The upside-down logic of Wall Street

By Bill Fleckenstein

The only thing better than good news these days is bad news. Twisted logic, but it's the unmistakable mindset on Wall Street, as last Tuesday's action demonstrates.

Never mind Home Depot's (HD, news, msgs) quarter, which was much worse than expected, or the lowered guidance from both Home Depot and Wal-Mart Stores (WMT, news, msgs). It was an up day for the shares of those two companies, whose $450 billion in sales together constitute just shy of 5% of our nation's gross domestic product.

Bulls ignoring bellwethers

Tuesday proved to be a fine day for the market overall, as folks digested as "good" a comment by St. Louis Fed chief William Poole -- which was that the housing market, that fabled engine of our economy, may worsen yet. In any case, this kind of action is the hallmark of markets that want to go up. Although, in this case, it's quite possibly a sign of the complete drunkenness that's seen in the late stages of market advances, i.e., tops.

As someone who continually tries to make sense of all the motion -- some of which may be noise, but one never knows -- I was thus fortunate to discuss the current environment with Marc Faber, the editor of the Gloom, Boom & Doom Report, over dinner last week.

He kept coming back to the same point, which may explain why our equity market levitates in the face of deteriorating fundamentals: Essentially, the money is "no good." We print it at the speed of light and the drop of a hat.

Liquidity: Not the mother's milk of a mania

Part of me thinks that the current mini-mania in equities is a response to Fed-induced liquidity. And yet, when I discuss with my good friend Jim Grant what the big central banks of the world are doing -- Japan's, the United States' and Europe's -- he suggests that they really aren't spewing out liquidity as aggressively as people think. Of course, if they were, one might expect commodities to be on more of a run than they have been. To me, they seem to be suggesting that the world economy is slowing down at the margin.

Therefore, I've concluded that what we may have is the illusion of a liquidity fest. The stock market is acting as though there's an enormous fire hose of liquidity gushing forth -- when, what might actually be the case, is that a wanton derivatives/credit/lending mania is in full force.

Markets in motion may stay in motion. If, however, the source of the propulsion is mispriced and badly structured credit, things can come to a sudden stop. But if that were to occur, the Fed at some point would ride to the rescue with plenty of liquidity. That is Marc's point and is, of course, the point of my pet saying that in a social democracy with a fiat currency, all roads lead to inflation.

Metallic immunity to central-bank meddling

In terms of what conclusions Marc comes to: The easiest way to protect oneself from this money printing is to own gold. No matter how you examine the milieu, it seems that all roads lead back to gold.

Marc is convinced that gold and silver will go dramatically higher in the next few years. He expects that when the world's central banks are forced into a real print-athon, gold will truly explode. And the more they drive up the financial markets via their efforts -- that is, if they can drive up the financial markets -- the faster gold will go up. In other words, he believes the bear market in stocks, relative to gold, will continue and that it will accelerate the more that authorities attempt to fight it.

Mighty aches from little manias grow

Back to our stock market, I believe that it's in the throes of a manic blow-off, rather than signaling the start of some long, sustainable trend, as in 1991 and 1995. This has been my view for a while, though so far, it has proved incorrect, and that may continue to be the case for a bit longer.

Nevertheless, when I look at the environment, it quite frankly scares me because all I can see is a disastrous ending to this party. (Though I've reduced my short exposure, I can't bring myself to take it too low, due to the feelings I just described.)

As to what will bring about the demise, I suspect it will be sheer exhaustion, but it could be any number of events. As to when the party might end, there's no way of gauging that. Nor is there any way of gauging, when a market gets this out of control, how high is too high.

But the important takeaway point: If the environment is as I suggest, it can end quickly and violently. Those who are tempted to participate are likely to be hurt. That's my best attempt to make sense of what's going on and what it may lead to.

At the time of publication, Bill Fleckenstein did not own or control shares of companies mentioned in this column.