Editor's note: This column originally appeared April 9 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.
The market's response Wednesday to watching the statue of Hussein get yanked down is worth going into, because I think it sheds some light on market behavior and sentiment.
As it became clear the statue would be toppled, the futures started to motor off their lows. They were kind of being jammed straight up just as the rope broke on the first attempt. Next, we saw a little selloff in the futures, followed by a small, straight-up move when the statue actually came down. That was the high for the day. Then a little selloff ensued, but a couple hours into the day, all the indices were still green.
What these details show is just how emotional the tape seems to be, and how it continues to respond to news in a purely amateurish fashion. I mean, to buy the futures simply because the statue was coming down is absurd. To buy and sell each and every war or terrorist rumor is equally absurd. I think such behavior points out the fact that there is still a great deal of speculation on the tape. If it really weren't so sad, it would be hilarious.
Chapped, Stiff Upper Lip
: Wednesday was an apt demonstration of the old Wall Street saw "Buy the rumor, sell the news," as the de facto collapse of Saddam Hussein's regime resulted, in essence, in the market's being sold all day and closing on the low tick. The weakness was basically uniform, with the bank stock index down, percentagewise, just about the same as the SOX.
With all the good news about the successful waging of the war now discounted, the market is going to have to digest ugly earnings, and may in fact come in for some rough sledding. Consequently, I beefed up my short position Wednesday and now have a modest-sized short position. My expectation is that the market will have a hard time going up through earnings season. However, after earnings season, we may get the second installment of the war rally -- that being the phase in which everyone tries to make the excuse that all of our problems were related to the war, and now that it's behind us, and now that the bad earnings are behind us, we can embrace higher stock prices.
I am not saying that will happen for sure, but I can certainly see how the bulls may try to make that case. I don't want to get too far ahead of myself. For the time being, it looks like there's a good chance that bad corporate news may matter. The burden of proof is now on the bulls.
Fed Cannonball Hits the Wall
: Turning to the news, the war has obviously dominated the headlines and people's emotions, so there's really not much to talk about in the papers. That said, everyone should track down a story in Wednesday's
Wall Street Journal
titled "Fed Weighs Alternative Stimulus Plans." Writer Grep Ip discusses the Fed's plan to make sure that the inflation rate is at a level it deems acceptable.
I find it more than just a little ironic that the Fed, the great engine of inflation in this country, is preparing to "fight deflation." Now I do know that in the aftermath of a bubble, it is conceivable we could see some deflation. But I continue to think that is less likely than the prospect of seeing more inflation. After all, just look at what has happened to the purchasing power of the dollar in the last 90 or so years since the Fed has been around. Depending on how you want to measure it, the dollar has lost between 90% to 95% of its purchasing power, and for better than half of that time, we were at least on some variation of the gold standard. Otherwise, I'm sure the results would have been even worse.
Commercial Paper Lines Birdbrain Cages
: The Fed helped to create the biggest bubble in the history of the world. It has been trying to print money to stave off the bubble's aftermath. It has encouraged a housing bubble, a debt bubble, and has financed an overconsumption boom. Now the Fed is getting the drift that since 12 rate cuts haven't worked, perhaps it had better do something else, because it may not be able to take rates too much lower. It's a case of the law of unintended consequences rearing its interesting head, which Ip describes as follows: "Another reason to keep rates above zero: Money-market mutual-fund returns, after expenses, would otherwise go negative, so investors would pull their money out. That would hurt the ability of industrial companies to sell short-term debt securities, such as commercial paper, to such funds."
The fact that we have completely deregulated the financial system in the last 20 years is now threatening to complicate the Fed's attempt to lower rates to solve the problems that it believes it didn't create. Obviously, if money market mutual funds were producing negative returns, that would set off all kinds of problems. Every time I read about what the Fed has in mind, and I think about what the Fed has done, I can only conclude that the value of the dollar is absolutely going to get destroyed.
From War Fears to Fed Jeers
: Now that the war has basically been won, I believe the markets will have to deal with winning the peace, which will be more complicated. People will have to deal with the rotten economy. At some point, they will start to focus on the predicament that the Fed has engineered us into.
Once the world really gets a clear view of that predicament, our currency will take a beating. As protection against the lunatics at the Fed, and with the war premium out of the gold market, I think it is probably safe to add to one's precious metals position, as I did today.
Brave, Departed Hearts
: Finally, given the news in Iraq on Wednesday, I would like to end today's Rap by sharing the following quote with readers, which I had seen recently and which a friend also passed on to me today: "When in England at a fairly large conference, Colin Powell was asked by the Archbishop of Canterbury if our plans for Iraq were just an example of empire-building by George Bush. He answered by saying that, 'Over the years, the United States has sent many of its fine young men and women into great peril to fight for freedom beyond our borders. The only amount of land we have ever asked for in return is enough to bury those that did not return.' It became very quiet in the room."
William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for TheStreet.com and RealMoney, including Mr. Fleckenstein, may, from time to time, write about securities in which they have a position. In such cases, appropriate disclosure is made. At time of publication, Fleckenstein Capital was long Newmont Mining, although positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Mr. Fleckenstein's columns are his own and not necessarily those of TheStreet.com. While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to