yeah, so I mean, I can’t remember the latest stats, but I something like some ridiculous percentage of, you know, Wall Street professionals. You know, like started after 2008, or something like that. I mean, there’s just so much history, they don’t know. Yeah, right.
Bill Fleckenstein 46:45
And because I haven’t seen, and because the facts haven’t mattered as much as they used to, if not many of you probably know, financial history. So you don’t know financial history, you don’t know how big of an outlier. The last two decades have been in terms of economies and markets normally work?
Adam Taggart 47:03
Yeah, I’m gonna make an analogy. And then I want to start closing by asking you about, you know, what are you looking at right now, from an investing standpoint, like, what do you like, what do you don’t like we’ve talked a lot about bonds, but there’s obviously some other assets out there. But when I, I used to work at Yahoo, and I joined Yahoo. Actually, I joined Yahoo on the day of Yahoo’s first layoffs ever. So I joined like, right when the party ended, like it was just a money making machine with no thought up until the day and single handedly
Bill Fleckenstein 47:31
destroyed the company. i It was crazy.
Adam Taggart 47:36
But in the weeks after I arrived, I saw Yahoo having to completely gut and rebuild at Salesforce. Because the Salesforce were just order takers. You know, the muscles they had developed where oh, people call us and throw money at us. And I’m just, you know, basically the guy that says, What’s the biggest check, you can write? And okay, right? They then they just didn’t have the muscle to actually go out and prospect and sell. The environment shifted, and they had to replace the entire experience base, it sounds like you’re saying a very similar transition is probably likely going to happen. Today’s investment professional fleet,
Bill Fleckenstein 48:12
right, right. That could be the game we’re playing in. That game we’re playing now is different from the last 20 years. But it’s also different from the 90s and 80s, and 70s. Because even though there’s elements of the 70s, here, we’ve got the passive bid and structured products. So it’s a very complicated game that’s going on right now. And it’s different from it’s got elements of some of the past, but there’s this new wrinkles too. So.
Adam Taggart 48:34
Okay, I’m gonna talk to you forever, Bill, but gotta start wrapping up here. Thank you, by the way, this has been a great discussion. So what, from an investing standpoint for folks that that just have to navigate the reality we have in the ground here, which is complicated and messy and uncertain? Okay, clearly, I think part of your, you know, recommendations would be Yeah, you know, hang out in the short end of the Treasury curve, if especially if you’re not confident in what you think’s going to happen. In the past, I know you’ve been, you know, big into, or favorable for gold miners, because of their relative valuations. I think that relative valuation probably only gotten better because they’ve gotten shellacked, recently or for much of this year. True. You still like those guys. Yeah. So
Bill Fleckenstein 49:20
which but I think the important message is this is I just was alluding the environment is particularly different. There’s a lot of variables that are negative that you’re not being compensated to accept. So I think what Pete What the My advice to anyone would be, be extra careful about what you’re doing. And if you’re not really sure, just be willing to you’re least getting some compensation for sitting on the sidelines. You’re maybe making a little money on a real rate, but you’re not losing a lot from an inflation standpoint,
Adam Taggart 49:57
which is new. That hasn’t been the case for a
Bill Fleckenstein 49:59
long time. You Have so if so, So Tina is dead, right? And so now you have an alternative. So you have to just be a little more careful, then you have to ask yourself, what kind of businesses can I own in the environment we’re going into, I think the best businesses, if you can find companies that have are able to grow their units that aren’t particularly that are not particularly GDP sensitive, and have pricing power and barriers to entry, those kinds of businesses can do really well. A classic, you know, classic example would be of some, if you had a drug company where you know, the drug sales are not particularly GDP sensitive, you know, that you got pricing power, I’m not advocating drug companies, because in particular, but there’s there are unique companies you can take rifle shots with, I’ve taken a few myself. And I don’t really want to talk about them. But that’s the kind of thing people could think about, I think you absolutely have to own some gold or precious metals. You know, and there hasn’t been a really rip roaring run in them. You know, since prior to the run up in 2011, there have been some decent rallies of the miners, but they haven’t really done very well. And to your point, on a valuation basis, I think there’s cheap as they’ve ever been, particularly if you look at price to cash flow are, you know, they have real, they have real cash flow now, and the management’s are are not likely to behave recklessly after the period we’ve been through. So you know, that you can buy these things that, you know, what are very attractive valuations. Now, you have to believe the price of gold is not going to collapse. I don’t think I don’t think it’s going to I mean, what’s remarkable about the price of gold is, it’s $1,900. You know, this year, the ETFs have sold like over 300 tons, as of last week, because there is no positioning in the futures market. In fact, they were short. Meanwhile, you’ve got central banks buying it, not ours, not the g7 necessarily, are buying gold in hand over fist in in record amounts. So though there guys are in the central banking business, and normally don’t have a letter spec form, but it’s so obvious to them, that they should that gold is a beneficiary they needed a portfolio that they’re buying it. Yeah, so I think you need to own some how much you need to own is a function of your own situation with the rest of your portfolio looks like? And yes, I think these mining stocks are, you know, some of them are extremely attractive. And I think they have the potential to do really well. If we start to get interest from Western investors, ie North America, the price of gold is gonna go up a lot, because they’re there, we all the stuff has come out of the ETF has gone to Asia. So we got to get those tonnes on top of the other demand that shows up and speculators so, you know, I think a lot of people have felt there was some sort of a big top being made here. But if gold can get over 2000 and start to move higher, then people are gonna say, Oh, my God, it wasn’t a top, it was a long basing period, and I better get involved. So I think the the case is quite strong. And I think the reasons are, are, you know, are close at hand. So I think you that it’s, it’s a great diversifier? You know, when I started the business in 1880, it was a prudent to, to have, say, five to 10% of your, your, your money in gold in your portfolio. And that, again, depends on whether inflation hedges you might as well, we get back to that, I mean,
Adam Taggart 53:16
the less than 1%, on average aren’t winning.
Bill Fleckenstein 53:19
I mean, so the bull case is very strong. But right now that that bull case that I’m alluding to, is kind of a theory. So we have to have the theory. And then if it looks like it’s starting to happen, that’s when you can fork it up.
Adam Taggart 53:30
That’s when you that’s when you backup the truck. All right, great. Well, we’re gonna have to leave it there from a time perspective. So Bill, for folks that have really enjoyed this conversation would like to follow you and your work going forward. Where should they go?
Bill Fleckenstein 53:42
My website is Fleckenstein. capital.com. It’s a pay site where I write a column every day and answer questions. It’s about 1012 bucks a month, I can’t exact price I have looked. And then I have I’m on Twitter, or x net, I guess you’d call it. And I my handle is at FLETC. Cap.
Adam Taggart 54:01
Great. And when we edit this bill will put the URLs up there so folks know exactly where to go. Bill, stay around for one second, just want to give folks two resources to go look at when you talked about you know, what’s really going to matter economically, is what’s going to happen with jobs. And then you talked about, you know, the potential there for the precious metals, mining companies. Just want to remind folks that the Wealthion online fall conference is coming up this weekend. So if you haven’t registered for it yet, go to wealthion.com/conference. Amongst the amazing faculty, we have there our best ever. We’re gonna have Michael Kantrowitz, developer of the hope framework, the E and the hope framework stands for employment. We’re gonna be doing a super deep dive into that so we’ll know exactly where we are in the employment story right now. And then precious metals analyst Jeff Clark, is recording a bonus video that everybody who attends the conference or registers for at least will get that has his latest most updated list on all the precious metals mining companies that he thinks offer the best relative value right now, as Bill said, really tricky time for even well seasoned, experienced professional investors. But certainly for the average investor, highly recommend that most people, especially if you’ve got a job to focus on a family to take care of that deserves most of your attention, that you work with a good financial advisor in navigating the future. But make sure they’re a good one. And they’re one that takes into account all of the macro issues that Bill and I talked about, a lot of them do not. If you don’t have one, or would like a second opinion from one who does feel free to talk to them at one of the financial advisors endorsed by Wealthion. To do that, just fill out the short firstname.lastname@example.org These consultations are totally free. There’s no commitment to work with these advisors. It’s just a free public service. They offer to help as many people as possible positions prudently as possible for the things that that bill, you know, prognosticators may lie ahead. Bill, I want to give you the last words here any parting bits of advice to today’s investor just trying to make it through all this and hopefully not become roadkill?
Bill Fleckenstein 56:06
Just be extra careful and realize you can get paid to wait. But if real opportunities come along, you understand and you can avail yourself. Oh,
Adam Taggart 56:15
all right. Very well said Bill. Thanks so much for giving us so much of your time and your insight. I really look forward to having you back on the program again, folks. If you want to see Bill, come back on the program again soon. Please vote vote your support for that by hitting the like button and then clicking on the red subscribe button below. What was that little bell icon right next to it. Thanks so much again, Bill. Everyone else? Thanks so much for watching.