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Fleckenstein: All Roads Lead to Inflation

Editor's Note: This article was originally published on in April of 2003.

My name is Bill Fleckenstein. I have been in the money-management business since 1982. Since 1996, I have run a short-only hedge fund, been a director of Pan American Silver (PAAS) and written a daily column about the stock market on the Internet.

I decided to set up a short-only fund in 1996 because I thought that things were headed in a very bad direction, though my timing was a little on the early side. My goal was to distance myself from the "speculative performance derby" and greed that was building, so that one day, I could return to the long side of the business with my credibility intact, which I still plan to do when I feel it's safe to be bullish on stocks. For those of you who care, I will start a mutual fund that will be open to everyone.

I thought I might state my prejudices at the outset. I believe that the mania for stocks and the revulsion against precious metals that we saw in the late 1990s were opposite manifestations of the same psychology. I believe that while that psychology has been dented, later this year it will be shattered, and stocks will sink as precious metals soar.

I believe that the stock market averages are headed much lower. I believe a dollar crisis lies in our future. I believe that the move that we will see for silver will dramatically outpace gold to the upside, though I own both, and I own a sizable position in Pan American Silver and one gold stock. However, I do not believe that a so-called plunge protection team actively manipulates the stock market. And I do not believe that gold is actively manipulated, as is suggested by many gold bulls.

Lastly, and most important, I believe that in a social democracy with a fiat currency (like ours), all roads ultimately lead to inflation. And in fact, that is the story of all paper currency regimes. They all collapse.

The biggest bubble in the history of the world that we recently experienced was powered by the most incompetent and irresponsible Fed in history, along with the public's willingness to suspend disbelief. It was a state of mind as much as anything else. Folks believed in the existence of a "new era," in a Greenspan put, and in retiring early and rich.
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