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To: ild who wrote (111586)	7/7/2001 4:41:44 PM
From: ild	Respond to of 436258

comstockfunds.com DEFLATION The only time deflation is ever mentioned in the financial media is in the form of it being beneficial to the economy or stock market. For example, this morning on CNBC Larry Kudlow continued to discuss how the metallic commodity deflation would allow the Fed to lower interest rates “all the way down to 3% if that is what it takes to get the economy rolling again”. Others on the show continued to elaborate on the “fact” that the Fed reductions may take longer than the 6 months previously thought to impact the economy. Naturally, all this took place in the face of weakening employment and many drastic earning warnings. We have a different position at Comstock. We don’t believe the Federal Reserve rate reductions will work at all, however, they will continue lowering rates to a minimum of 3% and probably lower rates much more than that. After all, they had to lower rates to 3% just to get us out of the shallow recession of the early 1990’s. They are going to have to pull out all the stops to get this economy out of the deflationary, bear market, recession we believe we are in presently. Keep in mind, this recession is associated with the largest financial bubble in all of world history and accompanied by the largest reduction in worldwide wealth ever ($11 tn). We believe this has all the ingredients to produce “deflation” in this country and this deflation will not be looked upon as being beneficial or benign. Remember, the last time this country suffered through a real deflation dates back to the 1930’s, however, Japan has been experiencing deflation ever since their financial bubble broke in 1989. We tried to relate the statement made by Larry Chambers from Cisco about not being able to predict his company’s woes by saying it hit like a “100 year flood, which was impossible to anticipate”(daily comment 4/23/01). We were early in predicting this same phenomenon because we never thought the bubble would last as long as it did, but all the ingredients were there. It starts with interest rates and inflation or commodity prices peaking years ahead of the deflation, and the consumer and corporate sectors leveraging up to create a financial bubble. Once the bubble breaks corporations retrench and postpone capital spending, while the consumer eventually loses confidence and the combination produces the actual deflation. Please understand that we definitely do not believe this deflation will be nearly as painful as the US experienced in the 1930’s, but it could be as bad as the deflation Japan is experiencing presently. (another recent daily comment on deflation is "Deflation is the Problem- Fed Weapons Inadequate 3/19/01)