Comstock Partners, Inc.
"Stormy Seas" Both in the U.S. and Globally
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!