Bill Fleckenstein: The Fed's Game Of Chicken With The Stock Market

Excerpt from Financial Sense:

The Bulls' Self-Deluding Prophecy

I'd like to take a moment to reiterate where I think we are. Since the Fed began tapering I have been expecting the market to have a nasty spill at some point. As I have said many times, the market is where it is because of money printing by the Fed (and other central banks). That's what drove the stock market to the moon and put rose colored glasses on folks of a bullish persuasion regarding the U.S. economy, and the combination of the optimistic outlooks for stocks and the economy has led to strength in the dollar.

So three major macro conclusions have all been reached based on the premise that Fed money printing has worked. It would appear that folks also believe that not only can the Fed stop printing money, but it will be able to start raising rates and withdrawing liquidity. I and others who think likewise don't believe that is the case. Thus, my shorthand expression has been that there is a game of chicken going on between the S&P and the Fed, fueled by the aforementioned beliefs of the stock bulls, which they will continue to hold until the Fed's actions — or lack thereof — produce a huge break in the stock market.

Overdue Diligence

Just because a big break has not happened along the way doesn't mean that it won't. Timing the ending of markets that have been kited higher by easy money is impossible. It couldn't be done during the stock bubble that ended in early 2000, the bond bubble that ended in 2008, and it can't in this bubble either (especially given the epic size of QE). But it will occur. The question then becomes at what point will the stock market start to sink, and when will expectations for it, the economy, and the dollar all change? As noted, we can't know that in advance, we can only react to change once it occurs.