The Ending of QE
4/28/16 9:05 PM
of QE-3 formed a stock market top formation that presents a very strong technical
resistance that will be DIFFICULT to overcome!!
market swings (based on the S&P 500) have been extremely volatile since the
end of QE-3 in December of 2014. In
fact, ever since QE-1 ended in 2010, QE 2 ended in 2011, Operation Twist
ended in 2012, the market rose slightly and then fell sharply soon afterwards. Now that the Fed ended QE-3 and have started raising rates the stock market has been very volatile and we suspect that the swings will wind up breaking down through the lows of 1812 and 1810 that took place early this year.
(First Attachment—Ending QE and the Markets Reaction).
Attachment—S&P 500 – Ten Market Peaks) These are the same type of stock
market swings that remind us of all the other endings of QE phases. This time the S&P 500 rose into 2015 to
make a record high in May of 2015 at 2135 (rounding out for simplicity). The market has not exceeded that level since
then, even though it has come close numerous times over the past year. In fact,
in 2015 the market rose to 2120 in February, 2115 in March, 2126 in April, 2135 in May, 2130 in June, 2133 in July, 2117 in October, 2115 in
November, and 2002 in December. Also there has been a 2020 peak this April--that's 10 peaks over the past 15 months. That's a lot of peaks to break through, especially when the Fed is trying to tighten and you can see from the first attachment that the market breaks down whenever they just stop loose monetary policy.
made last year were 1867 in August and 1872 in September. The second low in September was interrupted
by a strong move back to 2021 also in September. The lows that were made this year (2016) were
1812 in January and 1810 in February.
These two lows were also interrupted by a sharp move up to 1947 also in
February and the low of 1810 was called the Jamie Dimon low on February 11th. That was because of Dimon’s purchase of his
company stock, JP Morgan, that same day.
The move up since the Feb 11th low has been quite impressive
by rising to 2120 in April and is still pretty close to that peak now (2076
have been watching the stock market rise to new highs without many corrections
over the past seven years. In fact, the
market has not had a significant decline since this bull market started in
March of 2009. Clearly, this seven year
bull market in the U.S. was due to the Fed pumping in enormous amounts of money
into the financial system. Such monetary
policy in the U.S. (and also worldwide) distorted the way money is typically
distributed and inflated the price of stocks, bonds and anything else that
trades, including commercial real estate.
ludicrous monetary stimulation policy was not confined to the U.S. The rest of the world copied the U.S. as well
as Japan, who has been doing a similar monetary policy for the past 27 years
without much success. The Japanese stock
market hasn’t come close to the 39,000 reached by the Nikkei in late 1989. It is now trading around 16,700. The Bank of Japan (BOJ) has been even more
outrageous than our Fed since they have been buying everything imaginable to
keep their economy afloat. Their present
ownership of common stock ETF’s is mind boggling! Their Japanese government and the (BOJ) own
over 10% of over 200 stocks of their most widely traded index, the Nikkei 225.
The BOJ has just recently decided to use negative interest rates to stimulate
their economy and weaken the Yen. The
“unintentional consequences” hit them as the stock market fell and the Yen
rose. Negative interest rates are also
being used by the ECB in order to grow the European economy. As is the case with Japan, we believe their
efforts will fail miserably. In China,
though rates are not negative, the Public Bank of China (PBOC) has “doubled
down” and added huge amounts of renminbi debt over the past seven years. In fact the government debt has grown to 243%
of GDP over the last 7 years.
We have been
extremely critical of all the Central Banks that have been guessing on the
policies they use while hoping everything will work out without even
considering the “unintended consequences” that may occur. Just by studying the first attachment chart
you can see what a difficult time the Fed will have in reversing their
extremely loose monetary policy. Every
time they have tried to reverse it, the stock market drops, and now they are
scared to death of trying to raise rates again after the decline the market
took in January, not long after the first rate hike in December.
In the U.S.
alone the Fed’s balance sheet grew from just over $500 bn in 2009 to $4.5 tn
presently. This drove interest rates
much lower and essentially forced investors (who wanted to get an adequate
return on their money) into risky stock investments, risky bond investments and
even commercial real estate. The Fed
claimed they were saving the U.S. from going through another “Great
Depression”. They could be correct in
that assessment since this crisis is still called the “Great Recession”. What the Fed didn’t tell anyone about is the
fact that they all have been complicit in this crisis.
one of the first institutions that came out being very, very critical of the
Fed since it was so clear to us that what took place to provoke the "Great Recession" was caused by Alan Greenspan. He got it right at first during the dot com era when he stated in 1996 that the worldwide markets reflected "irrational exuberance" but then changed his mind when the stock market continued up and he thought maybe this time it would be different!! When the market finally broke in 2000 he should have realized that the U.S. market was the most overvalued market in its entire history. He didn't and instead in 2003 he lowered interest rates to 1% and kept them there for a year. This started the worst financial crisis and depression since the "Great Depression". As our readers are aware we have comment after comment on our website, Comstockfunds.com , about the Fed and central banks. In fact, we have a “special report” titled “THE CENTRAL BANK BUBBLE”.
believe that if the Fed decides to raise rates at this time, while most other
central banks continue their stimulus plans, the results could be
disastrous. If the Fed does move this
year (which is a high probability), it will drive interest rates higher, the
U.S. dollar higher, and the stock market lower.
If the Fed makes more than one rate hike this year, it will just drive
the rates and U.S. dollar even higher and the stock market much lower. However, if we are correct and the stock
market drops sharply after the first hike, we suspect they will make the first
hike the last hike for the year and maybe forever. In fact, if they really fear the market as
much as we think they do, they could even go back to QE-4. But, in our opinion, if they do the investors
will not continue to be the Fed’s flunkies any longer and the market will still
fall sharply knowing there is no way out of this mess except to tighten.
opinion, once the Fed makes the next rate hike the market will not have a chance
of breaking through the 10 peaks outlined in the second attachment. Those are all peak prices that should hold
with such a weak economic recovery (0.5% GDP for the first quarter), earnings and revenue recessions, and a stock market with very high
valuations (22 times earnings if GAAP earnings are used).
Corporate Buybacks Aren't What They Used To Be
3/31/16 3:30 PM
Engineering” as it applies to a corporate structure usually is defined as the
aggressive use of various techniques to enhance shareholder value by affecting
the balance sheet. Probably none has
received more attention over the last several years as stock buybacks. It seems that not a day goes by that CNBC and
the financial media are reporting that companies have initiated or increased
share buyback authorizations, and there has been a great deal of attention
given over the last many months to whether share repurchases represent a
judicious use of a corporation’s capital.
report we will attempt to shed some light on this topic and also examine what
message the market may be saying about large companies that are doing
buybacks. This is possibly one of the
most important questions facing market participants today since the U.S. has
been in a zero or near zero interest rate environment for 87 months (an
unprecedented amount of time.) During
that time corporations have raised record amounts of long term debt at
historically attractive levels, while at the same time remaining voracious
buyers of their own shares. The major buyback companies as a whole have
outperformed over the last 7 years, since the bottom on 3/9/09. However, this recently has not been the case
as we will illustrate.
Now in this
era where it seems there is an index for any financial asset class that can be
measured there are indexes of companies that are buying back their own
shares. The performance metrics of the
two most popular are reasonably similar so we will focus on just one, the
S&P 500 Buyback Total Return Index (SPBUYUT). This index is calculated by S&P back to
1994 (numbers sourced from Bloomberg), though it appears a more recent creation
since trading volumes and ranges don’t appear until 2013. This index is equal dollar weighted and
rebalanced quarterly. It is a subset of
the S&P 500 consisting of the 100 companies that for the 4 previous
quarters have repurchased the largest percentage of their market capitalizations. We will compare this to the S&P 500 Total
Return Index (SPXT). This index is
capitalization weighted and like SPBUYUT reinvests dividends. It is thus a reasonable “apples to apples’
would argue that returns on financial assets have been inflated by an
experimental and dangerous environment the Fed has created through QE and ZIRP
the numbers tell us that since the market low on 3/9/09, SPXT has returned 252%
while SPBUYUT has returned 374%. A
shorter and more recent time frame, however, tells a somewhat different
story. Since the 3/9/09 market low there
are 29 rolling 4 quarter periods we examined.
Of the 29 periods, there have been five where SPBUYUT
underperformed. There were 2 in 2012 and
the most recent 3 (through this writing on 3/29/16). The largest of the 5 is the last 4 quarter
roll and the underperformance number is 7.02%.
So we believe that the market is starting to punish companies that are the
most voracious buyers of their own stock.
several arguments made by buyback opponents that go as follows:
Buybacks steal from the future by
expending resources that should be used to fund/ensure future growth in
exchange for the short term gratification of a higher stock price that is the
result of the buyback. Worse yet, if
financed with debt, the debt has to be serviced and paid back eventually.
Buybacks do not return money to all
shareholders (as dividends do) but rather only to selling shareholders; (that
are now no longer shareholders)
Corporate managements have an
inherent conflict of interest when, as is typically the case, their
compensation is determined by EPS metrics that are influenced by the buybacks
arguments make sense to many, including us.
It is likely true, however, that when the markets are near the high end
of their all time ranges, most investors either don’t care or overlook these
facts. When the extended bear market
that we see coming arrives in earnest, we believe the finger pointing and
recriminations will arrive with it.
our regular readers know that we believe the U.S. is in a long term
deflationary cycle that is the result of excessive debt (see attached “Cycle of
Deflation”). The debt situation has been
exacerbated for the last 87 months by the “experiment” of QE and ZIRP by the
Fed. Other Central Banks have followed
with their own QE and ZIRP/NIRP. During
this time frame corporations have been large buyers of their own stock with
much of it financed by debt. This most
certainly has been a prop under the market.
But as stated above corporations are doing so to the detriment of long
term investment in the business. While
in the past, indexes of companies doing buybacks have outperformed their market
benchmarks, that has started to change recently. Buybacks done at elevated levels of valuation
will prove to be ill conceived and ill timed (think Devon Energy and Amerada
Hess which recently needed to sell equity at levels far below stock repurchase
levels of the past several years).
Companies doing excessive buybacks will negatively affect future growth
by underinvesting in capital assets; all the worse if financed with debt. Because
of the aforementioned facts and circumstances, yesterday’s stock buyback
winners could prove to be tomorrow’s losers.
We believe that will be the case.
"Stormy Seas" Both in the U.S. and Globally
3/03/16 11:00 AM
warned in the past about the potential for a world-wide deflationary bear
market accompanied by a U.S., and possibly, global recession. We believe this recession and deflationary
bear market have begun and expect it will last through most of 2016 and into
ago Barron’s Magazine ran a cover story titled “Stormy Seas”. The authors were essentially on the other
side of this debate, by claiming “Despite Turbulent Markets”, the U.S. economy
will avoid a recession and grow at a healthy 3% pace this year. However, even if Barron’s is correct and the
U.S. economy grows at 3%, this would still be the slowest recovery since World
nine reasons that we believe there will be a US and possible global recession
The S&P 500 peaked in mid-2015 at
2135 and broke through many areas of support on the way down to the 1800-1812
area. Though it successfully tested that
area in both January and February, we believe that 1800 will prove an important
psychological level that will be breached in short/intermediate term. When this occurs we believe the potential
will be there for a rapid and significant move lower.
The spread between the 10 year US
Treasury and the 2 year US Treasury (flattening yield curve) is now just 83
basis points; the lowest level since late 2007.
This is a deflationary indicator.
According to Bloomberg, high yield
bond issuance was down 72% in February versus 1 year ago. Notable was the complete
absence of issuance by energy and materials firms; a possible indication that
financing is not available. This has
implications for future default rates.
The Bloomberg Commodity Index, which is
calculated back to 1991 and is broadly representative of the commodity complex,
made a new all-time low in January and currently is 68% below its all-time high
set in September of 2008.
Gold has been rallying over the past
few months as investors are worried about currency debasement and negative
interest rates. Negative real interest
rates can occur because interest rates are low relative to some inflation (now)
or interest rates are not high enough to compensate for hyper-inflation (a
possibility in the future as governments further debase currencies).
ISM manufacturing has been below 50
for five months and is now 49.5. 50 is
the break point between expansion and contraction
Downward earnings revisions,
according to data compiled by Bloomberg, are happening at double the average
pace of the last five years with profits seen dropping the most since the
global financial crisis.
The Atlanta Federal Reserve just
lowered its forecast of 1st quarter GDP to 1.9% down from 2.1%. Also significant is that its forecast of real
consumer spending growth was lowered from 3.5% to 3.1%
Fear and Loss of Confidence in
Central Banks. The Fed is looking at
everything they can before raising rates again---weakness in global markets as
well as all financial data. Other
Central Banks are also guessing after the Fed made significant decisions for
the past 7 years –i.e., zero interest rate policies as well as increasing the
balance sheet from $800 bn to $4.5 tn.
They are now scared to death about the “unintended consequences” of
their moves—especially after lowering rates in 2003 causing the housing bubble
and the “great recession”. They are
especially nervous knowing that so many countries have taken on so much debt
over the past few years without generating enough income to pay the debt
down. We believe that debt restricts
economic recovery and will probably cause “Deflation” (see attached “Cycle of
Deflation”). This debt has caused many
countries to fall into recessions (e.g. Brazil, Venezuela and a major slowdown
in China) and its effect has yet to be fully realized.
on a separate note, the people running for the Presidency have us very concerned.
On the Democratic side they are talking
about income inequality and how they can tax and spend more to alleviate it. There has been not a mention of the fact that
ZIRP has been the policy of our Federal Reserve. Zero interest rates are their dictum, not the
outcome of a free market price determined by the true supply and demand of
money. It did not precede income inequality but has
certainly exacerbated it as those with financial assets, real estate and
collectibles have benefitted. On the
Republican side the front runners are in a food fight and demeaning themselves,
our system and the office they seek. No
one, since Rand Paul dropped out, is talking about $19 tn in debt and
potentially $200 tn in unfunded liabilities that are not going away and in fact
growing. We believe this to be the most
important economic factor that will influence the quality of our children’s and
grandchildren’s lives. It is so large an
influence that it has implications for many things including defense,
infrastructure and social spending. They
in turn will factor into our security, quality of life and social order. And that is about as important as it gets!
More Fed Criticism
We Are In Good Company
2/05/16 8:00 AM
commentary (which we also made a “special report”) was essentially a response
to a financial reporter who asked us why we were so negative on the stock
market in 2016 just because the Fed, more than likely, was going to raise
rates. He stated that the stock market
almost always rose during the previous rate increases. We explained the difference between the Fed
tightening now, with enormous headwinds to overcome, relative to the times when
the Fed raised rates in the past. We
went on to also explain why the same headwinds to the Fed tightening would
probably also cause a U.S. recession (and maybe even a global recession).
comment was written in late December just after the Fed had raised the Fed Funds
rate by 25 basis points. Before this
past commentary very few people were warning
about a recession, here or globally.
However, now we are reading a lot about criticism of the Fed, and
virtually everyone that appears on the financial networks seems to have a
strong opinion about the probability of a U.S. or global recession. We have
been critical of the Fed since the Greenspan days but seldom heard of anyone
else criticizing the Fed or complaining about the ineptitude of the Fed. Now, however, after the stock market declined
sharply in January, we seem to hear about these two areas of concern almost every
recent criticism was a Wall Street Journal op-ed article by Martin Feldstein
regarding the Fed on January 14th 2016. The title of the article was, “A Federal
Reserve Oblivious to its Effect on Financial Markets”. We were struck at how closely this article
mirrored everything we have been talking about for years. The synopsis of the article was in the second
paragraph, “The overpriced share values are a direct result of the Federal Reserve’s
quantitative easing (QE) policy. Beginning in November 2008 and running through
October 2014, the Fed combined massive bond purchases with a commitment to keep
short-term interest rates low as a way to hold down long-term interest rates.
Chairman Ben Bernanke explained on several occasions that the Fed’s actions
were intended to drive up asset prices, thereby increasing household wealth and
consumer spending.“ The Federal Open
Market Committee last month didn’t even mention the risk from persistent low
rates. You can well deduce from the
title of the article that Feldstein does not have much confidence in the Fed
and FOMC in extricating the U.S. from the mess the Fed has put us in over the
past 7 years.
Gross asked a sarcastic question of the central banks in his written piece for
his clients yesterday. He asked, “How’s
it Working for Ya?” central bankers. He
then went on to criticize virtually every country that has been under the thumb
of their central bank. We were happy to
see that Bill Gross is on the same page as us.
recently, Rand Paul also criticized the Fed and the entire way our governmental
system works. He stated that the U.S. spends
over $600 bn. on the military in this country which compares to the top 10
countries spending on their military (including Russia, China, and the other
top eight countries spending on the military).
The right wing governmental forces want to spend more than $1 tn. more
on the pentagon while the left wing wants to spend much more on the domestic
side of our economy. Both get their way,
and the taxpayers get stuck with the bill as we borrow $1 million a minute to
support this and other spending. As we
stated in our last comment, the total debt of the county exceeds $100 tn. if
you include unfunded liabilities and promised entitlements. This debt is enormous relative to our $18 tn.
economy. These numbers are the main
reason our economy is growing so anemically.
heard a radio interview with economist Lacy Hunt, whose point of view we very
much agree with. The common theme here keeps
coming back to what the Fed has done to the financial markets by essentially controlling
the price of money rather than have the free market determine it. It has forced savers to chase return, which
cannot be done without increased risk.
And investors are not the only ones farther out on the risk curve than
ever before. We see announcements almost
every day about companies buying back their own stock, often with borrowed
money. As Mr. Hunt pointed out in his
interview, corporations are making financial investments in their own stock at
very inflated levels instead of making capital investments in their businesses. This phenomenon
does not bode well for future economic growth or for future stock market
We have been talking about the Fed and
government deficit spending over the past 15 years. The Fed cannot expect to
control the price of money and not have the economy and markets suffer adverse
consequences. Continuing the rate
increases risks further weakening of an already weak economy recovering at the
slowest rate in history from the last recession. While a cessation or reversal of the rate
rise has, on its own, potential to cause a panic as the markets realize that
the economy is weak and not likely to recover before there is a bursting of
what we and others have termed the “Central Bank Bubble”.
Difference between Past Fed Tightening and Now
1/04/16 8:30 AM
A reporter asked us about the prospects of the stock market if the Fed raises the Fed Funds rate, since at the time there was a strong possibility of a rise in the rate to around 25 basis points. We explained that, in our opinion, the ending of the ZIRP (Zero Interest Rate Policy) and increase in Fed Funds will be a significant negative for the stock market. The reporter asked why this is a negative since many times when the Fed raised rates in the past, the stock market also rose. We explained that the difference between the Fed raising rates in the past and today is that raising rates now has a lot more to overcome than in the past. We then explained the difference.
Difference between Past Fed Tightening and Now
- ZIRP has been going on for the past 84 months (7 years) and will probably now end. During the past 7 years with interest rates far below where they should have been, investments in risk assets are much higher now than they would have typically been. Also, the Quantitative Easing (QE) 1, 2, and 3 has ended after years of the Fed starting and stopping major purchases of Treasury Bonds and Mortgage Backed Securities. Whenever they stopped the purchases in the past the stock market declined.
- This time the Fed is raising interest rates right into the face of a profits recession as well as a manufacturing recession (both down at least 2 quarters in a row).
- This time the Fed has grown its balance sheet since the “great recession” from about $800 bn. to over $4.5 tn. This enormous amount of money has to eventually be wound down. This injection of money printed by the Fed has not driven us into an inflationary environment because there is very little “Velocity” (or transactions) associated with the liquidity. This is because of the “Liquidity Trap”. A liquidity trap is caused when people hoard cash because they expect an adverse event such as deflation, insufficient aggregate demand, or war. Common characteristics of a liquidity trap are interest rates that are close to zero and fluctuations in the money supply that fail to translate into fluctuations in price levels. Japan went through this process (back and forth) for the past 26 years since the high debt they generated caused a deflationary environment.
- Our Government debt is not just the $18-$19 tn that all the Presidential candidates constantly talk about. That amount is much lower than the actual government debt. If you include the unfunded liabilities and entitlement promises the government debt skyrockets to over $100 tn.
- Global debt has grown by just about double the global GDP over the past 10 years and over indebtedness causes deflation. In the U.S. the Fed made sure we had plenty of money over the past 7 years with QE and ZIRP. Easy money is the cause of indebtedness and as we said before, over-indebtedness is the cause of deflation. We will attach the “Cycle of Deflation”, which we authored years ago, to explain exactly what takes place after excess debt drives weakness in pricing power. The Bloomberg Commodity index is at its lowest level since 1999 and is not far from its lowest level since the start of the index in 1991. Virtually all commodities are “canaries in the coal mine” warning of a global recession. These commodity price declines are all you need to see in order to put everyone on guard for a significant recession. Don’t let anyone convince you that the reason for the declines are all related to over-supply. OPEC as well as Russia and the U.S. are continuing to pump oil and Iran is trying desperately to get rid of the sanctions that are holding them back from selling more oil (they would love to add another 500,000 barrels of oil to the world’s supply). Also, there are some crops that are plentiful, but the main reason for most of the commodity declines is a lack of “demand”! It is the slowdown in demand that starts most commodity price declines, and they continue to decline as businesses refuse to close down plants, and mines that keep pumping out their commodities in the face of the slowing demand. It is difficult to reduce the supply as the mining and oil companies do whatever they can to maintain or increase their market share. The only way to stop the mines from producing commodities is for them to go bankrupt. It is hard to imagine continuing to pump out commodities (like copper and iron ore), while at the same time there is a worldwide slowdown occurring. China is slowing at the same time it is having environmental problems, and Japan just emerged from a recession that saved them from going through 5 recessions in 5 years. Brazil and Ireland are already in recessions. Europe is also struggling, and if we do slip into a global recession the stock markets worldwide will be a disaster along with the commodities.
- U.S. stock market valuations are also extended and if the employment rate stays low there will be wage pressures which probably will affect profit margins that are at extremely high levels now. The market is trading around 17 – 18 times earnings and if profit margins come down it will also be very negative for the US stock market. Also, Robert Shiller’s CAPE (Cyclically adjusted PE ratio—take the S&P 500 and divide by the average of 10 years of earnings) shows that US stocks are around 50% to 60% overvalued.
- In the past when the Fed was raising interest rates corporations were making normal capital expenditures. Presently most corporations have been replacing cap-ex by borrowing money to buy-back their own shares in order to increase their earnings per share (EPS) as well as increase the stock price. The announced buybacks in 2015 reached close to $1.2 tn., which shattered the prior yearly record of $863 bn. in 2007.
- Geopolitics—The US and even the rest of the globe will have potential terrorism problems for some time until we can contain or deal with ISIS.
- Because of the US dollar’s rise, and probably continued rise as rates move higher, it will be more difficult to compete with our trading partners. Most of our trading partners are participating in a race to the bottom as they do whatever they can to lower their currency. This is called a “Currency War”. And even with the fanatical lowering of rates and currencies, Brazil, South Africa, Russia and other countries that are tied to commodities (which are in a deflationary downtrend) are still doing worse than us economically. Of course, if the spread of interest rates and their currencies continue it will not be good for the U.S. long-term. The best signals to watch for will be the high yield spread widening, and a flattening yield curve that turns inverted.
Will all of these Headwinds be the Catalyst for a U.S. Recession or even a Global Recession?
The most controversial question for 2016 and 2017 is whether the U.S. will collapse into a recession ….one that could wind up as a global recession? In mid-year 2016 we will have 8 years of global expansion even though the expansion in the U.S. has been one of the weakest expansions on record. Global recessions typically occur on the average of about 8 years. This potential recession may not be due to the U.S. consumer because unemployment has improved and wages are finally starting to rise after 20 years of stagnation in real wages. Oil and food prices declined significantly, but have been somewhat offset by health care costs and apartment rentals. Also, the unemployment rate is partially distorted since the labor force participation is near a 40 year low. Even though there could be a consumer produced U.S. or global recession, the greater risk is the American export sector, which has been a larger factor in the weak recovery due to the dollar’s rise and if the dollar, as well as rates, rise in 2016 watch out for a recession.
Now that the Fed has started its tightening policy whereas almost all other parts of the world are now following the Fed’s easy money position, this will take the global economy into the awkward position of easing as the U.S. is tightening. This will probably cause interest rates and the currencies of our trading partners to decline just as they are starting to rise in the U.S. This will put pressure on the U.S. manufacturing sector and will probably drive the U.S. into a recession while our trading partners could prosper. The manufacturing sector is important to the U.S. economy because it has provided many of the skilled jobs in the U.S. This may seem fine for the global economy until the world’s largest economy pulls down the global economy as we did in 2007 and 2008 with the housing bubble bursting. Keep in mind that the bubbles of the dot coms in the late 1990s, housing in 2007, and now central banks have had an enormous negative influence abroad. We discussed this in many comments in 2006, 2007, and 2008 (just type “housing” in the archives of our comments to see how many times we warned our viewers about the housing bubble and you can do the same for the dot com bubble and central bank bubble). It was the Fed that drove us into the housing bubble and it was also the Fed that was oblivious to the U.S. having the most expensive valuations in the world during the dot com bubble. You would have to reach far and wide to find a market more expensive than the U.S. stock market (especially NASDAQ) in the late 1990s (maybe the tulip bulb mania of the 1600s).
We believe strongly that the Fed will be to blame for the central bank bubble we find ourselves immersed in presently. After all, it was the Fed (under Greenspan) that missed the dot com valuations, and it was the Fed that lowered rates to 1% in June of 2003 that brought on the housing bubble with virtually no discipline of the banks and other mortgage lenders. When the credit markets and housing markets imploded in 2007-2008, driving the U.S. into the “great recession”, the Fed resorted to whatever it took to save our economy from collapsing into another depression. As stated previously, the measures the Fed took in the “central bank bubble” and inspired other central bankers to follow our lead (like QE and dramatic increases in the balance sheet) could be worse than the dot com bubble and housing bubble combined. When this breaks there will be no shortage of business school textbooks about the inter-relationships between these three bubbles.
Another reason we are skeptical about the U.S. economy avoiding a recession in 2016 is because of the breadth being as weak as it was in 2015. The top 10 companies in the S&P 500 accounted for virtually all the gains, but were overwhelmed by the 490 stocks that accounted for the decline in the index. This is also true about the number of stocks in the S&P 500 above the 10 day, 150 day and 200 day moving averages. We are also very concerned about the unsustainable path of the entitlements in our country. We have to elect the politicians who can get us on a sustainable path for the promises we made for the Affordable Care Act, Social Security, Medicare, and Medicaid by increasing the retirement age, means testing, and adjusting for inflation properly (for the ACA we need a program that doesn’t increase the premiums while making sure we increase the participants).
In fact, we believe the Fed’s decisions over the past 20 years were instrumental in the dot com and housing bubbles. In the Fed’s mind they have done everything possible (including increasing their balance sheet from $800 bn. to $4.5tn.) to resurrect the U.S. economy. Instead, their legacy will be tarnished by the outrageous policies that were used over the past 8 years, and in our view, will not result in the salvaging of our economy, but rather what may become one of the greatest destructions of wealth in history.
We hope that we satisfied the reporter’s question about why the stock market may not do well this year. Keep in mind, every time the Fed raised rates in the past, there was never a time that the financial environment was even close to being this difficult. In fact, the only time we can remember the Fed raising rates while interest rates were very low like now, was in 1937, and that drove us into another recession on top of the great depression.
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