The Snowman Cometh - TheStreet







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Editor's note: This column, which reflects market activity from the day before, originally appeared May 19 on To sign up for RealMoney, where you can read Bill Fleckenstein's commentary every day, please click here for a free trial.

Absorbing the Local Color: Red: Well, they finally did it. The administration pushed the currency over the cliff at the G8 shrimp fest last weekend when the secretary of debasement, John Snow, described the dollar's decline thus far as "really fairly moderate." When I heard that remark on Saturday, I knew it would be bombs away for the currency, and it was. (More about the dollar in a minute.) Overnight, the world markets sold off, with Europe down a couple percent in the early going, and down 3% to 4% after our market opened. A couple hours into the day, the S&P and the Dow were down about 1.5%, and the Nasdaq was down about 2%, with biotechs one of the few areas of strength.

The early-morning swoon in stocks was just a harbinger of what the day had in store. In essence, the market slid all day long and closed on the low tick, with hardly a bounce. Folks can check the box scores to see that the damage was rather widespread. The only areas to buck the trend were gold stocks, for obvious reasons, and



on some company-specific cancer-related news. All in all, it was a very ugly day for the equity markets, and the first such one we've seen in some time. The right analogy would be to envision billiard balls careening around the table at high speed. It's pretty clear that we're going to get lots of action, but exactly what and when is sort of hard to know. Paying attention to the details may yield some clues.

Snow School of Obedience Training

: Away from stocks, the yellow dog was barking, up 3%, which is what it's supposed to do when the dollar declines. Silver was up about 1%. The dollar was down nearly 1% against the euro, and down against everything else as well, except for the yen. After having initially been stronger last night, the yen was down over 1% against the dollar today, due to rumors that the Japanese had intervened.

As for fixed income, the 30-year bond future was up an amazing five-eighths of a buck when the markets opened last night, and actually up almost a point for a while this morning. But then it began to dawn on people that since we rely on the rest of the world to fund us, it might be kind of hard for Treasurys to go up when they yield so little, and the 30-year futures contract closed slightly lower. In fact, if you're from the European Central Bank and you owned a 10-year note, you lost a year's worth of income in the forex market in the last couple of days.

Fixed Incoming Bubble

: These huge leaps in the bond market, in the face of obviously bad news, can best be described as bubble-like activity, and reminiscent of the action in stocks during the mania. As an aside, I think the word "bubble" gets tossed around pretty loosely these days. I myself have been guilty of this when speaking about a bubble in housing. To clarify, housing strikes me less as a bubble than a very speculative market. It lacks the three-standard deviation move, or however one wants to describe it, associated with bubbles. But this lesser category of risk does not afford protection from the big problems that lie in store for the housing market, not too far down the road.

Returning to the dollar decline, I think it might be useful to lay out the psychological progression, whereby folks' complacence turns to perception of a potential debacle, and what that might mean. First they have to recognize that something serious is under way. Next they have to react to that awareness. Then they have to take action. Then we usually see excessive action. Then we see wild overreaction. This entire sequence is still in front of us, because very few people have even identified the dollar decline as a problem. In fact, I continue to hear the same misguided talk about how a weakening dollar is great for us. That has been completely predictable, as I have noted, because it's what people always say when the dollar starts to weaken.

Greenback-Breaking Currency Choreography

: The problem is, you cannot get your currency to go down a little bit to where you want it, and then assume it will stop there. Once these things are put into motion, they always go longer than you think possible, and they always overshoot. I think we have an incredibly dangerous period in front of us, as our financial, economic, and balance sheet situation is far riskier than the last time we had a dollar crisis, which was in 1987. The economy was overheating then. Now I believe it's getting set to contract. The world is swimming in dollars. We have a monstrous amount of debt outstanding. The size of our trade deficit, $1.5 billion a day, is just gargantuan. Plus, we've got trillions of dollars' worth of derivatives exposure. So, if you wanted to set the stage for a potential dramatic accident, it's been set.

I can only shake my head at the economic folly of the last seven or eight years as we have tried to speculate our way to prosperity. So many people have been misled into thinking the policies were all good or manageable. How this all plays out is not yet knowable, but it's a given that we face financial and economic turmoil. When one's own government, against a backdrop of precarious fundamentals, stands up and says, "Sell our currency," which is basically what Snow did, it's a recipe for disaster.

William Fleckenstein is the president of Fleckenstein Capital, which manages a hedge fund based in Seattle. Outside contributing columnists for 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 had no position in stocks mentioned, 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 While Mr. Fleckenstein cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to