Tuesday, January 05, 2016

the fundamental truth that "the big short" was crafted to conceal

comstockfunds |  A reporter asked us about the prospects of the stock market if the Fed raises the Fed Funds rate, since at the time there was a strong possibility of a rise in the rate to around 25 basis points. We explained that, ***in our opinion, the ending of the ZIRP (Zero Interest Rate Policy) and increase in Fed Funds will be a significant negative for the stock market. The reporter asked why this is a negative since many times when the Fed raised rates in the past, the stock market also rose. We explained that the difference between the Fed raising rates in the past and today is that raising rates now has a lot more to overcome than in the past. We then explained the difference.***

[big snip]

We believe strongly that the Fed will be to blame for the central bank bubble we find ourselves immersed in presently.  After all, it was the Fed (under Greenspan) that missed the dot com valuations, and it was the Fed that lowered rates to 1% in June of 2003 that brought on the housing bubble with virtually no discipline of the banks and other mortgage lenders. When the credit markets and housing markets imploded in 2007-2008, driving the U.S. into the “great recession”, the Fed resorted to whatever it took to save our economy from collapsing into another depression. As stated previously, the measures the Fed took in the “central bank bubble” and inspired other central bankers to follow our lead (like QE and dramatic increases in the balance sheet) could be worse than the dot com bubble and housing bubble combined.  When this breaks there will be no shortage of business school textbooks about the inter-relationships between these three bubbles.

Another reason we are skeptical about the U.S. economy avoiding a recession in 2016 is because of the [stock market] breadth being as weak as it was in 2015. The top 10 companies in the S&P 500 accounted for virtually all the gains, but were overwhelmed by the 490 stocks that accounted for the decline in the index. This is also true about the number of stocks in the S&P 500 above the 10 day, 150 day and 200 day moving averages. We are also very concerned about the unsustainable path of the entitlements in our country. We have to elect the politicians who can get us on a sustainable path for the promises we made for the Affordable Care Act, Social Security, Medicare, and Medicaid by increasing the retirement age, means testing, and adjusting for inflation properly (for the ACA we need a program that doesn’t increase the premiums while making sure we increase the participants).

In fact, we believe the Fed’s decisions over the past 20 years were instrumental in the dot com and housing bubbles. In the Fed’s mind they have done everything possible (including increasing their balance sheet from $800 bn. to $4.5tn.) to resurrect the U.S. economy. Instead, their legacy will be tarnished by the outrageous policies that were used over the past 8 years, and [which] in our view, will not result in the salvaging of our economy, but rather what may become one of the greatest destructions of wealth in history.