Bill Fleckenstein: The Market Is In A Dangerous Set-up That Could Get Ugly Quickly

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**Bill Fleckenstein** (0:59)
This is a very dangerous setup. And it may continue to be for two more years. I mean, it's not possible to know when the passive bid will get swamped by enough bad news, or the balance of the passive bid in terms of the money going in versus what comes out, can get diminished enough to allow the fundamentals to matter. Or if we at some point will see the passive bid start redeeming. I mean, if that were to happen, it would be absolute chaos. So you have to be aware that it's a very dicey setup. It will be hard to change it. But if it changes, things could get ugly quickly.

**Adam Taggart** (1:50)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. It's a tricky time for investors right now. We're seeing increasing signs the economy is slowing down, but nearly all assets are surging in price right now. Some, like many stocks, are at all-time high valuation levels, even though the weakening economic data increasingly makes their forward earnings forecast look less and less attainable. Bond yields remain elevated, and inflation is not yet at the Fed's 2% target. Yet, it seems highly likely that an interest rate cut of at least 25 basis points will happen this month. So what will win out from here as we head into the end stretch of 2025? Will the momentum and investor exuberance keep driving asset prices higher? Or will they finally start to buckle under the gravity of the underlying data? For answers, we've got the great fortune today of turning to veteran money manager Bill Fleckenstein, founder of Fleckenstein Capital. Bill, thanks so much for joining us today.

**Bill Fleckenstein** (2:50)
Nice to see you back, Adam.

**Adam Taggart** (2:52)
Well, Bill, it's great to have you back on a beautiful day in the Pacific Northwest. I'm glad you guys are still having a great Indian summer there, as you mentioned. Lots to talk about. I went back and reflected on our previous conversation from a few months back, and a lot of the questions we were raising then, we have more answers to now. So very interested in getting your latest update here. If we can, let's start at the market valuations. How concerned, if at all, are you by the disconnect that I mentioned between today's elevated and still rising asset prices versus the slowing economic data?

**Bill Fleckenstein** (3:29)
Well, the problem is that valuation means almost nothing anymore because the driving force in investing in the market today is the passive bid. And given its market share at roughly 50 percent, and then all the people have reverse engineered what appears to have worked, you have a smaller subset of people who are actively trying to look at securities and look at the fundamentals and try to weigh them, right? I mean, the market is 100 percent voting machine in the short run always. But now, the voting machine aspect is entirely what moves the market. And that's why incremental flows seem to help on the upside. And that's why so many people are focused on flows now, because it is currently working. It's not that the flows necessarily, from a logical perspective or would work in a period where the market wasn't as dominated by a passive, but that's what has worked. And so the valuations mean literally nothing right now. To the market, to the system, to all that, it might matter to you and me how we run our money, or it might matter to people who try to manage risk. But if you're a professional, that's been a dangerous thing to do because if you try to use your good judgment as to what to do, you get left behind by the passive monster, and then people think you don't know what you're doing, and they take the money away, and then the process continues. And so that process is still underway. It's been underway for the last group of years. Every time we've spoken, it's bigger and more powerful than ever. And you have to be willing to hold two thoughts in your head. One, this is a very dangerous setup, and it may continue to be for two more years. I mean, it's not possible to know when the passive bid will get swamped by enough bad news, or the balance of the passive bid in terms of the money going in versus what comes out, can get diminished enough to allow the fundamentals to matter. Or if we at some point will see the passive bid start redeeming. I mean, if that were to happen, it would be absolute chaos. So you have to understand, as Mike Green said so eloquently the first time he explained this to me, you have to know the rules of the game that you're playing.