‘One of the Greatest Decisions in My Life’: Short Seller Closed Fund Before Fed’s Monetary ‘Bazooka’

The Federal Reserve building is pictured in Washington on Aug. 22, 2018. Chris Wattie/Reuters

After a decade in the securities business, Bill Fleckenstein began to see the writing on the wall at 2051 Constitution Avenue in the mid-1990s. At about that time, the Marriner S. Eccles Federal Reserve Board Building—at the time occupied by Fed Chairman Alan Greenspan—had a stark shift in philosophy and governance style.

Once a student of the free-market Austrian School of economics and close friend of Libertarian novelist Ayn Rand, Greenspan’s monetary policy stood in contrast to his ideological roots. The “Greenspan put” became a central theme on Wall Street, describing the Federal Reserve chair’s tendency to lower interest rates in response to declines in the stock market.

The end result: the dot-com bubble.

“I thought what Greenspan was doing was wrong. It was going to end up with trouble,” Fleckenstein told The Epoch Times. “The bubble got way too big. So midway through the ’90s, I shifted.”

Formerly a value investor focused on profitable companies with a sound business model, he started Fleckenstein Capital Management, a short-only fund that would capitalize on the overvalued tech names that were soon to meet their demise in the coming new millennium. The fund earned 43 percent in 2008, but Fleckenstein chose to close it down after seeing the Fed’s response to the Great Financial Crisis (GFC) of 2008–09.

“I thought the quantitative easing would make short selling very difficult,” Fleckenstein said. “I had no idea that events would play out as they have.”

Quantitative easing is the process whereby the Federal Reserve buys U.S. government debt across the duration spectrum (two-year, 10-year, and 30-year bonds) at historically unprecedented levels. It was pioneered by former Fed chair and Bush appointee Ben Bernanke, who more than doubled the number of assets held by the central bank in the months following the real estate and stock market downturn in 2008.

Former Federal Reserve Chairman Ben Bernanke answers questions at the Brookings Institution in Washington on Sept. 12, 2018. Win McNamee/Getty Images

Today, the Fed’s balance sheet is more than 10 times the levels that were common throughout the mid-2000s, something few predicted would occur. Many have pointed to this unprecedented monetary expansion as the primary driver behind the inflation concentrated among asset prices such as housing and securities.

In February 2009, the S&P 500 Index was at $735. At the time of writing, the index is $4,135. The post-GFC environment proved unfriendly to full-time short sellers.

Renowned short-seller Jim Chanos—famous for exposing the Enron scandal—lost more than $3.5 billion between 2010 and 2015, with the total value of his investment fund Kynikos Associates falling by more than 50 percent.

Fleckenstein’s decision to close his fund proved prescient.

“It was one of the greatest decisions in my life,” he said. “The environment now is completely different than what it used to be, thanks to the activist central bank. We have out-of-control government spending, and the amount of investment dollars that are moved on a daily basis blindly by the Vanguards and BlackRocks of the world where they take corporate retirement money or 401(k) money and blindly push it in their index.

“So that kind of warps how the market trades. ... As bad as Greenspan was, he was using a pea shooter compared to the bazookas and nukes that they use now.”

Folly of Today’s Central Bankers

Fleckenstein pins much of the financial turmoil we’re witnessing today on the contemporary models and patterns of thought exhibited by those occupying the Eccles Building. They’re far astray from their Reagan-era predecessor, Paul Volcker, who’s commonly credited with ending the inflation of the late 1970s, even by acting Chair Jerome Powell.

The thing that “made Volcker so successful,” according to the retired short seller, “was focusing on the amount of money in circulation.”

President Ronald Reagan meets with Paul Volcker, chairman of the Federal Reserve Board, in the Oval Office. Bettman/Getty Image

It was a loss of consideration for the total money supply and a misguided fear of deflation that set the Federal Reserve down the reckless path for which we’re paying the price today, according to Fleckenstein. He pointed to a 2019 article by the Financial Times titled, “Powell Seeks a Cure for the Disease of Low Inflation,” as exemplary of the sort of problematic thinking that caused decades of asset price inflation and now consumer price inflation.

“They conflate deflation and depression. ... A depression generally sees falling prices along with it,” he said. “So this idea that we need to have rising prices and fight deflation at all costs, it’s just wrong-headed nonsense from these academics at the central bank.

“Nobody benefits from rising prices except for people that have assets.”

Asset inflation has caused considerable wealth inequality. Pew Research found that from 1989 to 2016, “the share of aggregate wealth going to upper-income families increased from 60 percent to 79 percent.”

Overall, Fleckenstein said he thinks market participants hold too much faith in central bankers.

“They treat the Fed with this reverence like they deserve to be respected, and they hang on every word,” he said.

Fleckenstein’s economic outlook is centered on a wake-up call that investors will finally lose confidence in monetary authorities. Consequently, he said precious metals are his preferred asset at the moment.