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On Being Right for the Wrong Reasons

Bill Fleckenstein was ripped into by a CNBC commentator this morning for “being wrong” about monetary policy.  That is, Fleckenstein has been very vocally against the Fed’s QE policy citing the risk of a currency collapse and a bond market debacle.  But the CNBC commentator is a little unfair with Fleckenstein.  After all, he shut down a short fund in 2009 citing the Fed’s policies and the “don’t fight the Fed” mantra.  This was, by any measure, an incredibly prescient move.

But Fleckenstein does deserve some criticism.  After all, he has been on TV dozens of times since 2009 calling for a high inflation, collapsing dollar and a bond market collapse (see here , here and here for instance).  He also didn’t just shut down his short fund, but has been out of US stocks since 2009.   So, while he shut down his short fund, he also appears to have  misunderstood the effects of QE and the Fed’s policies.  In other words, Fleckenstein was right, but for many of the wrong reasons.

I think there’s a good lesson to learn here.   People who understood QE back in 2009 and 2010 knew that there was a very low probability of it causing high inflation or any of the negative consequences that so many people predicted.  And this resulted in drastically different portfolio positioning than what one might have otherwise done.  For instance, if you thought QE was the equivalent of “money printing” then you unload all of your USD denominated assets, you sell bonds, you sell US stocks, you buy hard assets and you call it a day.  But if you understand that QE isn’t “money printing”, but is really “asset swapping” then you know there’s no risk of a dollar collapse, high inflation or cratering stocks due to QE.  In other words, your superior understanding of the financial and monetary system helps you better connect the dots.

A lot of people say you can’t make smart decisions about the financial system because it’s too complex, too dynamic or too hard to predict.  That might be true to some degree.  But I am also a firm believer in the idea that, while the markets are dynamic and complex, we can substantially increase the probability that we will make wise allocation choices simply by reducing the number of errors we make.  And one of the primary ways we can achieve that is by simply understanding the system better so we avoid jumping to extreme conclusions based on misconceptions.


  1. Cowpoke

    haha you are “prescient”, I was just going to the ask Cullen section to ask you to comment on this piece.

  2. blonderealist

    Cullen, I know you’re not a avid WSJ reader, but Malpass had yet another op-ed piece in that newspaper recently — and he once again state that all the money the Fed created out of thin air amounts to a bunch of IOUs, which the Fed will have to pay back.
    I’d email you a link, but I’m too cheap to add the online access to my WSJ subscription.
    Then, in today’s WSJ is Holman W Jenkins, Jr., one of their opinion columnists (and a smart guy, I’m sure) who slips this towards the end of piece about Obamacare “…A world in which rising powers (e.g. China) no longer can be expected to finance endless American deficits so Americans can spend somebody else’s money on health care.”
    I think all the writers and editors at the WSJ should read the Vickrey piece you quoted yesterday.

  3. tealeaves

    I agree Cullen though I think Flek gets a bit of a pass here because he is in cash and doesn’t see a good risk/reward profile. Guys like Faber, Schiff and Flek etc are financially set, entertaining interviewees and really anything he suggest is probably not useful for the “typical investors” portfolio. Now, Hussman on the other hand is below his 2002 “IPO” on his mutual fund. That is just terrible management. He rode the market up to 2007, then paritally down in 2009 and has been bleeding downward ever since then. Wow just think he would have done better buying and holding the SPX or bonds or Gold or even commodities or shudder that T-bills from 2002 until today. That’s impressive accomplishment.

    Also, I have to say I thought I was pretty smart in 2009 in owning gold mining stocks as a play on both the “don’t fight the fed” potential stock market rise and to capture gold upside if the inflation story played out (being I was so confused who was correct about the future). That trade worked brilliant until 2011. Since then market is behaving pretty stupid for not rewarding my brilliance. But I’d have to admit I probably overallocated in that asset, underestimated the potential of the US recovery and believed the sensational stories that Mauldin, Schiff, Faber’s, Roger etc were talking up.

  4. Cullen Roche

    Yeah, I don’t read the WSJ too much. Malpass has had QE wrong from the start. A number of people have sent me links to his commentary on it. The Jenkins piece implying that we’re relying on China to buy our bonds is just silly….He should know that the demand for T-bonds is through the roof and that the Fed could theoretically buy them all even if China stopped.

    These guys all have issues with govt spending in some manner, but don’t properly communicate the risks from it. If they understood the monetary system they could still hold true to their political leanings, but would better communicate the risks….

  5. Cullen Roche

    Faber, Schiff and Fleck are all basically anti govt people. I think they’ve allowed political ideology to cloud their understandings. Hussman is a much more interesting case. I think value investing and value metrics in general have just led him astray. His fund would make for a super interesting case study….

  6. gbgasser

    “A lot of people say you can’t make smart decisions about the financial system because it’s too complex, too dynamic or too hard to predict.”

    Making smart decisions is not the same as making decisions that make you money every time. You can make smart decisions by making decisions from a properly informed perspective. But making a smart decision may be less about making a lot of money (could be a lucky call) and more about not losing money.

    Personally I don’t think there is any shame in losing money to inflation. Its the endless trying to keep up with the inflation boogeyman that drives many people to the poorhouse. Inflation is inevitable in a growing dynamic economy. Its the cost of progress, of including more and more people into the economic pie. Don’t lose money to inflation AND to stupidly following idiots who don’t know what they are talking about and are just selling an agenda

  7. Cullen Roche

    Yeah, I am mainly disagreeing with the “passive” indexing people there who claim you should just look at historical returns based on factor tilts and set a portfolio on auto pilot. This is Chicago School general equilibrium thinking being applied to portfolio management and I think it’s unrealistic and even naive. Our lives are dynamic and so is the financial system. None of this makes it easy to predict, but the idea that we should go through our financial lives without trying to make probabilistic forecasts, is a little silly to me.

  8. Dctodd27

    His fund is called Strategic Growth. It’s his hedging that led him astray, not value investing.

  9. Dctodd27

    Cullen, I’m sorry but that is just not correct. If you read what he writes, he even saya overvaluation by itself is not enough to warrant a bearish stance. Its the combination of overvalued, overbought, overbullish, rising yield characteristics that make him bearish. So you can’t credit his success or failure on value investing.

  10. Willy1964

    – QE is “asset swapping” for the commercial banks.
    – But QE is also “money printing”/creating more credit by the FED.
    – Bond market collapse ? Yes, it’s coming. Remember, in both Hyper-Inflation & Hyper-Deflation a bondmarket can/will collapse.
    – Dollar collapse ? But that assumes Hyper-Inflation and we’ll go through Deflation again and then the USD will strenghten.

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