By J. D. Heyes
February 4, 2015
A capital investment expert who chose to shutter his short-only hedge fund during the depths of the Great Recession of 2008-09 has warned in a recent interview that 2015 is likely the year in which the U.S. dollar takes a steep decline.
In his interview with King World News, Bill Fleckenstein, president of Fleckenstein Capital, also warned that the dollar “is an Internet stock that’s on borrowed time.”
“People are going to lose confidence in the central banks and there is going to be an ugly dislocation when that happens,” he continued. “Will they come back for another round (of money printing)? I’m sure the Fed will come with QE [quantitative easing] again when it turns out this one doesn’t work.”
Continuing, he said that, at the moment, there are people who believe in “the fantasy of central banks delivering economic Nirvana,” and that they are capable of keeping financial markets elevated indefinitely, as well as “those of us who say that this is going to end in disaster…”
Fleckenstein said that, once financial sectors begin to tumble, the market won’t be far behind, and momentum towards a crash will build. And he says the time is coming — soon.
Crashing sooner rather than later?
“But I think it (disaster) will (start to unfold) pretty soon because the dominos that are going to fall from the oil patch will mean credit problems in fixed income markets, be it government or fracking, exploration or drillers — anyone who used too much debt because they thought it was so cheap and ridiculous and nothing could go wrong,” he said. Oil prices are, at present, lower than they have been in years, largely due to a glut on the global market triggered by unprecedented growth in the U.S. energy sector.
“I think there are going to be a lot of dominos that will cascade on the back of that,” Fleckenstein told King World News. “The reason I alluded (earlier) to how fast oil broke (to the downside) was because that shows you in this environment that we live in, especially with algorithmic and computerized trading — how quickly you could have a rout in the stock market. In the space of virtually no time you could see stocks drop 25 or 30 percent. I know the whole thing is a fantasy.”
There have been other critics of quantitative easing, which is best described as a rather unconventional monetary policy used to stimulate economies by central banks, simply by printing money out of thin air.
Alan Metzler, a historian of the Federal Reserve and a Carnegie Mellon economist, said the police of QE was misguided largely because it did not accomplish one of its primary goals — increased bank lending.
“With $3.5 trillion in excess reserves sitting in the banking system, what good can the Fed do by adding to it that the banks couldn’t do on their own? The answer is nothing. Whatever has happened in the economy isn’t being caused by quantitative easing,” he told Fortune magazine in July.
He also said the failure of the policy is evident by the fact that corporate investment remains at lower-than-average levels. Corporations instead have taken advantage of historically low interest rates to buy back stock and issue debt, but they are not using much of that money to invest in growing their companies.
Jim Bianco, president of Bianco Research, added in the Fortune piece that QE has “had somewhere between zero and no effect” on the economy.
As some predict the dollar’s collapse, the dollar, meanwhile, has soared to new heights. MarketWatch reported January 2:
The U.S. dollar soared Friday, building on big gains scored in 2014, on expectations the Federal Reserve will raise interest rates while the European Central Bank and Bank of Japan continue to loosen monetary policy in the year ahead.
The ICE dollar index… rose to 91.11, up from 90.27 in late North American trade on Wednesday and marking its highest level since March 2006, according to FactSet data. The index rose almost 13% in 2014, to mark its best yearly gain since 2005.
The best answer is to simply diversify your assets, by keeping some dollar reserves, some land, some gold, some in the market and other assets. It’s never really been a good idea to put all of your economic eggs in one basket, especially in this, the “Year of Self-Reliance.”