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Bill Fleckenstein

Contrarian Chronicles4/27/2009 12:01 AM ET

Thank Uncle Sam for the rally

Cranking up the money-printing machines is like pouring gas on a smoldering fire. While the short-term response is predictable, the long-term effect is far from certain.

By Bill Fleckenstein
MSN Money

There is nothing like a monumental surge in government stimuli to help boost the markets and, by extension, people's perceptions of the news.

I've been struck by how well the recent stock market rally illustrates an old saw -- the market writes the news -- because as this powerful rally has built over the past six weeks, enthusiasm has increased with it.

A stimulus-is-bliss rally

The primary reason for the rally, in my opinion, is the extraordinary amount of liquidity and fiscal stimuli that has been provided by the Federal Reserve and the federal government.

In a recent issue of Grant's Interest Rate Observer, Jim Grant charted the stimulus money (both monetary policy and government spending) as a percentage of gross domestic product for this downturn, compared with the previous 13 recessions.

In those earlier recessions, if you added all the percentages, the cumulative monetary stimuli constituted about 6 percentage points, while thus far in this recession, the stimuli have clocked in at 18%. Add in the 11.9% (of GDP) supplied by the government and you get 29.9% for the combined stimuli. That's compared with a total of 39.3 percentage points for the prior 13 recessions.

When the current recession is compared with the Great Depression, we find the relative amount of stimuli is almost four times as high today as during the 1930s collapse, even though GDP has dropped only 1.8% versus 27% back then.

Given the massive stimulus efforts, one must be leery about the conclusions one draws concerning what this rally might mean.

This rally could indicate that times are getting better -- or just that massive liquidity is leaking into the stock market and that the real economy is going to see more inflation.

There is a tremendous amount of motion, and there are lots of ways to get fooled. Money printing won't necessarily solve our problems, but expressing a bearish view on that subject is dicey. Who can say what can't happen? Thus I continue to believe there is no big hurry to participate in stocks generically.

Waiting for ideas to take off

That doesn't mean there aren't potentially terrific ideas to be found both on the long side and the short side.

Sybase (SY, news, msgs) is a software maker in which I took a long position in late February and sold a couple of weeks ago. It's been one of the few companies that, despite the environment, has really managed to make progress, both because CEO John Chen is a good businessman and because of Sybase's strength in the mobile-messaging arena.

At some point I would like to repurchase the stock, but for now I am just paying close attention.

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Jim Jubak © MSN Money
Is inflation ahead?
The other $700 billion bailout -- the one in which the Federal Reserve has bought $700 billion of consumer loans -- could really set inflation raging, MSN Money's Jim Jubak says. (April 20)

Poker as teacher

The patience required in investing is not so much the patience for sitting with a position after you establish it but the willingness to be patient beforehand.

To quote my friend Jack McHugh (using a Texas Hold 'Em analogy): "Waiting for more information allows a patient gambler to better know when to commit his or her chips. . . . There's always another hand to be played, just as there will always be a new set of investment opportunities to consider."

I agree. And I will continue to wait for opportunities where I believe the risk-reward ratio is really in my favor and I am able to muster up some conviction.

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

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Monday, April 27, 2009 7:40:22 AM
Davicitova, why don't you stop talking and get to work?  I'll get back to work so my taxes can build you your train, provide you with broadband, and free healthcare.  Then, you can sit at your coffee shop and think about the other things you are owed in life.  Stop your whining. 
Monday, April 27, 2009 8:45:32 AM

Well said DidYouReadThis!

Monday, April 27, 2009 9:02:35 AM
Davicitova it sounds like you want to live in Europe. Why don't you go there? I'll stick with the USA and capitalism.
Monday, April 27, 2009 10:12:08 AM
Davicitova you need to update your knowledge on economics and I suggest you look at this website www.mises.org and subscribe to their daily emails and order the book, The Road to Serfdom. 
Monday, April 27, 2009 10:41:03 AM
Well Davicitova,  I agree that you should leave the comforts of the great USA and go to a socialistic society.  Having been stationed in Spain, I saw their great healthcare system at work.  If you don't mind waiting a year to see a doctor and two years to see a specialist, I say move!!!!  I served my country with pride for over twenty years and yes I protected the ungrateful people like you from harm.  So, excuse me if I don't tear up at the thought of you and others like you want to leave!!  GO FOR IT!!!!!!
Monday, April 27, 2009 11:08:27 AM

Davictova is just another "star-bucks groopy" who wants a free ride at the working persons expense.  Davictova represents the class of liberals that elected Obama in the first place.

 

Republicans, we have to pull together and put an end to this rash of free spending and the overall liberalism that people like Davictova represent.    If we fail to do so, we will all suffer the consequences as double digit inflation with double digit interest rates will surely return and undo all of the economic prosperity the we have enjoyed since we ousted Jimmy Carter in 1980.

 

We must all remember though that we conservatives are as much responsible for Obama's election as those like Davictova.   We failed to keep our house in order and failed to adhere to the core values we were taught.  We allowed Obama to win states like Indiana, Virginia, North Carolina, Florida, Ohio and Colorado; states that Bush carried easily in 2004.  We must never again allow that to happen!

Monday, April 27, 2009 11:15:28 AM
Sounds like we have a naive liberal (Davicitova) in our midst. It is going to take years for all of the reasonable people in this country to undo what imbeciles like this (Obama and Congress) have inflicted on us.
Monday, April 27, 2009 11:39:53 AM
Fleck, are you growing cautious in your old age? Do you actually believe in this deadcat rally? The govt is throwing phantasmagorical trillions at zombie banks and deadcat auto peddlers, money we don't have and can't pay back, and interlarding the bailouts with porkbarrel "infrastructure" projects. Do you really think this "recession" is ending any time soon (say three years)? Remember Japan--ten years.
Monday, April 27, 2009 11:43:13 AM
#6
Navy Vet
Monday, April 27, 2009 10:41:03 AM
Well Davicitova,  I agree that you should leave the comforts of the great USA and go to a socialistic society.  Having been stationed in Spain, I saw their great healthcare system at work.  If you don't mind waiting a year to see a doctor and two years to see a specialist, I say move!!!!  I served my country with pride for over twenty years and yes I protected the ungrateful people like you from harm.  So, excuse me if I don't tear up at the thought of you and others like you want to leave!!  GO FOR IT!!!!!!
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You were in Spain protecting Americans from harm?
What harm would that be exactly? What exactly did you do in those 20 years that was crucial to the national security of America? Please tell us why it is better to put billions into defense contractors pockets than spending it on America. 
Monday, April 27, 2009 11:48:04 AM
Don't you people get it? America is and has been a socialist society since the 30's. The only difference between the US and Europe is Europeans pay with higher taxes and Americans pay out of pocket. Nothing is free.
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