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Fleck Rap



Note: Professor Fleckenstein provides his commentary every Wednesday evening for educational purposes - his insights are not intended as investment advice. You can find his daily comments at

Dr. Baby Steps Surprises No One

Overnight equity markets were quiet, in anticipation of the Fed's post-seance communique today, though foreign exchange markets were pretty active (more about that below). We opened to the plus side when the casino opened for business, and we immediately tried the upside.

Scents of a Slowdown

The market had a modest head of steam until the Chicago Purchasing Managers opinion poll results were released, and they were way below expectations. Last month was 68. This month was supposed to be something on the order of 65, but it came in at 56.4. Also in the data department preopening, we saw that MBA mortgage applications were down 4.5% in June.

The market did not like that suggestion of a slowdown, though I'm not sure that many are on board with the idea of the post-stimulus-slowdown. But I would point out that in today's "Ahead of the Tape" column in The Wall Street Journal, Justin Lahart did note that "the economy's growth rate already seems to be slowing down." His additional comments on this subject would sound familiar to Rap readers.

TASR & RIMM Hike Rates of Return

In any case, the early going action saw speculation on display, as both TASR and RIMM were on fire. RIMM was up a quick 15% and TASR was up about 10%. The former raised numbers and the latter got a contract. It was just like the good old days of Internet speculation, when companies would get a contract and then get a market-cap increase of about 100 times the value of the contract. But now, at least, it's only going on in a handful of situations, whereas in the prior stock mania, almost all tech stocks acted that way.

Fed's Foot Grazes the Accelerator

As per the usual, trading basically ground to a halt until the Fed told us that, surprise, surprise, it was going to raise rates by 25 basis points -- though it did promise, cross its heart and hope to die, that it would respond to "economic prospects as needed to fulfill its obligation to maintain price stability [as it defines it]." It was kind enough to tell us that the whole world will soon be in the wonderful land of non-eaters and non-drivers, because recent "elevated" inflation has been due to "transitory factors," and "underlying inflation [is] expected to be relatively low." I still have to scratch my head at why more people in America don't ask, if everything is as wonderful as the Fed wants us to believe, how come it still has the Fed funds at the emergency rate of 1.25%, while inflation scoots along at 4% to 5%?

The stock market initially liked the news, and we saw a little surge to the upside. Then, as is commonly the case, the first reaction was undone, as the market came back to its earlier levels, before the Fed pontification was put on display. After consolidating near the higher levels, the market made another push to the upside, with many speculative stocks leading the way, followed closely by housing stocks and nearly everything else. I didn't see the last 15 minutes as I had to leave early, so folks can check the box scores for the final standings. But the bottom line, on this quarter-ending day, was: The bulls were living large and in charge.

Commodities Quaff the Communique

Away from stocks, the dollar was weaker across the board, with the dollar index down about 0.5% as we rolled into the Fed's communique. That bit of utterly predictable verbiage initially caused the dollar to sag, before it closed down about 0.7% by day's end. Fixed income, as measured by the 10-year, wound up closing about three-quarters of a buck higher, as the Fed's measured approach allowed the leveraged carry boys to resume their flight to quantity.

The metals were firm in the early going, with silver up a couple percent and gold up 1%. However, with about half an hour to go, they sold off pretty hard, I guess, as weak longs got out of the way for fear the Fed might throw more tough talk their way. By day's end, gold was flat and silver was down 1%, though I should note that in electronic trading post-Fed time, both metals were higher.

Turning to tech land, one area of weakness has been in the memory-related part of the business. Last night, Lexar (LEXR), a maker of flash products (primarily for digital cameras), lowered its expected results for a handful of reasons, not least of which was "greater than anticipated price reductions."

Weakness: The Stuff of Which Memory Is Made

The whole memory business is one weak area of chip land, and I suspect that as we get into Q2 earnings reports, we might see a fair amount of guidance lowering from the chip sector, if not from other technology companies, and non-technology companies as well.

So, while stock bulls seem sanguine, and the consumer seems even more sanguine (at least if we are to believe yesterday's government-calculated consumer-confidence number), that may all change as we start to get data from July, in the form of Q3 guidance, and potentially even more data points that help buttress the case for the post-stimulus-slowdown.

The Keynesian Versus the Clueless

Lastly, a friend forwarded some thoughts from John Maynard Keynes on the subject of inflation, penned around 1919 in his book Essays in Persuasion. The following three excerpts are from a chapter titled "Inflation and Deflation":

"Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity [fairness] of the existing distribution of wealth."

"As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery." Sound like the last five years?

"Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

It will come as no surprise that I think Keynes was exactly right, and I encourage everyone to read this small passage several times, as I found it more illuminating on about the third pass.

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