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.