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.