FOX Business NetworkÃ¢â‚¬â„¢s Ã¢â‚¬Å“CavutoÃ¢â‚¬Â 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 FleckensteinÃ¢â‚¬â„¢s comments:
courtesy of Fox Business
About the Federal ReserveÃ¢â‚¬â„¢s responsibility:
Ã¢â‚¬Å“The Fed can hid behind the fact that theyÃ¢â‚¬â„¢ve got the dual responsibility of keeping the nation at as full employment as possible without creating inflation. But theyÃ¢â‚¬â„¢re serving two masters for sure. And behind the guise of promoting full employment, theyÃ¢â‚¬â„¢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. ItÃ¢â‚¬â„¢s very difficult to get that genie back in the bottle when the FedÃ¢â‚¬â„¢s proclivity is to pretend itÃ¢â‚¬â„¢s not happening and print more money.Ã¢â‚¬Â
Ã¢â‚¬Å“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. ThatÃ¢â‚¬â„¢s the way it used to be. In the Greenspan era, heÃ¢â‚¬â„¢s always trying to suppress that bustÃ¢â‚¬Â¦So suppressing the downside has got us to this place where the Fed is pandering to the stock market or is perceived to be.Ã¢â‚¬Â
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, weÃ¢â‚¬â„¢d be better off and we wouldnÃ¢â‚¬â„¢t have these giant misallocations of capital.
HeÃ¢â‚¬â„¢s not any better than Greenspan. HeÃ¢â‚¬â„¢s been dealt a terrible hand, but he believes the same myth. 3.0% looks good, 2.5% might look good. ItÃ¢â‚¬â„¢s guessing the interest rate to balance the economy that got us here.
ItÃ¢â‚¬â„¢s very real, okay. I donÃ¢â‚¬â„¢t know if weÃ¢â‚¬â„¢re going to get to Carter-like levels. How did we get out of that? Volcker came in and said weÃ¢â‚¬â„¢re going to target the money supply Ã¢â‚¬â€œ 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 Ã¢â‚¬â€œWe have to take a little pain.
On keeping rates low:
They donÃ¢â‚¬â„¢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 donÃ¢â‚¬â„¢t think the level of rates we have now is the problem, itÃ¢â‚¬â„¢s the re-sets, the weird mortgages that were created that shouldnÃ¢â‚¬â„¢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