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Fleckenstein: How Wall Street fooled itself with the Fed

Talking Numbers

Bill Fleckenstein, president of Fleckenstein Capital, says the financial markets have it all wrong when it comes to Federal Reserve Bank.

He correctly predicted the tech bubble of 2000 and the subprime mortgage mess of 2007. Most recently on Talking Numbers, he warned that the Japanese markets were due for a correction and the Fed wouldn't taper its $85 billion monthly bond-buying program ("quantitative easing" or "QE").

Now Bill Fleckenstein, president of Fleckenstein Capital, says the financial markets have it all wrong when it comes to Federal Reserve Bank.

"Wall Street has sort of fooled itself with the Fed all year" with the notion of an eventual taper, says Fleckenstein. "But, the Fed is going to make much more difficult to leave QE. What that really implies, though, is that everything they've been doing thus far hasn't worked."

(Read: US bonds move higher but Fed taper talk stirs the pot)

"I really don't think they will ever taper," says Fleckenstein. "These policies don't work."

To be sure, Fleckenstein does believe QE has worked out well for one sector of the economy.

"Wall Street and the people close to the spigot have gotten very wealthy on the back of [QE]," says Fleckenstein. "But, it hasn't solved our problems because our problems run deeper than that."

Fleckenstein postulates that it will keep moving its goals so it could continue it stimulus program. But, eventually, something will stand in its way of continuing.

"At some point, the bond market's going to stop them," says Fleckenstein. He sees the so-called "bond vigilantes", investors who sell bonds anticipating higher inflation on an increased monetary supply, as now taking action.

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"The bond market already isn't listening to the Fed," says Fleckenstein. "Rates 10 years and out don't trade on the same spread off the short rates that they used to."

To see the rest of Fleckenstein's take on the Fed and its stimulus policy, watch the video above.

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