Central Bank Bubble is Similar to the Dot Com and Housing Bubbles
The Debt Built Up Over the Past 34 Years Still Haunts Us
3/04/15 3:00 PM
criticized during the late 1990s as we continued to warn our loyal readers that
the dot com bubble would eventually burst and would be written about for years
to come. In fact, we stated that Harvard
would have case studies about the fundamentals of how many eyeballs were
looking at the internet stocks rather than P/E ratios or even EBITDA
ratios. We were charging a substantial
amount of money from our viewers throughout the 1980s and 1990s until we got so
frustrated by saying the same thing over and over, we decided to stop charging
for our research reports in 1999.
report entitled “Analyze This” in the mid-1990s was the last report we charged
for and you will be able to understand our frustration by quoting the first
paragraph of it now. “When stock market
history is written the current period will be looked upon as a textbook example
of the conditions that exist at a major market top, and future investors will
wonder how so many did not see it at the time.
This should not be surprising since one of the hallmarks of a market top
is that the majority are not aware of it, since a market top coincides with the
point of maximum optimism, just as a bottom occurs at the point of maximum
pessimism.” We went on to describe just
how outrageous the valuations were at the time as we pointed out the extremes
of earnings, cash flow, sales, book value and dividends.
of time during the housing bubble in 2005, 2006, and 2007 was just about as
frustrating to us as the dot com bubble.
In fact if you scroll down at the end of any of our comments you will
find a box showing “archives”. If you
click on it and type in “housing”, you will see that in each and every report
we warned about the housing bubble. And
now the “Central Bank Bubble” is becoming just as frustrating to us as the
other two bubbles.
tried to point out to our current viewers that the Federal Reserve has not
raised interest rates for the past 9 years.
Instead, they lowered Fed Funds rates to zero, and increased their
balance sheet from $800 bn. to $4.5 tn. mostly thru 3 QE programs and one “Operation
Twist” where they bought long term securities while they sold short
maturities. The result of all of this
was raising financial assets to almost record levels. The stock market has tripled over the past 6
years while art, houses, and collectibles rose substantially during the same
the Fed is just about ready to reverse all of the extremely loose monetary
policies they used to push these assets up to hopefully create a wealth effect
for the consumers (especially the wealthy consumers). Now that the Fed will be taking the punch
bowl away while many of our trading partners are filling up their punch bowls,
what do you think will happen to the assets that were driven up by the reverse
of the present Fed monetary policy?
Now that the
U.S. is in the process of reversing the loose monetary conditions, many of our
trading partners are copying similar U.S. QE procedures as well as lower
interest rate strategies. This will
drive their currencies down while the U.S. dollar will continue climbing. These “Currency Wars” will help the stock
markets and economies of our trading partners.
While this should drive up the stock markets of our trading partners,
the U.S. stock market could reverse.
Japan and Europe are in the midst of QE programs, while China and India
both just lowered rates twice over the past two months. Although the Fed is acting like they have
bailed us out of the “great recession” we still have plenty to worry about in
our opinion. Our stock market could
easily reverse the current break out to new highs and begin trending lower
since we still have not solved the enormous debt problem built up over the past
34 years, when the total credit market debt vs. GDP grew from 155% to 367% in
2007, but has only declined to 330% presently!
A Race to the Bottom
2/05/15 1:30 PM
As our viewers know, we have been sounding the alarm about the
deflationary process that is playing out in the world’s equity, bond and
currency markets for quite some time. Because of the activity by central banks in
major and more recently in developing countries we have described what is going
on as “The Central Bank Bubble”.
It is truly an irony that in their efforts to fight the
forces of a crushing deflationary environment, central
banks have been the direct cause of one of largest inflations of financial
assets in history. This asset inflation
even extends to collectibles such as art.
As we write, equities in several major markets around the world are
trading at or near all-time highs while growth in those economies remains
anemic. In others, such as Japan,
equities are trading near the highs of recent years with the same anemic growth. On the fixed income front, sovereign yields
in the US, Japan, and most countries in the Eurozone are trading at all-time
lows. In the latter case there is an
unprecedented negative yield curve out 3-6 years for the very best credits
(France and Germany). All of this, as
many currencies are falling rapidly relative to the dollar. To paraphrase the character Marcellus from
Hamlet; something is clearly rotten in the state of the currency markets!
We strongly believe that the Currency Wars, (described in
our Cycle of Deflation as “competitive devaluation”) have begun. Many countries have now joined “the race to
the bottom”. Since the beginning of 2015 no fewer than 8
countries have unexpectedly cut interest rates in an effort to stimulate their
economies. In our view, they clearly
took these actions in a desperate attempt to export the deflationary forces
that are plaguing them. For its part,
Switzerland would have no part of defending the value of the Euro versus the
Franc and decided to get “out of the way” and remove the cap that had existed since
2011. The reaction in the Swiss export
dependent equity market was an immediate 15% correction. Imagine for a moment what the Swiss must expect
to happen to the Euro once the ECB starts their “Quantitative Easing” program
of about $1 tn. in March. They had to be
frightened about the Euro declining sharply to be willing to take a valuation
loss of that magnitude to their equity market in one day!
We continue to reiterate that all of this will not be good
for US equities. The decline of oil,
copper, iron ore, the Baltic Dry Index, and many other commodities, is starting
to have a telling impact. In the past
few days Chevron has suspended its $5 Billion (2014) share buyback and cut its
2015 capital spending budget by 13%.
Exxon, for its part, while refusing to give a cap-ex budget, reduced its
share repurchase by 75%. We fully expect
a cascading effect as companies down the chain feel the pinch. Included will be commensurate effects on wages
and employment which we strongly believe are not the improving picture the
government has painted.
Lastly, volatility has ramped higher in response to all of
this. The VIX Index and futures on VIX,
while not on their recent highs, are well off of their lows. More volatility is coming and we expect the
US equity market to begin a large corrective phase shortly as most of our
trading partners will do whatever they can to “win the race to the bottom” with
their currencies. This process will
continue to drive the U.S. dollar up. We
can’t win this race since we have virtually run out of ammunition after the
most outrageous monetary easing ever over the past 7 years.
THIS is WHY the FED is BETWEEN a ROCK and a HARD PLACE
12/31/14 3:00 PM
We write to
reiterate that the United States and other major stock markets are in what we
have termed the “Central Bank Bubble”.
In December, the U.S. stock market staged a furious comeback rally following a rapid and substantial decline. Just
prior to the latest upturn, the market seemed ready and poised for further and
even more substantial declines. The
rally appears to have been precipitated by the Fed substituting the word
“patience” for “considerable time” in their latest policy statement. While we were disappointed that the markets
rallied based on the simple parsing of words, we remain convinced that deflation,
overvaluation, and Fed policy in response have intertwined to cause one of the
largest stock market bubbles in history.
We see nothing
that would cause us to change our opinion.
Let us once again point out the near zero interest rate policy and three
quantitative easings (along with operation twist) that have not only expanded
the Fed balance sheet to unprecedented levels but have thoroughly distorted our
capital markets. With returns to
investors in money market funds at zero, investors have had to chase yield in
both the stock and bond markets. A
glaring example of capital market distortion is at the sovereign level where the
US 10 year Treasury yields 2.16%; while Portugal's 10 year trades at 2.76%, Italy trades at 1.92%, Spain at 1.63%
and Germany at .54%. A further example
of distortion caused by zero rate policy is near record low yields in US
Corporate Bonds combined with record high issuance; now over $2tn. for three
years running. Much of the debt sale proceeds have been used
to fund share repurchases, which in our view has artificially propped up
earnings, while leaving corporate balance sheets more leveraged and revenues
the velocity (turnover of money) of the M2 money supply has remained near the lows of the past 60
years. That statistic serves as proof
that the Fed’s efforts are getting very little “bang for the buck”. We also observe that the several different commodity price indexes declined to their lowest point in the past 5
years and shows no sign of bottoming. And as you all know energy prices have been collapsing, as supply is overwhelming demand--many think that energy prices are holding back the U.S. bull market by hurting other countries abroad. Soon they will realize that the commodity price decline (see attachment) is caused by the global distress--not the other way around. For example, Europe will be attempting to do whatever it takes to prevent more deflation with a vote to start a new QE policy at the January 22nd ECB meeting. Japan is lowering corporate taxes to try to exit 25 years of deflation, and China is trying to prevent a credit bubble crises now that they are no longer the growth engine of the world. And while they are attempting to move from an exporting led economy to a consumer led economy, in the face of a property overhang. There are many more examples of stress in the global economy.
The Fed is about to raise interest rates
sometime in 2015 (for the first time in 6 years), and that could be
trouble for stocks just as it was after the ending QE-1, and QE 2. On the other hand, if they don’t raise rates it
would only be based on failed QE policies that were supposed to revive the
economy. This is the incredible dilemma that the
Fed faces in the coming year.
All of the
aforementioned factors are screaming "deflation". Thus far the market has not
heard the message. But we are convinced
that it will be heard, and when it does, we believe the U.S. stock market will
decline precipitously (see Cycle of Deflation attachment).
With that being said, we still wish all of you a Happy and Prosperous New Year!
The Central Bank Bubble
As Bad as the Dot Com and Housing Bubble?
12/03/14 2:30 PM
As the long term shareholders of Comstock Capital Value Fund
are aware, we warned about the dot com bubble during the late 1990s, and the
housing bubble of 2004 to 2008. We admit
to being very early in both bubble predictions.
Presently, we strongly believe that we are in the process of building
yet another bubble. It may well be
called “The Central Bank Bubble”.
It was very painful for Comstock to warn about these bubbles
so early, but we must call the markets as we see them. Recall that Alan Greenspan recognized the dot
com bubble as early as December 1996 when he warned investors about “irrational
exuberance”. The warning roiled the
stock markets both here and abroad before reaching a trough in early 1997, but the
bubble resumed and continued for the next 3 years. In fact, the NASDAQ Index doubled from 1998
to early 2000. Dr. Greenspan subsequently
reversed his feelings of “irrational exuberance” and instead proclaimed “no one
is able to recognize a bubble until it bursts”.
The reason we bring up these two bubbles is because we
warned our investors about them years in advance of their bursting. We now have been warning our investors about
the Central Bank (CB) bubble for the past 3 years. While we did go neutral on the market in
2009, it was after the market rose by about 50% that we began shorting stocks
again. We will continue warning our
investors about the CB bubble until it bursts no matter how painful it is
during the last stages of the bubble. We
fully expect another crisis to come down on stock investors for the third time
in the past 14 years.
Most investors were pleased with the announcement of another
200,000+ employment report, and a 5.8% unemployment rate for October. The 200,000 barrier was reached for the 9th
time in a row. However, please consider what
the Federal Reserve did to get the employment number over the 200,000
barrier. Consider that in 2008 the Fed’s
started with QE 1; in 2010 came QE 2, and in 2012 came QE 3, or some would call
it QE to infinity. QE 2 and QE 3 were
separated by “Operation Twist” (the purchase of long Treasury bonds while
selling short term Treasury bills). The
Fed’s balance sheet ran up from $800 bn in 2008 to close to $4.4 tn presently.
It is a statistically significant fact that with this entire
monetary stimulus, along with $800 bn of fiscal stimulus, this economic
recovery is less than half as strong as the average recovery from recessions
over the past 60 years. Each average GDP recovery since
1983 has been progressively weaker; with the last 3 being 3.6 % following the
1991 recession, 2.8% following the 2002 recession, and 2.2% following the 2008
recession. This decline in recession
recoveries was directly attributable to the continuous build-up of debt. All this in the face of potential insolvencies
in Medicare, Social Security, and the Pension Benefit Guarantee Corporation’s
high probability of going under within 15 years. It
stands to reason that an economy that is weak in the face of unprecedented easy
money and zero interest rates will be even weaker when the Fed unwinds its
Please also consider that the other major central banks in
the world are attempting to stimulate their economies in much the same manner
as the Fed in the face of extremely large debt loads. While US Debt to GDP stands at 330%, the EU
and Japan stand at over 460% and over 655% respectively. It is also significant that these large debt
loads are also present in the emerging economies. We therefore, continue to believe that until
the large debt overhang in the world economies is substantially reduced that
growth will be limited or potentially negative.
It is the facts stated above, combined with extremely
expensive stock market valuations across all major markets of the world that
compels us to warn our investors about the potential for a third bubble busting
in the short span of about 14 years.
Did the Fed Save us from a "Liquidity Trap"?
Is this a Global Central Bank Bubble? How will the Markets React?
11/04/14 4:00 PM
There have been a number of very sophisticated economists who recently made some presentations on the financial networks discussing just how effective the Federal Reserve was in being able to avoid a “liquidity trap”. One economist in particular used the avoidance of a “liquidity trap” a number of times as he praised the Fed.
We, at Comstock, were shocked at the praise given to the Fed when we don’t believe the Fed rescued the U.S. from the ravages of a “liquidity trap” at all, but even more shocking to us was the response of the interviewers. We are sure that there were not many people watching on TV that understood the definition of a “liquidity trap”. Yet the economist was never asked to explain it. Hopefully, in this comment we will explain what a “liquidity trap” is, and why we don’t think the Fed avoided the “trap”. We will also explain why we think the Fed painted themselves into a corner and will have to keep rates very low, continue increasing their balance sheet, and maybe even resort to QE 4. We are skeptical that going back to the same old fashioned government subsidies used by the Fed over the past six years will work any better than they did for the past six years.
A “liquidity trap” as defined by BusinessDirectory.com, is a situation when bank cash holdings are rising and banks cannot find a sufficient number of qualified borrowers even at incredibly low rates of interest. It usually arises where people are not buying and firms are not borrowing (for inventory or plant and equipment) because economic prospects look dim, investors are not investing because expected returns from investments are low. People and businesses hold on to their cash and thus get trapped in a self-fulfilling prophecy. Wikipedia agrees that a liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Thus, if an economy enters a “liquidity trap”, further increases in the money stock will fail to lower interest rates and, therefore, fail to stimulate.
We believe that this country and many other countries across the globe are intertwined in this “liquidity trap” presently. It is clear that the Fed has tried to pump as much money as possible into the U.S., but for the past 50 years M1, M2, and M3 have grown at around 7.5% and this past year the Ms grew at 1.5%. According to the Federal Reserve figures and Moebs Service the average checking account balances have averaged about $2,000 for most of the post WW II period, but now they have grown to $3,700 in 2011, $4,400 in 2012, $5,000 in 2013, and $5,800 now.
We are clearly in the same “liquidity trap” that Japan has suffered from for the past 24 years. This is the main reason that this economic recovery from the “great recession” is so weak. We understand that the 3rd quarter GDP came in at 3.5%, but the U. S. has been growing at around 2.2% over the past 6 years. The average recovery from recessions since WWII has been closer to 5%. That is just about double the recovery rate we are experiencing today following the worst recession since the “great depression”.
There was a lot of trepidation in the U.S. stock market as investors were concerned about QE 3 ending. Many investors were worried about the ending being similar to the 12% and 14% declines that followed QE 1 and QE 2. Instead, the markets handled that fairly well, which surprised us.
Then the news came out of Japan! The Bank of Japan (BOJ), the Ministry of Finance (MOF), and the Government Pension & Insurance Fund (GPIF) decided to do even more than our Fed. The BOJ raised its goal for the monetary base to 80 tn. yen from 65 tn. yen. The central bank’s governor, Haruhiko Kuroda, stated that this was aimed at “ending Japan’s deflationary mind-set.”
This past September, the GPIF was supposed to invest in more Japanese equities (going from 12.5% to 25%), but postponed the move until year end. They surprised most global investors last Thursday by not waiting until December. They announced that they would double their positions in Japanese equities to 25%. But, they were so concerned about deflation they also raised their positions in international equities exposure from 12.5% to 25%. They raised the cash to make these investments by trimming their domestic bonds from 60% to 35%. This announcement drove up all international markets significantly this past Friday (including a 7% upward move in the Nikkei).
We suspect strongly that this outrageous surprise move will not help the Japanese market over the long term and be just as ineffective as all the other moves the Japanese made over the past 24 years. Remember, they tried our form of QE about 20 months ago with no apparent inflationary results. Their latest quarterly GDP was down about 7%. They will keep trying to offset the deflation in Japan by exporting it to their trading partners by driving down their yen in relation to their trading partners’ currencies. This is called “competitive devaluation” and we have been stuck for years on this part of our “Cycle of Deflation”(which is attached). Soon, many countries that are caught in the “Cycle” will be forced to move down the “Cycle” to “protectionism and tariffs” and then next to “beggar-thy-neighbor” (an example of this is Saudi Arabia lowering the price of oil today in an attempt to gain market share from the U.S.). They are doing this in an attempt to export their deflation.
This global deflationary environment has resulted in a Central Bank “bubble” that we believe will end badly both here and abroad! The reason for this difficult deflationary environment all over the world is explained very well in The Geneva report titled "Deleveraging, What Deleveraging?" It explains that, most believed that the 2008 crash (caused by the debt explosion) would result in deleveraging. But, instead, due mostly by government spending, worldwide debt grew rapidly. According to the report, global debt as a percentage of GDP has risen 36 percentage points since 2008, to a record 212%.
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