InvestorPlace Blogs "Meet the Experts" Chat Featuring Bill Fleckenstein of MSN's Contrarian Chronicles

Bill Fleckenstein, author of the Contrarian Chronicles on MSN Money, just concluded an hour long chat hosted by Jamie Dlugosch, editor of InvestorPlace Blogs. Bill gave his opinion on former Fed Chairman Alan Greenspan, inflation, our current recession (yes, he says we're in one for sure) and even his take on the election.

Wednesday, August 14, 2008. 2:00pm.
Jamie Dlugosch: I'll start with a big welcome and hello to MSN Contrarian Chronicles author and money manager Bill Fleckenstein. Bill could you begin by telling us a bit of your background?

Bill Fleckenstein: Sure - I've been running money since 1982. I started as a stockbroker in 1979. Before that I was in the computer business.

Jamie: In your work you have been a long critic of The Federal Reserve, its policies and leadership. What is your biggest complaint of the central bank and why does it matter to investors?

Bill: Well to fill in, I wrote the book, "Greenspan's Bubbles," to let folks know who was responsible for the mess the country faces... It was clear to me back in 1996 that Greenspan was a disaster. His and the Fed's policy of targeting interest rates is DOOMED to fail... They keep picking the wrong interest rate, too low always and it keeps causing bigger and bigger problems which culminated with the housing bubble... now the financial system is in tatters and folks are in over their heads in debt.

Jamie: Was there a direct correlation to the insane values in the market in 1996?

Bill: The policy of bailouts and deregulation with no adult supervision is also part of Greenspan's legacy which is also part of how these financial institutions got so over leveraged/out of control.

Jamie: Would you describe yourself as a Graham/Dodd type investor?

Bill: No -- Values weren't quite insane yet in '96... but the behavior was starting, just starting to get dangerous. Of course it didn't end until the blow off of March 2000. Graham and Dodd? Not exactly. I'll explain.

Jamie: Please do.

Bill: Value is important because it gives you a margin of safety - which is very important... often being contrarian gives you pockets of ideas that are unloved and therefore have value. BUT as Warren Buffett has noted, value isn't just what can easily be seen. Some businesses have intangibles that are very valuable, so being a value investor doesn't always mean buying at some discount to say book value.

Jamie: Well said. Ok, I have been a fan of your work since the turn of the century and found it to be very helpful with my own research and decisions. How can readers best use your work?

Bill: Well to the extend that I can be helpful, because I am often correct in identifying some big picture theme that is quite important... However, I am often, sadly, very early in my point of view...

Jamie: I'll turn it over to the room in a bit, first here are a few questions that came in advance...

Jamie: Lisa asks: In your opinion where are we headed over the next few years and how best can we protect our assets?

Bill: Often times markets take things to tremendous extremes, both up and down, so folks need to use ideas that I or others have as a part of THEIR thought process... My strength is the big picture, I think. The economy, the housing market, the stock market are all headed lower as result of the burst real estate/credit bubble... I cannot stress that enough. That is why I wrote my book. I think everyone would find it of some use to understand the environment we are in (I'm not trying to drive sales -- I really believe that or I wouldn't have bothered to write the book.)

Jamie: Cheryl wants to know where gold is going over the next 1, 3, 5 years?

Bill: Gold is headed much higher -- but folks need to understand that it is very very volatile sometimes as we saw the last two weeks. Gold is the only currency one can trust to not be debased by the politicians... but it doesn't go up in a straight line.

Jamie: Dave wonders how an honest investor can make a dollar in this market. I've already lost 17% and my planner keeps telling me to gut it out.

Bill: Dave - You need to cut your losses, in my opinion... everyone should get as conservative as they feel OK with. This is a time to avoid losses. Best way to protect assests, as lisa asked, is to NOT lose money. This bear market/recession will generate huge loss in my opinion.

Jamie: Do you trade frequently?

Bill: I trade as the market forces me to -- when I'm long I trade very little, when I'm short, as I have been for years now, I must trade because short selling requires it. But I hate trading... to easy to be wrong.

Rant: Where does the Fed money end up after banks use it to shore up their balance
sheets?

Bill: Banks lend out money they get from the Fed -- BUT now they have so many holds on their balance sheets, they are kind of hoarding it to offset losses. Ergo the credit contraction we are seeing.

Aaron: Are we doomed? Are we in for a big nasty recession? Or do you think we can continue as we are for a couple more years until this overhang works itself out?

Bill: Doomed? That too ominous...but, we are in for a world of hurt... There is no fixing the problem. It is too big. People can't afford their homes, but the price is sinking and their paycheck is shredded by inflation... plus the financial system is in tatters. It's a huge mess... All foreseeable and preventable -- if we hadn't have had Greenspan in charge.

Jamie: yes, I think you get unfairly painted as a doom and gloomer...Instead I just think you are being quite Rational :)

Bill: Jamie - Yes. I'm an upbeat person. I'm not a pessimist, but I'm not willing to pretend the huge problems don't matter.

Brent_Bonstingl: I can't even envision an event or an environment that could harbor a consumer driven US economy again in the future based on how little savings this country already lacks and based on a consistently declining dollar based and PPP, how do you see the American economy transforming once this period of downturn is over?

Bill: Brent - I wish I could give you a good guess, but honestly I have no idea. I just know it's going to get very, very ugly in the next 12 + months.

Jamie: I'm curious: there are many examples of central bank or government policies in the past that were inflationary. Is it unfair to solely focus on Greenspan? And don't forget we have a long history in this country of utilizing debt and leverage for future growth.

Bill: Unfair??? Greenspan is the worst central banker in history, in my opinion. No one has ever been able to do as much damage as he has unleashed... Now, he had help. Those in a regulatory role did nothing. Wall Street acted like third graders... people who were involved in the real estate bubble willingly suspended disbelief... so lots of folks acted in an irresponsible way, but were it not for Greenspan we never ever could have had a disaster of this magnitude. No way.

Chris C: Bill, do you think the Fed will cut rates this fall? BTW, I have a chart that shows the FED rate has followed the 3 Mo T-bill rate for the last 7 years. I can post this chart to the chat room if you want.

Jamie: Chris: become a blogger on InvestorPlace blogs and you can post charts. Our community would find it quite valuable.

Bill: Chris - Yes. They will cut rates sometime this year -- I just don't know when they will panic. They don't care about inflation. THEY are at the engine of inflation.

Brian H: If you had to guess what "inning" we're in as far as the housing/credit crisis, what would you say?

Bill: Brian - I'd guess maybe 5th inning... of a double header 

mcqkm: What's your "finger-in-the-wind" speculation on what to expect depending on the November election?

Bill: No clue about the election. Probably Obama will win. Neither is a good choice from an economic point of view, in my opinion.

Jamie: Shameless plug: www.investorplace.com has a number of articles regarding the election and its impact on the market.

Rant: What's the difference between credit contraction and price deflation?

Bill: Well, in deflation, the dollar goes farther against almost everything... credit contraction can create bear markets in stocks and real state, but not take down inflation. If it gets bad enough, we could see deflation, but the FIRST step would see the Fed drop money from helicopters driving inflation higher.

Jamie: Bill, does not the nature of capitalism which I believe is growth solve many of the problems that now exist? In particular I am really encouraged by what is going on with oil and demand destruction. What do you make of the Pickens plan?

Bill: Well, capitalism involves growth and destruction... since Greenspan was at the Fed the downside was suppressed, hence the excesses kept building... So growth can't happen until massive destruction happens, which is underway. There are no more bubbles left that are big enough to bail out the burst housing/credit bubble. Pickens plan, from what I have seen, which isn't much, seems like a good idea.

Jamie: Indeed. I guess it comes down to the macro and micro, right?

Bill: Yes. Macro and Micro. Need to understand both.

jmcdowell: When the recovery begins, what industry groups will lead? In particular, will banks precede housing or vice a versa? Will retail or other consumer precede both? etc.

Bill: JM- Recovery begins???? Way too many steps away. We haven't even got folks to admit we are in a recession yet. Well anyway, who had acted prudently has been disadvantaged as the Fed/Government have acted to help the reckless... which has penalized the prudent via inflation, etc.

Lucy: How about some practical advice for everyday Americans that have followed the rules and lived within their means. What should people do with their 401k's, savings, etc. Should they pay off their mortgages or keep their funds liquid (and how to do that safely), stock up on non perishables, what?

Bill: All you can do is hunker down and protect yourself against loss... I think gold/silver will hedge against currency debasement/inflation -- but remember that is an insurance policy.

dr_mysterio: A few years ago, if one discussed "naked shorting" as a serious topic in public, one ran the risk of being branded a kook. More recently the issue has gained the stature of a serious public debate. I believe, and I'm sure you agree, that the traditional practice of short selling is a legitimate and useful investing tool. I'm curious how you feel about naked short selling, and why?

Bill: Naked shorting is illegal and should be stopped... but... That isn't what has caused the financial stocks to collapse or any other problems. The SEC and the Government aren't focused on the real problems, just cosmetic issues such as short selling. What about all the CEO's out touting their stocks on a regular basis... some of them are just rumor mongerers. Why doesn't the SEC stop that sort of thing?

BillC-Denver: Fleck, I really enjoy your column on MSN. In following your views and some others along with mine (probably the least intelligent of the group) I am starting to formulate the belief that the US brand of capitalism is turning out not to be a very good one. Specifically when more than 80% of the people (from a statistically sig poll a few months back) don't think that we as a country and society.

Bill: BillC-Denver- We are moving away from capitalism, sad to say. We have crony capitalism, and socialism elements invading in a big way. It's very disturbing to me.

toroandbruin: Looking at other countries' central banks and heads of same, can you point out an example of GOOD management -- either at present or in the past?

Bill: Toro- Volcker did a great job...

FleckFollower: Similar to Lucy's Q: If you had a good friend who had money to invest, but was clueless about investing, what advice would you give the person about how to go about investing his/her money? (Handing it over to you, while I think a wise decision, doesn't count as an answer.)

Bill: FleckFollower - (Nice handle ) I would say to stay very liquid and not try to invest until the problems start to be discounted via lower prices... If you stay in T-bills, you will lose vs. inflation for a while, but you won't get ripped to shreds as you might be in stocks or real estate in the next year. So, I would say get liquid and stay liquid for a while. It may be boring but it beats losing money.
Ron: Will the stock options that are being issued in the 100s of millions of dollars and the mega salaries of 100 of million of dollars be stopped. Will Bill Gates' of the world be forced to stop selling registered stocks to the tune of 50 billion dollars be stopped from selling into pensions plans, mutual funds, index funds to make them the power kingbrokers of our world?

Bill: Ron - Stock options per se aren't the problems. There are far bigger problems than that.

Mark - Vancouver BC: Hi Bill, when the Fed and the Treasury lose their battle to resurrect the drunken debt party atmosphere, how many auto companies, airlines, banks (money center and regionals) will disappear? What other significant changes to the economic/financial landscape will take place?

Bill: Mark - I just don't know what will replace all these companies that are in trouble.

24kt: Do you see Bernanke staying on after Jan 09?

Bill: 23kt - I don't see why he would leave -- I mean these guys at the Fed love the power, I think.

BillC-Denver: Fleck do you have any knowledge about the state of the Pension Guarantee Corp (US government agency) in the face of all the turmoil in the financial markets and financial system?

Bill: BillC - The PBGC is probably going to get its assets depleted just like the FDIC before this recession is over.

donquixote: Re: naked short selling illegal: market makers might have some legitimate interest in doing it, perhaps the false rumors which accompany such naked shorts is the more significant culprit...

Bill: DonQ - Yes market makers are allowed to short without borrowing, i.e. "naked".

Bear or Bull: Is it better to use inverse return ETFs to protect long positions and use the gains to buy more shares for the eventual (if not near term) rebound?

Bill: BearorBull - It all depends on what assets you are trying to protect, but in general I prefer just cutting exposure vs. putting on hedges.

ca: Do you have a downside target for the S&P?

Bill: No, I don't use targets because we don't know what will happen to earnings, etc. I just think that the market could easily decline by a large amount. How large depends on how these variables interact with each other.

Tracy: After reading about all the back-scratching on Wall St and in boardrooms, how do we know which investment advisor to trust? Can we even trust the prospectuses? We all have more skin in the game now due to pushes to 401ks and communities' finances tied to bad investments, so we are at the mercy of corrupt capitalists.

Bill: Tracy - that is a damn good question... You have to try to find firms where you think the managers have real integrity and are honest. Guys like that would now be holding lots of cash, I would guess. Like Bob Rodriguez at FPA.

Aaron: Fleck any dangers in money market accounts? Is your cash in short term treasury backed funds?

Bill: Yes. I think there are risks in money funds. I would only use treasury, only money funds, or only T-bills directly.

TShak: Bill, what would you need to see before you start to believe that things were turning around for the positive?

Bill: I need to see folks discussing the problems I see, and talking about how they will be addressed. That process will lower prices and thus create some margin of safety I think... but right now Wall Street is all about denial. Just look at what passes for NES on bubblevision.

EMin NYC: what is the best way to be fluid? Gold? Cash under mattress? Cash in the bank (can we trust FDIC)?

Bill: Emin - Cash in the bank is ok if <100k at each bank. I like T-bills or government only money funds, balanced off with some fold or silver.

don: You mentioned Volcker. In 1982, when Volcker was with the Fed, we had better than 10% unemployment, inflation in the double digits, and prime at 20%. How does 1982 compare to now?

Bill: Volcker did what was needed to create the basis for a decade or so of prosperity. We are dramatically worse off now. We have massive debts, with the public and banking system both in trouble... AND 8-10% inflation. We are far, far worse off now than in 1982. Not even comparable.

Brent_Bonstingl: I believe you wrote in your Contrarian Chronicles about future problems with municipal gov'ts because of all of their exposure to "low risk-high return" instruments like CDOs, LBOs, etc... what do you supposed will happen and do you think the bond insurers like Ambak will go under?

Bill: Brent - I'm not sure how much impact those insurers will have when they finally go bust. I'm not sure they insurance they wrote is very collectible, but I'm not really certain about that. However, I don't think that most municipalities are in that much danger at the moment in any case.

Rant: The collapse of Nasdaq equities in April 2000 set up bear market of 2 1/2 yrs. Should I be concerned what's happening now will be much worse and longer?

Bill: Yes. The stock bubble had no real debt build up... the housing bubble obviously did. As I said, now the banks have bad debt and the public does, too. Both are squeezed and that will impact the economy from both ends. It's a really big problem.

Rob: What are the catalysts that will likely lead to the next leg down?

Bill: Rob - I wish I knew. I have no idea. It could be any one of several issues, or something seemingly out of the blue. But my guess would be that series of economic release be really ugly - or some corporate news will be - and that will finally tip things over. It's all there for people to see but denial is the prevalent theme these days.

pig paulson: Could you elaborate on the PPT/Plunge Protection Team. Do you think they are intent on sustaining this bear rally until AFTER the election to keep certain incumbents from losing their house/senate seats?

Bill: Pig - That the PPT props the market is in my mind an urban legend. I know someone who has attended PPT meeting...

pig paulson: Yeah, it was established in the Reagan administration, right?

Bill: Yes. It's a real committee but to think they rig the stock market is incorrect, in my opinion.

Jamie: ok, Bill I will post last question shortly

mcqkm: Thanks millions for sharing your time and expertise with we mere mortals.

Bill: I'm just a mere mortal like everyone else. I'm happy if I can help out. No ego buy in my book. 

donquixote: Should the birth/death rate adjustor (fudge factor according to the Dow Jones people) be outlawed from government statistics?

Bill: DonQ- Government statistics have devolved to a state of uselessness... the birth/death model is just one example of distortion. It is meant to be useful, but as is often the case with the government it turns out to be useless.

Jamie: Thank you so much Bill. You have some great advice for investors. Any last words?

Bill: Jamie - nothing I can think of, except be careful out there. The next 12 months looks very, very dicey to me.

Jamie: Yes, it is a scary time indeed. I try to be optimistic, but ...

Bill: Me, too. I'm an optimist but also a realist!

Jamie: Thank you all for joining us today. Be sure to join us weekly for a Happy Hour, unmoderated chat. Also, we will have a new guest next month. Thanks again to Bill.

by The Freshman |  08/14/08