We, at
Comstock, believe as the Fed tightens by ending Quantitative Easing 3 (QE-3)
this month, and plans on raising rates next year, that the stock market will
not do well and may wind up crashing.
Logic tells us that the Fed’s reduction in interest rates, and three QE
programs of buying Treasury Bonds and Mortgage Backed Securities has put all
other QE programs to shame. Clearly, the
programs we used to stimulate the U.S. economy was what drove the stock market
up approximately 200% from 2009. Now,
that they are in the process of ending this stimulus, isn’t it logical that the
stock market will decline substantially as these policies are reversed.
Remember,
this shouldn’t be difficult to understand since when the 1st QE
program ended in 2010 the stock market declined 13.2% in 3 months. When the 2nd QE program ended in
2011 the stock market declined 18% over the next 3 months. Now, you may think that if the Fed decides to
come up with another QE-4, if stocks
decline, they can get bailed out again, but we don’t think they can pull
another rabbit out of the hat a 4th time.
We continue
to believe that we are in the midst of a global deflation that will end in
stocks following the same path as Japan after the Nikkei traded at close to
40,000 at the end of 1989. The reason for the Nikkei collapsing at the end of
1989 was because it became obvious that Japan was in the midst of a serious
deflation. It subsequently dropped to
about 7,000 and has been trading between 7,000 and 20,000 for the past 14
years.
The global
deflation we have discussed with our regular viewers over the past decade was
confirmed by other economic data released this week. For example the news of a weakening Eurozone
economic data with an unexpected rise in unemployment in Germany. The German PMI came in at 49.9 (the first
contraction in the past 15 months). The
German 10 year Bund is trading at .91% which is sharply lower than the U.S. 10
year Treasury at 2.38%. Also, the economic sentiment surprised on the
downside as factories slashed prices and inflation slowed to the lowest reading
since the height of the financial crisis.
The European Central Bank (ECB) is meeting today and they probably will
be announcing some form of QE and rate reduction tomorrow. It looks like the Eurozone will be entering
another recession, as well as most South American countries, and Japan which
just reported the second quarter GDP at negative 6.8% as they raise consumption
taxes. China’s debt continues to grow as
their credit cycle peaked, and their attempt to build empty buildings and homes
has backfired while their debt to GDP ratio has grown to over 217%. All this, and commodities continue to collapse.
The current
Geneva report stated that “global debt levels are still rising mostly in
developing countries. Contrary to widely
held beliefs, the world has not yet begun to deleverage and the global debt to
GDP is still growing, breaking new highs.
At the same time, in a poisonous combination, world growth and inflation
are also lower than previously expected.
Debt levels are also rising in the fragile eight countries of India and
Indonesia in Asia, Brazil, Argentina and Chile in South America, plus Turkey
and South Africa. These are all major
emerging markets that suffered credit bubbles and escalating current account
deficits following quantitative easing by the Fed.”
This bull
market, measured by the S&P 500, has gone to extremes from the low in March
of 2009 (5 ½ years) without a bear market (down 20% or larger), or from the
high level mark since October of 2011 (1100 days) has not had a correction
(down 10% or larger). This bull market
is what you would consider to be “long in the tooth” anyway you want to
measure it.