Newsletter - SpecialReport

Debt is Still the Major Problem and Deflation is the Painful Solution

7/8/2010 12:00:00 AM

We understand that we have discussed the debt problem in this country for what seems to be forever, but we can't stop talking about it now that the debt is clearly the catalyst for the latest stock market downturn. Debt is discussed by the pundits on financial TV also, but in almost every case the discussion revolves around government deficits relative to GDP or government debt relative to GDP.

The Cycle of Deflation

2/25/2010 12:00:00 AM

We have been strong believers in the deflation theme since we have been writing these reports beginning in early 2000 (and even before). We are attaching a chart depicting the "Cycle of Deflation" which you should print out and refer to as you read this comment.

The Total Debt Relative to GDP Trumps Everything Else

1/25/2010 12:00:00 AM

Barron's magazine printed the first part of its annual Roundtable discussion of 2010 this past week. We noticed that many of the participants were very concerned about the debt (mostly government debt while we think total debt is a much more useful metric).

Debt Dynamics Will Hold Back Economy

11/12/2009 12:00:00 AM

We believe that U.S. government and private debt levels will diverge over the next four or five years as the authorities attempt to use government debt to replace the private debt that is almost certain to decline substantially.

“FUMBLE--ITIS”

9/30/2009 12:00:00 AM

With the latest 60% gain in stocks since the March low there has been an almost universal feeling that, "the worst is over for stocks and the economy, and now there is clear sailing ahead". We, however, are looking at the dilemma of the U.S.

Deleveraging the U.S. Economy

8/6/2009 12:00:00 AM

We are in the process of deleveraging the most leveraged economy in history. Many investors look at this deleveraging as a positive for the United States.

Green Shoots---Flowers or Weeds

5/6/2009 2:00:00 PM

We seem to have a plethora of "green shoots" that we can all point to that indicate greener pastures for the economy and the stock market and we sincerely hope that they turn into the flowers everyone expects. However, we have to look at things as realistically as we can, and have in the past, when we were concerned about the dot com mania in the late 1990s and when we were concerned about the housing bubble from 2003 through 2007. The only thing that made sense to us over the past 13 years was the start of the secular bear market for a couple of years starting in 2000 and the financial unwinding starting in 2008. It would suit us just fine to be wrong about this thinking, but we also must express our analysis as we see it.

We went on a corporate, consumer and government binge that took our debt levels to the highest in all of history at about 370% of GDP. As most of you know we have been concerned for many years that the unwinding of this debt will take our country into a deflationary spiral that will not end until a significant amount of the private debt is wiped out-- either through defaults or being retired. We also do not expect the green shoots to produce the flowers that most envision until the secular bear market in stocks declines to the valuation levels of past bear market troughs.

Warren Buffet was interviewed on CNBC yesterday and stated that, "this market is not expensive but is not as cheap as it was in 1974". We don't disagree that this market is not as cheap as 1974, but would add that this market is also not as cheap as it was in 1933, 1937-38, 1941-42, 1949-51, 1980-82, 1987, and 1991. You can determine relative valuations by clicking on "Limbo, Limbo" (using NDR charts) on our home page to determine when the market was more or less expensive using the metrics of your choice. The one thing that is incontrovertible is that the market was much cheaper at the trough of every secular bear market. And in most instances we never got close to the bargain areas that were reached at the end of each secular bear market.

After these two bubbles bursting and the financial breakdown that caused a global meltdown, you would think the stock market will trade at the bargain levels of past major bear markets before this mess is resolved.

We also believe we will experience a final bear market capitulation of equity mutual fund liquidations that will drive us to these low valuations.

Substituting Debt for Savings and Productive Investment

1/7/2009 12:00:00 AM

By now it must be clear to everyone that the U.S. economy is dependent upon DEBT, and we believe we have reached the debt limit!! It took the resurgence of the stock market bubble in 2003, just a few years after the late 1990s bubble, coupled with the housing bubble to get the private sector to feel wealthy or comfortable enough to generate the enormous debt relative to GDP that finally froze up the credit markets.

Putting It All Together

11/20/2008 12:00:00 AM

We had been selling our research for many years before the year 2000, but after writing about the financial mania of the late 1990s, we felt that we were saying the same thing in every research report we wrote. "The savings rate was collapsing, debt was rising at an unprecedented rate (at every level), and the stock market rose to alarming valuation levels that could not possibly be sustained." Attached, we show a Ned Davis chart depicting the debt to GDP relationship over the past 6 decades, which shows why we were so concerned.

How To Get Out Of This Mess

6/11/2008 12:00:00 AM

In this report we will attempt to explain what needs to take place in order to resolve the mess in which we find ourselves due to over consumption, excess debt, and the government trying to micro manage. We believe the Fed and Government were the main cause of the dual bubbles (stock market and housing) by attempting to stop the perceived deflation in 2001.

"How We Got Into This Mess!"

3/27/2008 12:00:00 AM

This Special Report will deal with the possibility that the market move of the past five years was not the bull market that everyone else believes, but instead a very strong counter-trend move in a secular bear market. As everyone now knows, there was a truly unbelievable financial mania in the late 1990s that produced a severe bear market and a mild recession.

February 2008 - What is the Real P/E Ratio?

2/20/2008 12:00:00 AM

There has been a lot of discussion about the correct way to measure valuations in the stock market. Comstock, in fact, wrote a piece published in Barron’s magazine a few years ago about what we consider to be the correct way to measure under or over valuation of the stock market.

Potential Catalyst For Deflationary Bear Market - Real Estate

9/22/2003 4:30:00 AM

Our regular readers know that we have concluded that real estate is the most logical catalyst for the deflationary environment we expect to unfold within the next 6 months to a year. We have also mentioned a collapse in the dollar or a major bankruptcy as potential catalysts, but real estate stands out in our minds as the prime candidate. This real estate comment is longer than normal and will serve to replace the usual Tuesday and Thursday's comments this week.

In the Special Report-"The Bubble" on our home page we go into the macro-economic reasons as to why real estate is just about the only asset which continues to attract loans from lending institutions at an alarming rate. We went into the historical precedents of past inflations and deflations and determined the best way to pinpoint which areas are the most vulnerable--you just have to determine which areas are attracting the most capital. Usually this capital takes the form of a loan, and lending (especially by banks) when concentrated in any one-area drives the sector to levels of extreme overvaluation and eventually collapses. It happened in the 1970s in lesser-developed countries and the oil belt, followed by the oil sector in the early 1980s and real estate in the late 1980s. The lending came close to destroying the junk bond market while sending Mike Milken to jail in the early 1990s. The lesson the bankers never learned is that the reason the collateral behind the loan was rising was due mostly to the fact that too many of the lending institutions' capital was concentrated in the same specific area.

You have to keep in mind that housing price increases fueled the refinancing mania that has been going on until very recently. According to the Richebacher Letter, since 1997, total housing values have soared from 8.8 trillion to about 14 trillion presently. According to the Center for Economic & Policy Research (CEPR), the national rate of home price growth surpassed the overall inflation rate by more than 30% since 1995. They concluded that there was as a high probability that "the existence of a housing bubble now is similar to the stock market bubble of the late 1990s".

Moreover, U.S existing home prices as a percentage of median family income just hit a new post-war high. Year over year, new home prices have accelerated 17.5% and existing home prices were up 13.8%. This relationship shows clearly that existing homes are less affordable now to U.S.

The Bubble, Deflation, and Implications for Real Estate

6/17/2003 12:00:00 AM