Comstock Partners, Inc.March 04, 2015
Central Bank Bubble is Similar to the Dot Com and Housing Bubbles
The Debt Built Up Over the Past 34 Years Still Haunts Us
Comstock was criticized during the late 1990s as we continued to warn our loyal readers that the dot com bubble would eventually burst and would be written about for years to come. In fact, we stated that Harvard would have case studies about the fundamentals of how many eyeballs were looking at the internet stocks rather than P/E ratios or even EBITDA ratios. We were charging a substantial amount of money from our viewers throughout the 1980s and 1990s until we got so frustrated by saying the same thing over and over, we decided to stop charging for our research reports in 1999.
The research report entitled “Analyze This” in the mid-1990s was the last report we charged for and you will be able to understand our frustration by quoting the first paragraph of it now. “When stock market history is written the current period will be looked upon as a textbook example of the conditions that exist at a major market top, and future investors will wonder how so many did not see it at the time. This should not be surprising since one of the hallmarks of a market top is that the majority are not aware of it, since a market top coincides with the point of maximum optimism, just as a bottom occurs at the point of maximum pessimism.” We went on to describe just how outrageous the valuations were at the time as we pointed out the extremes of earnings, cash flow, sales, book value and dividends.
The period of time during the housing bubble in 2005, 2006, and 2007 was just about as frustrating to us as the dot com bubble. In fact if you scroll down at the end of any of our comments you will find a box showing “archives”. If you click on it and type in “housing”, you will see that in each and every report we warned about the housing bubble. And now the “Central Bank Bubble” is becoming just as frustrating to us as the other two bubbles.
We have tried to point out to our current viewers that the Federal Reserve has not raised interest rates for the past 9 years. Instead, they lowered Fed Funds rates to zero, and increased their balance sheet from $800 bn. to $4.5 tn. mostly thru 3 QE programs and one “Operation Twist” where they bought long term securities while they sold short maturities. The result of all of this was raising financial assets to almost record levels. The stock market has tripled over the past 6 years while art, houses, and collectibles rose substantially during the same period.
Presently, the Fed is just about ready to reverse all of the extremely loose monetary policies they used to push these assets up to hopefully create a wealth effect for the consumers (especially the wealthy consumers). Now that the Fed will be taking the punch bowl away while many of our trading partners are filling up their punch bowls, what do you think will happen to the assets that were driven up by the reverse of the present Fed monetary policy?
Now that the U.S. is in the process of reversing the loose monetary conditions, many of our trading partners are copying similar U.S. QE procedures as well as lower interest rate strategies. This will drive their currencies down while the U.S. dollar will continue climbing. These “Currency Wars” will help the stock markets and economies of our trading partners. While this should drive up the stock markets of our trading partners, the U.S. stock market could reverse. Japan and Europe are in the midst of QE programs, while China and India both just lowered rates twice over the past two months. Although the Fed is acting like they have bailed us out of the “great recession” we still have plenty to worry about in our opinion. Our stock market could easily reverse the current break out to new highs and begin trending lower since we still have not solved the enormous debt problem built up over the past 34 years, when the total credit market debt vs. GDP grew from 155% to 367% in 2007, but has only declined to 330% presently!