Why this downturn is different

By Bill Fleckenstein

Let's begin with a question that recently arrived in my "Ask Fleck" mailbox. Queried a reader of my daily Market Rap:

"As you assess your strategy at this point of the downturn, what lessons and changes in approach have you learned compared with how you assessed the downturn in 2002 and 2003?"

Stacking up the downturns

Back then, I expected a rally related to the invasion of Iraq and pretty much moved far away from the short side. But I never expected that rally would turn into the early days of what was to become the biggest real-estate/credit bubble of our lifetime.

Throughout that period, I was certain there was unfinished business on the downside for the stock market and the economy, because the residue from the technology-driven equity bubble that preceded it had not been swept away and because the excesses of the real-estate/credit bubble were continuing to build.

Of course, as we traversed 2006 and 2007, it became clearer and clearer that an epic disaster lay in front of us. I spilled plenty of ink describing what I thought would be the outcome and why. I had absolutely no doubt about any of that. I just did not know when it was going to unfold.

Today, my outlook is mixed. On the one hand, the bursting of the real-estate/credit bubble severely wounded the financial system and, but for some fancy footwork on the part of then-Treasury chief Hank Paulson, nearly vaporized it. I believe jobs will be difficult to come by (as I have explained repeatedly) for quite some time, because the prior expansion was a function of the misallocation of capital in the real-estate market, preceded by a misallocation of capital in the equity market.

• Video: Buying gold to preserve your wealth

So, I feel strongly that this country will experience a difficult economy for quite some time.

On the other hand, I have been expecting an economic bounce. Given the fact that gross domestic product growth had registered minus-6% for two quarters, business had to pick up, simply because in a lot of cases, orders had literally stopped.

Unpredictable road ahead

As for the stock market, as I have noted often, I'm much more agnostic. We actually almost had rules about what the government or the Fed could do in the last up-cycle (the real-estate bubble), though due to the zaniness that ultimately broke the financial system, the Federal Reserve and the government now abide by no rules. The money printing and monetization of debt, as well as the federal deficits, have gone wild.

Continued: Sticking with precious metals

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