The big XOI stocks seem to be withering with the market lately. My TRU is holding up well though.
>Deflation Is The Problem
Fed Weapons Inadequate
We have been discussing “deflation” for some time now, but for new readers, we would like to make it perfectly clear what we expect the future financial environment to look like. The problem with this stock market has nothing to do with any potential inflationary forces unfolding. We put very low probabilities on inflation rearing its ugly head. We are not at all concerned with commodity prices in general rising, but expect commodities to decline further over the next few years. A very thoughtful strategist has been discussing “fire or ice”(inflation or deflation) as potential problems. We happen to agree that either possibility could occur, but we would put the probabilities at something like 92% deflation, 5% inflation, and 3% the disinflation we’ve been in since 1982.
Disinflation produces the best financial environment for both the economy and stock market. Inflation is much worse, but not as bad as deflation, which is absolutely devastating. We are not talking about technological innovations that lower the cost of goods and services. We are talking about the deflation of assets like common stocks, businesses in general, prices of office buildings and manufacturing facilities, residential homes or anything else that lowers the net worth of individuals or corporations. This process occurs when the emotion of greed takes over and individuals and corporations take on more debt than would be considered prudent to leverage purchases of assets in order to increase returns. Individuals do this primarily with real estate and common stocks. Corporate greed is personified by excess investment (capital expenditures) to produce more widgets, as well as purchases of their own stock or other companies stock they hope to sell later for capital gains. Presently, private debt relative to GDP is the highest in all US history by a wide margin. The combination of less demand by individuals with too much "stuff", and excess capacity in the corporate arena that produces pricing weakness. It is the unwinding of these overleveraged assets that produces the deflation.
We have just gone through a major deflation of stocks with the Nasdaq alone losing about $4 trillion. Whenever the deflationary forces take over, the stock market declines sharply and continues declining for years to come. Notice that family net worth declined in the year 2000 for the first time since the 1974 recession.
Deflation is not a common occurrence, but it did take place starting in 1929 in the USA, and in Japan over the past 12 years. Most people think that the Fed will be able to control any deflationary force just by lowering interest rates. The Federal Reserve Board (established in 1913) tried to prevent the deflation and depression in the early 1930’s by lowering the Discount Rate (the main rate the Fed controlled back then) from 6% in late 1929 to 1.5% by 1931. Treasury Bills yielded an average of ½% for 15 years once the deflation started, yet it still took a World War to get the economy back on track.
Japan’s stock market (Nikkei Average) just made a new 15-year low at under 12,000 after peaking at 38,900 in December 1989. We are sure the monetary authorities in Japan were, and are, aware of the magic elixir that Alan Greenspan supposedly has concocted to bail out the US economy and stock market. He can just wave his magic wand and lower interest rates. The Japanese central bank just lowered rates to zero, while Japanese Government Bonds presently yield just over 1%. It sure doesn't seem to be working.
We believe our portfolios at Comstock represents the best protection against the deflationary forces we anticipate in the US. The positions consist mostly of puts on the S&P 500, common stock shorts and long- term US Treasury Bonds.
>
comstockfunds.com |
