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Bubble Rewrites 'Rules' on Recession/Recovery

Bill Fleckenstein

Editor's note: This column, which reflects market activity from the day before, originally appeared July 23 on RealMoney.com. To sign up for RealMoney, where you can read Bill Fleckenstein's commentary every day, please click here for a free trial.

Given yesterday's news that U.S. forces bagged the yester-day brothers, Ud- and Qu-, the world equity markets were rather tepid last night, and likewise our stock-index futures. No sooner had our casino opened for business than it was sold, such that within a couple hours, the S&P was down about 0.5%. Speculation helped the Nasdaq do a little better, with Amazon(AMZN Quote) leading the upside charge for over 10%, thanks to its abracadabra before-expenses "great quarter." Most of tech piggybacked modestly green, but little else that I saw gained much traction in the early going.

Re: The Flying Pig, a Dead Fish Beats a Dead Horse: After the morning swoon, the market took off about midday, then headed for the highs of the day, which is where it closed. Housing stocks were unable to bounce on the bounce in bonds (described below), but elsewhere, speculation was the order of the day, particularly in Internet and SOX land.

Micron Technology(MU Quote), the flying pig, was at it again, as our favorite dead fish from yesterday raised his estimate. Now Micron will stop losing money sooner than he had expected. His reasons are the same spurious ones that have perennially led people to be wrong about Micron and DRAM prices, so there's no point in reprising them.

However, I will share with folks some data from NPD Intellect that illustrate how illusory the fabled pickup in PCs this spring was (thanks to a friend who subscribes to the service for passing this on): Total PC growth for the first two weeks in July was up 5% year over year, compared with a 17% year-over-year gain in June, and a 28% year-over-year gain in May. Looking at notebooks is even more interesting, as the gain for July was 8%, compared with 48% in June and 83% in May. That big number in May, for folks who don't follow this closely, was related to the hoopla surrounding the Centrino, which has now fizzled. Desktop growth picked up a little in July, to up 4%, year-over-year, vs. 2% in June and 1% in May. The difference between all of those desktop numbers is essentially noise, in my opinion.

Of course, folks are also looking for PCs to be strong in the back-to-school season and during the Christmas season, based on a fantasy that occurred in the late 1990s. But, as I have always said, when Micron can rally on news like this dead-fish upgrade, it proves that pigs can fly, and it also means that any tech stock can go anywhere. So, while Micron levitates, I intend to be very careful, but watch the developments closely, because I think there will be a spectacular short-selling opportunity in a lot of tech names in the not-too-distant future.

A Greenback Ho-Hum for Tweedledee, Tweedledum: Turning back to the action, the real story was once again away from stocks. Bonds were trying to sustain their bounce from the turnaround that began yesterday, with the long bond up nearly a point at one point, before closing up about one-quarter point. In currency land, however, the euro was up over 1%, as was the Canadian dollar. I think it's rather meaningful that the dollar caught no bid on the back of the brothers Hussein, sort of like its weak rally the day the statue fell, when at the same time, gold started to go higher.

Molten Delight at Silver's Flight: Gold itself was up over 2% in the early going, but the real action was in silver, up a SOX-like 6%. My sources in the silver market tell me that we may be nearing a move akin to what occurred in gold a couple of years ago when Ashanti(ASL Quote) blew up. It would appear that the silver market is short "vol," and an upside accident could be in the process of playing out. We'll just have to see. Meanwhile, folks interested in owning gold and silver should already have taken the opportunity to establish or add to their positions. We can now sit back and watch what the upside looks like. As I was musing the other day, I think the low is in for the euro, as well.

Now I want to touch base on the economy, for a moment. Reading my column from last April, which I cited in yesterday's Rap, I was struck again by how remarkably consistent the bullish argument remains, even as the earlier arm-waving has been proved wrong. What folks expect right now is exactly what they expected in 2002 and 2001, and really have been expecting ever since the market peaked -- i.e., for things to get better right away. There seems to be very little understanding of the fact that we had a bubble, and what it means.

'Deja-Voodoo,' Says De Voe: So far, every rally in this bear market has been a head fake for folks who've gotten bullish for the long term simply because we had a rally. They've always held up the rally as proof the economy's coming back. Last night, I was reading a recent report by Ray De Voe that hammers away at this point. It's so useful that I thought I'd share some of his comments with readers. He writes:

On January 4, 2001, the Fed made the first of its 13 interest rate cuts, and virtually every economist stated something similar to 'The economy normally responds to the Federal Reserve cutting interest rates with a time lag of six to nine months. Thus, there should be a strong recovery in the economy during the second half of 2001.

The July 2, 2003, Wall Street Journal published the results of its survey of 54 economists on their expectations for Gross Domestic Product (GDP) growth over the next four quarters -- along with other economic forecasts. In the January 2003 survey, the average GDP growth forecast by the 54 economists for the first quarter this year was 2.7%. The actual figure was about half that, 1.4%, and could have been even lower. The average GDP growth rates forecast by those economists for the next four quarters were, respectively, +3.5%, +3.8%, +3.8%, and +3.7%. What a statistician with a memory and extensive files would also note in comparing those averages for GDP growth is how similar they are to the July 2002 survey results, and that they are not materially different from averages for the July 2001 survey.

I have commented on this before, that during economic expansions, economists tend to extrapolate the past into the future. Few, if any, have correctly forecast recessions. And when one does arrive, as in March 2001, they immediately forecast recovery. Thus, those economists are almost always predicting growth, usually extrapolating the past rates into the future. Perhaps this is why I have that 'deja-voodoo' sensation. This is the third year in a row that I have seen these virtually identical forecasts for the economy -- and the other two did not work out as expected.

A Data with Destiny: So, the implication of Ray's data is that things won't work out any better this time than they did last time. Notwithstanding folks' fervent hopes, I anticipate that many will have to change their positions radically. This is part of why I expect that we could see a massive dislocation in the market between now and the end of the year.