Comstock: 6 Near-term Market Risks

Since we seem to be entering one of those phases again where it looks like the stock market can do absolutely no wrong we’ll highlight some commentary from a resident bear, Comstock Partners.  After all, if we’re going to all start cheering for the end of the monetary system at a rate of 98% approval, then I might as well join the crowd, right?   I’ll work up my required hyperinflation prediction here in a few minutes.  For now, here’s Comstock:

Although the sigh of relief that the nation wasn’t going to default today was worth a short bounce, the outlook for additional stock market gains seems bleak.  The agreement to open the federal government and raise the debt ceiling temporarily is a Band-Aid rather than a solution, and merely sets up the prospect of another confrontation within a short time.  Meanwhile, an economy that was already sputtering before the negotiations even started has now undergone further significant damage.  We see the following serious problems with the near-to-intermediate outlook.

1)     The agreement settled nothing, and we will now be doing the same thing over again within a short time.  The settlement called for the formation of yet another congressional committee to either come up with a long-term budget solution or a budget for fiscal 2014 (ending September 30, 2014).  The problem is that we’ve tried this over and over again, and, if anything, positions have hardened.  The House budget resolution proposes deep spending cuts and no tax increases, while the Senate resolution includes large tax increases and less spending cuts.  Both sides are adamant in their positions, and are unlikely to work out a compromise by December 13th that they have rejected numerous times in previous negotiations.  Absent an agreement, we will be facing another bitter conflict as we approach January 15th.


2)    Part of the reason for the market’s optimism is the likelihood that the Fed’s tapering will be now put off to at least March as a result of the additional economic uncertainty created by the current deal.   However, quantitative easing (QE) has been priced into the market over and over again, raising the question as to how many times the market can discount the same factor.  In addition there is a serious question on whether the benefits of QE outweigh the possibly serious unwanted side effects.


3)    With the economy barely growing, corporate revenue growth has been decelerating while profit margins are 70% higher than their long-term average and likely to come down.  As a result, earnings growth is also slowing, and current forecasts will probably prove to be far too high.


4)    Economic growth was only in the 1.5%-to-2% range even before the recent round of negotiations, and is now likely to sink below that.  While lower government spending during the shutdown probably only sliced about 0.2% annualized from 4th quarter GDP, the effect on consumer and corporate spending can lop off anywhere between 0.2% and 0.7% more.  And the uncertainty leading into the January 15th deadline can affect 1st quarter growth as well.


5)    Most market strategists seem to assume that other than the turmoil in Washington, the underlying economy is getting stronger.  We’d like to see their data. Real consumer spending on an annualized basis increased by a tepid 1.5% in the 1st quarter, 1.2% in the 2nd, and 1.3% in July and August.  That’s barely above recessionary levels. In addition housing is slowing down, business remains reluctant to hire and spend, and government spending is declining.  Furthermore, if the budget committee comes up with an agreement, it will almost certainly involve additional cuts in spending and, perhaps, higher taxes.  If there’s no agreement, the sequester is scheduled to increase automatically in January.


6)    A last minute settlement is what the consensus expected, so was not a great positive surprise.  The market’s maximum decline was slightly under 5%, meaning there were few outstanding bargains available as result of any jitters during the conflict..  The preponderance of sentiment is dangerously bullish and the S&P 500 is selling at an historically high multiple of 19 times trailing reported earnings.  In our view, the current condition of the market is eerily similar to the peaks of early 2000 and late 2007, when unfavorable conditions were ignored by the majority of investors.


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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • Billiejones

    “After all, if we’re going to all start cheering for the end of the monetary system at a rate of 98% approval, then I might as well join the crowd, right? I’ll work up my required hyperinflation prediction here in a few minutes.”

    – Wow Cullen, Lots of bitterness in your posts lately. Its not like you and frankly I think you are better than that….hopefully its just a phase. I realize that you want credit for being “Right” but i think it may be beneficial for you to look at the bigger picture. Is it possible that you are counting feathers in your cap that others don’t see? There are many levels of “right” (again all relative). For example from an investing perspective….going long legacy non-agency RMBS in ’09-’10 was about as right as it gets………buying the indices at the lows was also “right” but to a much lesser degree (status quo). You have done good work here but i think your demanding credit is a big turnoff for some. Your best attribute is humility and an open mind…..its a mistake to give that up. You may not like the message, or who its coming from, but it would be prudent for you to listen. You have the potential to do great things with this blog and your business……demanding credit for sticking with the “status quo” will drive people away IMO.

  • S.Izreig

    This is more false equivalence nonsense.

    Not all views on the operation and nature of our monetary system are equivalent. This isn’t art that is open to interpretation.

    The fact is Cullen has been right, and the hyperinflationist/gold-buggers/flat-earthers have been straight, objectively, humiliatingly wrong. Either these loons come up with a new framework that addresses the glaring weaknesses in their approach, or they can be happy to cradle their ossified theories and sit in the intellectual dustbin.

    Cullen, I do hope you realize that when you engage the contrarians, it isn’t the individual himself you should be trying to convince. Lots of people read these back-and-forths and come up with their own conclusions based on the strength of the arguments presented. Just because some wacko refuses to believe that the US isn’t about to implode doesn’t mean more reasonable people aren’t reading your arguments and siding with your logic.

    Keep doing what you are doing. Reality has a way of bitch-slapping people who refuse to stop being wrong.

  • Cullen Roche

    I was just being sarcastic. I think you’re reading into my comments too much.

  • Cullen Roche

    But you know – I might be a little tiny bit bitter towards you. After all, you spent a good part of this past weekend trying to explain how water and gold were comparable vital resources in addition to trying to show how my business is just as big a scam as a guy telling people they need to invest their entire life’s saving in the gold he’s selling at a 8% mark-up based on the idea that he thinks the entire monetary system is a scam and the world is ending. That’s actually one of the most insulting things anyone’s ever told me. Don’t worry. I’ll be over my bitterness by 1PM today at the latest. :-)

  • http://www.joefacer.compblog Joe

    Um…. The hyperinflation prediction? Can I really trust it if you generate it Post 1:00 PM Left coast time? Shouldn’t the prediction rise out of fear and resentment?

  • Billiejones

    “After all, you spent a good part of this past weekend trying to explain how water and gold were comparable vital resources”

    -hahaha., this is just silly Cullen. I never compared gold and water at all or made any reference to either as “vital resources” ……I didn’t even infer any comparisons. I made a point about premiums as it relates to YOUR business and really all businesses. education on asset allocation and how to diversify,reduce fees etc. are free all over the internet…..yet people pay you a premium for that knowledge, it is a valuable resource and to that person it has real value. To other people it has no value…’s all perception, neither of those people are right or wrong. Many people (including me) pay a premium for bottled water…..even though it’s virtually free. To myself and others the premium is worth it for convenience, in some cases quality etc. to many others bottled water is preposterous and highway robbery…….it’s just perceived value. In this case as well neither person is right or wrong. Radio is free yet some people pay a premium for Sirius/XM…..I’m not on the road very often so I always let the free subscription expire after purchasing a new car……but someone who spends a lot of time driving may perceive value. Maloney sells gold, he doesn’t have a monopoly on it…..his premiums are nowhere near the highest nor the lowest. As a commodity, it can be purchased easily from many sources, some may perceive maloneys dealer services to have value….I have never purchased from him so I don’t know what that value would be to them, but I don’t begrudge them or him for doing so as I don’t begrudge you or arrowhead water or Sirius radio. It’s not like Maloney is selling numismatic coins that have premiums far above content value.

    I realize that you believe your services provide more value and are holier than the other above listed services, but this is just your PERCEPTION… the proprietor you should believe that you provide better value, but guess what, the FC at the local bank charging a yearly wrap fee also believes he is providing a better value, his price may be higher but no doubt he would argue that he (and the comprehensive services offered by the bank) offer more VALUE…….it’s the difference between price and cost…..the important difference of course being PERCEIVED value. It is silly to label any of the above services, regardless of how you feel about them “scams” or “snake oil salesmen”.

    I’m not sure how this isn’t obvious to you guys or how this viewpoint is considered extremist…..seems like logic and common sense to me….but then again that’s just my perception.

  • Andrew P

    How can the Stock Market have any big risk as long as QE continues? A plot of the S&P against the Fed’s balance sheet shows a r^2 of 0.95 since the “recovery”. That is too tight a correlation to be caused by psychology or nonsense – there must be a direct causal connection between QE and stocks. The market cap of the S&P rises by $3 for each $1 of QE. Even if the transmission mechanism is not obvious, it must be there hidden in the shadows (or in shadow banking).

    1. So what could make QE stop or force the Fed to tighten? How about a big oil price spike???

    2. Suppose QE-4-eva really does continue forever. Could anything break the tight correlation between the stock market and the Fed’s balance sheet and make the market tank? I suppose that depends on what the transmission mechanism actually is.

  • Cullen Roche

    I get it. You think the guy selling gold, fear & basic monetary misunderstandings is doing the same thing Dalio, Gundlach, or I do for a living. If you perceive things that way then fine. I am not here to twist your arm to believe otherwise. Take care.

  • Billiejones

    I’m not comparing anybody to anybody else…..I’m pointing out the obvious about perspective. As an aside, Do you seriously compare yourself to Dalio and Gundlach?….don’t you think your getting ahead of yourself a bit? It’s not like you have been making profound predictions during the last 4years (which you seem to feel you deserve credit for)….you have been preaching the status quo, muddle through. Congratulations, but that is not par with Dalio or gudlach. I wouldn’t even compare Dalio and Gubdlach to each other….apples and unicorns as you say. You continuously cherry pick the last 4 years but fail to include the previous 10 when Maloney bought gold somewhere in the low 3 digits. Similar cherry picking would be to point out your “bullish India call” on your bloomberg interview…..right before India got destroyed. I haven’t been following long enough to know, but did you predict the GFC BEFORE ’08? Many people pointed out the potential severity after the first cracks showed….but did you call it at the heights in ’06-’07? If so you should be claiming credit for that…..that would be a skillful call. Predicting that everything will meander along does not put you in Dalio or Gundlach territory IMO (respectively, as I pointed out, they are in very different businesses) before you go crowning yourself champion or bad mouthing people who did make remarkable calls (like it or not buying gold in low 3 digits was a remarkable call, call it dumb luck, call it a scam… made money and at a time when most other asset classes were losing).

  • Billiejones

    This is a very interesting question and good observation. I would be interested in hearing an answer as well.

  • Cullen Roche

    Sigh. You brought up Dalio and Gundlach saying that their views on gold are somehow comparable to the views of the guy in the video. I am simply pointing out that your average financial advisor or even your way above average macro manager like Gundlach or Dalio does something TOTALLY different from the guy selling gold, fear & misinformation.

    Anyhow, I get your view. You think I am just another dumb schmuck selling a shitty product. You’ve made your opinions apparent. I get it.

  • Billiejones

    I don’t think you are dumb at all, quite the opposite. I think you are being somewhat foolish though for disregarding entire paradigms simply because they don’t agree with MR. I also think that lately you are disappointed that you haven’t received credit/recognition for your work and as a result you are acting childish. It’s too bad because you have genuine talent and your best attribute was an open mind that was willing to listen to ANYTHING, pick out what you agree with and respectfully disregard the rest in an unemotional/factual way……that’s how you formed MR,no?

    Anyways, I’m not going to beat a dead horse, but I do hope you go back to the old style. Entrenched views are a dime a dozen.

  • Cullen Roche

    I am curious also. Where is your evidence that Maloney was buying gold and silver at the lows? I don’t see anything online about that. What I have seen is statements about how stocks are terrible, bonds are terrible, the dollar will crash and the economy is screwed. These have all been atrociously bad calls. I love how people like you are willing to overlook HUGE macro misunderstandings and bad predictions just because these guys said gold would rally. Nevermind that their entire thesis ended up being wrong and they’ve been right on ONE asset price despite their thesis having been totally wrong. Also, a 50/50 silver/gold portfolio is down 15% since 2010. So how good have their recent calls even been? Did they tell you to sell your silver before it dropped 60% from the 2011 highs?

    I just don’t get it. Why do you keep apologizing for people who peddle fear and nonsense?

  • Cullen Roche

    Of course. It’s all my fault for not being open-minded to his view! I should embrace this gold peddling nonsense and his basic mistakes about the monetary system. I should embrace people who sell gold at a 8% mark up and use fear to push people into portfolios that don’t come close to adhering to basic investment principles.

    No thanks. I am a pretty open-minded guy, but I will never agree with you on this. I think what they’re doing is terrible. I think they’re taking advantage of people’s emotions and advocating a portfolio allocation that is imprudent. I will never apologize for not being open-minded to their stance and I am appalled that someone as seemingly informed as you is so quick to defend them.

  • Billiejones


  • Billiejones

    Quick google search- mikes book bio: “Mike is the precious metals investment advisor to Robert Kiyosaki, author of the most successful financial book in history, Rich Dad, Poor Dad. Their partnership began in 2005, and since then they have been educating the public on the merits of precious metals investing as a means to wealth generation.

    Since 2002, Mike has specialized in education on monetary history, economics, and financial literacy. ”

    During the time periods referenced above gold ranged from $300-$400 ish….not a bad return for 11years especially considering that gold did well at a time when most other asset classes collapsed.

    It’s possible that Maloney is lying about the above….the only real way to know would be audited financial statements. Of course, he was allegedly was speaking publicly about gold since ’02…..’05 at the latest given that he joined kiiyosaki in ’05 and had a large public presence. As far as I can tell Maloney didn’t have a gold dealer before ’07 so I can’t see an ulterior motive to preaching PM’s for a commodity he didn’t even deal at the time.

    I don’t put it past Maloney or kiiyosaki to lie about anything, but like him or not, kiiyosaki does have a public presence so i would think it difficult to pull off without someone coming forward.

    Somehow, I get put in a position of defending Maloney and now kiiyosaki……I’m not a fan of either, but I also don’t despise them. They are just neutral players pursuing their own take on an economic viewpoint. I find their views interesting but I don’t fully subscribe…..I don’t subscribe to any economic theory. As you know I don’t believe economics is a science. W’s in the win column do count for a lot in my book…..I don’t care how a guy got the W or whether his viewpoint is right or wrong….if he is generating alpha over long periods of time then I find it interesting.

  • Billiejones

    I just read the rest of your comment. I don’t have outsized PM positions… allocation is roughly 10%. You are right, gold and silver have done horribly the past few years…..however, Maloney is still up 300% at least (assuming bought $400) since ’02……..significantly outperforming a pure equity index portfolio or debt/equity mix. I don’t think he is a great money manager…..but I also don’t overlook a guy that generated significant alpha just because his vies don’t mesh 100% with mine.

    Larry bird didn’t have a pretty 3 point shot but that doesn’t mean he wasn’t worth watching for pointers

  • Cullen Roche

    This isn’t a basketball game. It’s not a game at all. This is people’s lives we’re talking about. Their hard earned savings. And the video you’re defending is using emotional and misguided views to convince people they should allocate their savings almost entirely to gold and silver.

    The past performance HAS nothing to do with whether this video or mentality is valid or not in the future. Going to Vegas and hitting it big doesn’t mean you were smart. There’s a saying plastered on every piece of investment material ever printed that says “past performance is not indicative of future results”. Yet every day someone looks at past performance to validate or defend someone’s views. Evaluating a manager is ALL about evaluating their methodology, process and understanding. The process behind the approach you’re defending is: “sell blatant misinformation, pump fear, promote, get greater fools in line”. There is no logical methodology or process here. And the understandings are clearly just flat out wrong at points. Dalio and Gundlach – now those guys have a process, a methodology and an understanding of things. These gold guys are NOTHING like them. I spend a lot of my days auditing hedge funds and fund managers. Anyone running a 50/50 gold/silver portfolio based on the ideas in at video gets a failing grade. If I gave them a Morningstar grade they’d get zero stars from me.

    You want to buy into fear? At least be smart about it and do something like what Kyle Bass is doing. I totally disagree with his macro arguments, but here’s another manager with a process and methodology (though, in my opinion, a flawed understanding). He’s just buying really cheap out of the money options in JGBs. It’s a smart way to bet on the end of the world. He owns a sliver of gold and silver as well, but nothing like what these guys advocate.

    A 50/50 silver/gold portfolio is going to have a standard deviation of about 30. That’s madness. These guys aren’t generating alpha. They’re gambling on one asset class that has been known to rise and crash with regularity. There were people in 1982 saying the same thing you’re saying here. And when gold and silver crashed they had to wait 20 years before the next crop of lemmings came along with the internet to buy into this scheme.

    Precious metals are fine for a small hedging component of one’s portfolio, but there is no rationale for having PM’s as the core of a portfolio. I just don’t agree at all with anyone who thinks that’s prudent. I am literally shocked at the length and effort you’re putting in to defend this view of the world. It’s really surprising. You seem informed. Why would you defend such nonsense? You know these guys are selling fear and an imprudent approach to allocating savings. So why defend it?

  • Cullen Roche

    Didn’t one of Kiyosaki’s companies go bankrupt last year?

  • Nils

    The people peddling bottled water are usually not telling you that tap water will poison you and you’re going to die a miserable death.

    The thing with the people who peddle gold by telling scary stories is that they don’t believe their own bullshit. They’re in it for money, which they tell you is worthless.

  • http://pragcap Michael Schofield

    I think it’s mostly the relationship between stocks and bonds. QE makes bonds more expensive so equities follow. Could be a psychological angle too. I’m trying not to overthink it. Kind of pithy but it works until it doesn’t.

  • JWG

    I have seen charts showing a very tight correlation between the S&P 500 post-crisis run up and the massive increase in the Fed’s balance sheet post-crisis. If the taper tantrum is any indication, QE cannot stop to any significant degree, because it is the continuing flow of QE rather than the stock of assets held by the Fed that is supporting equity and bond prices. The Fed still is in shock over what happened to rates because it has subscribed to the “stock not flow” school of thought.

    It appears that any real and substantial reduction in QE might cause a crash. If the market as a whole draws a similar conclusion about QE without end, the inflation trade will make a comeback. Mining stocks, which have been a total horror show for two years and are notorious widow makers, should be the first tell on the upside if the QE thesis is correct.