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Market Risks Far Outweigh The Rewards

Latest from the Comstock boys…

At current levels the market remains at risk for a significant decline while the potential upside rewards are limited. Stocks are discounting everything that can possibly go right and are virtually ignoring the numerous factors that can go wrong. Investors are vigorously asserting that most of the risks are transient while the favorable factors will be long-lasting. In reality the reverse is more likely the case. The risks will be around for some time and have the potential to cause great damage, while it is the favorable factors that seem transitory.

1) The economy is a virtual ward of the government. It has taken massive unprecedented stimulus in the form of near-zero interest rates, QE1, QE2 and a $1.5 trillion fiscal deficit to come up with the weakest economic recovery since the great depression of the 1930s. However, this stimulus will begin winding down within a short time. Congress and the White house are under severe political pressure to come up with some meaningful cuts in the deficit, meaning that fiscal policy will become more restrictive. This is true of monetary policy as well. QE2, which is scheduled to end on June 30th, has gobbled up about 70% of all the Treasury bond issuance since its inception in November. Some one will take up the slack, but most likely only after being enticed by higher interest rates.

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