"People are, once again, being fooled," fears Bill Fleckenstein in this brief CNBC clip, warning that investors buying into the stock market at all-time highs here are making a grave error. Investors are ignoring fundamentals at their peril, "in the stock mania in 1999, people were bullish because stocks were going up. In 2007, people were bullish because stocks and real estate were going up. They didn't look ask - Why are they going up? Is this sustainable? Is this healthy? - and in both cases, it was not." In the current environment, the bubble Fleckenstein points to is powered not by tech stocks or real estate, but by the Fed's quantitative easing program. But, he warns, the Fed is losing control of one key market...
"Now we have the Fed suppressing the bond market such that rates are ridiculously low, and capital is being misallocated everywhere, and the price of nearly everything is out of whack," Fleckenstein said.
But he says the Fed is starting to lose control already - meaning that stocks could crack even if the Fed continues to buy $85 billion worth of assets each month.
"Interest rates on the 10-year bonds have risen 100 basis points since last spring, and there's still no tapering," Fleckenstein noted.
"So why have bond rates risen? I think the Fed is no longer able to dictate where the bond market is going to trade. If that's the case - and I say 'if' - then the game is going to change prospectively, because if the Fed loses control of the bond market, it's not going to be able to have unilateral say in where assets trade." Specifically, Fleckenstein is watching the 3-percent level on the 10-year yield very closely.
"If the bond market trades through 3 percent in the absence of some superstrong economic data or an actual tapering, then it will be clear that something is radically different," Fleckenstein said.
So once things do change, how low can the market go? Without getting specific, Fleckenstein said the stocks will head "a lot lower, and enough lower to make people really unhappy."
Via CNBC Futures Now