No Miracle Ending For Broken Global Economy

Oct
03

Here comes another boring video about why all the short term moves by the central banks will ultimately destroy us in the future. Why do I call this boring? Because most people would rather not hear the truth, living as if tomorrow doesn’t matter, hoping for a miracle. Certainly our central bankers political leaders are only focused on the present; always looking to kick the can further down the road.

 

Day traders, momentum traders and many regular investors also are only focused on the short term. Inherent in their misguided investment philosophy is that they will be able to get out and take their profits before “reality” hits the fan. That’s despite the fact that history has taught us repeatedly that pigs eventually get slaughtered.

 

Talking about short term results, our macroeconomic editor Madeline Schnapp is reporting that the US economy is actually improving a bit. Madeline estimates that 210,000 jobs were created in September, a number that probably is much bigger than the Bureau of Labor Statistics will report this Friday. Indeed I say the BLS number is no more than a “wild ass guess’ based upon their methodology of using sample surveys tied to historic data.

 

Madeline, who bases her job estimates on real numbers — increases in withholding taxes that flow daily into the US Treasury — says that the job gains are coming mostly from a pickup in real estate and a much easier car loan world. Yes, 3% mortgages are spurring home sales. And banks now are willing to make car loans to people with 500 credit scores. These factors and others are temporarily boosting economic activity. But the real problem is these short term gains are not sustainable. At most, the recent gains will add about $300 billion to the annualized take home pay from all taxable income.

 

Think about this. The current federal deficit is $1.2 trillion or so and on top of that the Fed is currently printing over $500 billion annualized. In other words, it takes a newly created $1.7 trillion to boost incomes by $300 billion. That would not be so bad, if the $300 billion was self sustaining, meaning that it would keep on happening without more borrowings and money printing. But the growth is not sustainable without more and more deficits and money printing.

 

To understand why you have to look at the big picture. When the Fed first eased in March 2009, the US economy was shrinking rapidly as all the inventory in the pipeline emptied out, and was not refilled. As a result of higher stock prices from the first two easing, US companies sold a record of almost $600 billion of new shares in 2009 and 2010 combined. Add to that record bond sales . The results: Balance sheet cash soared. All that cash obviously encouraged companies to rebuild inventories. That inventory restocking process started boosting profits and free cash flow starting in 2010. But by early this year, the inventory restocking process was completed. That is why earnings growth is slowing right now. There is very little real growth in final demand to encourage companies to increase production.

 

Another way of looking at this, is deficits and Fed printing has been around $7 trillion so far. Since 2.3 million jobs have been created since job growth resumed in 2010, that means it has cost a whopping $3 million to create one job.

 

Mr. Bernanke justifies his debasing of the long term health and wealth of the US economy by saying: he is only doing his job. In a speech the other day. Mr. Bernanke said, and I quote: “The Federal Reserve’s goals are given to us by the Congress. Those goals of price stability and maximum employment mean, basically, that we would like to see as many Americans as possible who want jobs to have jobs, and that we aim to keep the rate of increase in consumer prices low and stable.”

 

In other words, why should Mr. Bernanke worry about the long term? To governments and central banks, just like traders and politicians, the long term is not relevant.

 

Charles Biderman
President & CEO TrimTabs Market Research
Portfolio Manager, TrimTabs Float Shrink ETF (TTFS)

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4 Responses to No Miracle Ending For Broken Global Economy

  1. No Miracle Ending For Broken Global Economy | on October 3, 2012 at 1:46 pm

    [...] A few thoughts by Biderman. [...]

  2. Robert Park on October 4, 2012 at 12:47 am

    Excellent right on target. You’re the first thing I like to read.
    I want to ask one dumb question: How does inventory restocking increase free cash flow (if your willing to humor my ignorance).

  3. Chris on October 4, 2012 at 3:39 pm

    Hi, Charles,

    With an increase in taxes on qualified dividends looming, how do you see this impacting both corporate capital return policy (dividends vs share buybacks) and demand for stocks of companies that focus on share redemptions rather than dividends?

    Thanks

    Chris

  4. Ed_B on October 7, 2012 at 4:12 am

    A Biderman video boring? Not possible, Charles. Only those who really care about the future ever bother to come here and see these videos. We want the TRUTH and it IS valuable because it is such a rare commodity these days. There just aren’t a lot of places that serve this tasty fare, so when my hunger for truth pangs hit, here I am.

    I agree completely on the Fed and their mishandling of the US economy. When I am promoted to King, I will let the free market set the price of money so, at long last, we will have true price discovery on its value. What a novel idea, eh?

    On the other hand, perhaps the Fed does not really believe in its so-called dual mandate from Congress and has other ideas in mind… like serving the interests of the big NY banks that own it and attaching interest payments to every possible facet of American life. Surely that sounds more accurate than what they SAY is their “dual mandate”. History bears out that they are doing a truly rotten job of the former but an almost perfect one of the latter. Coincidence? Perhaps, if anyone actually believes in that sort of thing.

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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