Comstock Partners, Inc.December 03, 2014
The Central Bank Bubble
As Bad as the Dot Com and Housing Bubble?
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 balance sheet.
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.