FOX Business Network’s “Cavuto” program last night had Bill Fleckenstein, president of Fleckenstein Capital, a hedge fund based in Seattle. During this interview, he talks about the threat of stagflation and provides commentary on what Bernanke could be doing better. I agreed with 100% of what he was saying. I think we need to have some paid before we can have more gain. In relation to stocks, I think you will see the strong companies hold steady and companies propped by future hopes get killed. Here are some highlights from Bill Fleckenstein’s comments:

courtesy of Fox Business

About the Federal Reserve’s responsibility:

“The Fed can hid behind the fact that they’ve got the dual responsibility of keeping the nation at as full employment as possible without creating inflation. But they’re serving two masters for sure. And behind the guise of promoting full employment, they’ve stopped worrying about inflation and they stopped worrying about it a long, long time ago. Which is why we have the environment we have now where we have inflation picking up even if the economy is sour in the wake of a housing bubble. It’s very difficult to get that genie back in the bottle when the Fed’s proclivity is to pretend it’s not happening and print more money.”

On Greenspan:

“We have booms, we have busts. In the busts, people got reckless and acted crazy and have kooky ideas, [but] they get pushed aside and we set the foundation for the next recovery and we have a better, stronger boom. That’s the way it used to be. In the Greenspan era, he’s always trying to suppress that bust…So suppressing the downside has got us to this place where the Fed is pandering to the stock market or is perceived to be.”

On what the Fed should be doing:

If [the Fed] would keep inflation low without the B.S. of hedonics and substitution and all the things they do now, and quit hiding behind X food and energy and everything else going up in price, and had an inflation rate that they kept at 2.0% or lower, because of the way they ran the money supply, instead of guessing the right interest rate, we’d be better off and we wouldn’t have these giant misallocations of capital.

On Bernanke:

He’s not any better than Greenspan. He’s been dealt a terrible hand, but he believes the same myth. 3.0% looks good, 2.5% might look good. It’s guessing the interest rate to balance the economy that got us here.

On Stagflation:

It’s very real, okay. I don’t know if we’re going to get to Carter-like levels. How did we get out of that? Volcker came in and said we’re going to target the money supply – something that has a correlation to economic activity. They broke the back of inflation. Was it fun? No. Was it painful? Yes. Did people go bust? Yes. Then we set the stage for 25 years of really good growth, then the Greenspan era of easy money –We have to take a little pain.

On keeping rates low:

They don’t have to be so high as to be painful, but artificially low is going to promote more misallocation of capital and feed the inflation problem we have.

I don’t think the level of rates we have now is the problem, it’s the re-sets, the weird mortgages that were created that shouldn’t have been created and now the asset that has all the debt against it is going down in price.

To watch the video go here

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