Bill Fleckenstein is the author of the brilliant book entitled Greenspan's Bubbles: The Age of Ignorance at the Federal Reserve. Fleckenstein details how the Fed’s ‘wall of money’ policies of excessive credit created the technology bubble. He also points the finger squarely at Alan Greenspan for having inflated the housing bubble which inevitably resulted in the sub-prime debacle. In his book, Bill dissects Greenspan's longwinded speeches and FOMC transcripts, making light work of a topic most would consider to be a hard read.

Bill recently offered up some interesting commentary on the imminent November 3^rd QE2 announcement. He argues that the melt up in equities, bonds, and commodities over the past few months in anticipation of another round of quantitative easing has left the Federal Reserve “trapped,” and therefore likely to disappoint investors.

If Ben Bernanke announces a printing program that doesn’t meet the Wall Street’s expectation, “stocks will likely fall through a trap door,” says Fleckenstein, as the driving force behind recent stock market gains dissipates.  However, if QE2 is bigger than expected, more than approximately $1 trillion, Fleckenstein predicts that the rally in US treasuries is likely to be the “last hurrah for the deflationists and their favourite momentum vehicle: bonds.”  Higher interest rates will in turn lead to the “compression of price multiples over time,” i.e. lower stock prices. As a long time gold bull, Fleckenstein spoke to Eric King as reported on the King World News Blog:

“Do you think the average person has thought about the fact that paper currency in his wallet is worthless?  Currencies of the world are worthless, more people are starting to understand that.

The CPI is a joke and has been specifically engineered to not show inflation.  The reality is that the deflationists are on borrowed time. I think this whole notion of deflation is about to go poof.  That may change the tone of the gold and silver buying.

When people start to recognize that this is not going to be deflation, what are they going to do?  When the psychology changes, I think I know what is going to occur.

Something will do extraordinarily well, even though I won’t be lucky enough to own that thing.  Rare earths as an example may become the next dot com.  Rare things are going to go up in price and rare earths qualify in that category.”

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