Market’s Dead Cat Bounce Fooling the Short Term Greedy

Nov
20

Today’s dead cat bounce will fool the short term greedy into getting back into the stock market. All that really happened was that this past Sunday both Democrats and Republicans went on TV and made nice, nice to each other. The politicos said that they would work diligently on a solution to the fiscal cliff. And then Congress left Washington on holiday until the middle of next week and Obama went to Burma.

 

That is all that happened. However, all that cozy chatter, following a two-week stock sell-off, apparently was enough to generate a 2% gain today in the S&P 500. Obviously the short term greedy rushed back into stocks not wanting to miss this big rally. They were cheered on by a lot of so-called market pundits on TV whose ratings rally when the market does. One network nitwit even said the market could have only have gone up the way it did today because someone somewhere knows that there already is a deal that will save the world.

 

What nonsense. Whether or not there is a deal, all I see are a lot of tax hikes. At best, taxes will go up by nearly $200 billion next year and at worst probably double that. Since after tax income is growing at $200 billion annually, a best-case scenario is no growth in US after tax income. At worst, and the most likely outcome, is for a drop in after tax income.

 

And remember GDP is a garbage number that measures maybe 60% of the US economy. Therefore, my definition of a recession is when after tax income drops year over year for at least three months or more. And that is what I see happening next year regardless of whether there is a deal on the fiscal cliff.

 

As to government spending, CNBC has been running a string of public service announcements touting all the humanitarian type services that will stop at year end if government spending gets cut. But what CNBC in its reporting does not question is whether the government has been effective in providing those services that will get cut? Would we really be missing anything if it takes the government $3 to provide $1 in actual services? If you run the math the US economy would be better off without that ineffective government spending than with it.

 

As I said in previous videos, all the talk is about taxes and nobody wants to say that the US will go broke if it keeps spending $3.5 trillion a year while taking in only $2.4 trillion in taxes. Let’s suppose the government takes in an additional $200 billion in revenue from additional taxes and spending stays flat. So what? The result is a no growth economy with ever increasing government debt.

 

What’s more we all have to pray that interest rates on that debt stay at today’s low rates. The real monster hiding in the corner is a potential cataclysmic rise in interest expense. Remember, the US government debt was only around $4 trillion when Clinton left office. Under both Bush and Obama, government debt now tops $16 trillion. The US is currently spending $230 billion in interest on that $16 trillion of total government debt, which works out to be an average interest rate of 1.4%. What happens if interest rates go back to 3% or even 5%? Bad enough at 3%. Interest rate expenses would soar to half a trillion dollars. At some point the world will begin to doubt US solvency. When that happens interest expense will go through the roof.

 

Unless a growth genie miraculously pops up out of nowhere, what will happen to the US is called bankruptcy.

 

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

 

 

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10 Responses to Market’s Dead Cat Bounce Fooling the Short Term Greedy

  1. SteveB on November 20, 2012 at 7:59 pm

    I don’t see how bankruptcy can ever occur since the Fed can buy the Treasury debt. And since the Fed can keep short term rates low, and since the Fed returns all of its earned interest to the Treasury, the only real problem for the government would appear to be the increase in the number of circulating dollars. Thus, in the the long term, assuming the economy never fully recovers, wouldn’t there be major inflation, not bankruptcy?

    • Chris on November 21, 2012 at 11:19 am

      Eventually, markets will demand a rise in rates as your credit becomes riskier…..at least as long as someone other than your own govt owns your bonds. If not you will default and bondholders will get screwed but the counterparty contagion will be much larger. This is playing out in Greece right now. No way can their debt be repaid. The 1.5 trillion could be lost by bondholders but Greece would then have zero chance of access to credit but larger would loom the direct debt held by other Euro countries and payout of swaps…..this could start a spiral of contagion. So with the abscence of hyperinflation, you have financial repression until it all blows up. Someone else can probably explain better than I. Charles?

      • SteveB on November 21, 2012 at 12:16 pm

        You state “at least as long as someone other than your own govt owns your bonds”. But that is my point. The US is fundamentally different from any of the European nations. Our government can run any level of deficit and the Fed will always buy the bonds. The bonds’ interest payments can always be met, by selling more bonds to the Fed. Bankruptcy is not possible in a nation that can print its own money. Assuming our Congress does not forbid that debt level. Only our own Congress can force a default. That is why a purchaser of US bonds needs only worry about inflation, not default.

        • Chris on November 26, 2012 at 2:07 am

          But the Fed doesn’t own all of our bonds. China holds 5 trillion and others own them as well. We will have a good case study in Europe because it will eventually get to the point that nobody will own Greek etc debt except other Euro countries. In the short term I do not think we need to worry about default per se in the US. I have read where the big threat would be if the dollar loses so much value that it is no ,longer the world’s reserve currency but, as I said, others know better than I.

          • Chris on November 26, 2012 at 2:33 am

            And financial repression results in economic collapse as well. Keep printing money and devaluing currency also devalues most other assets (savings, real estate etc) as long as they are sold with dollars. ie your $200,000 home is now worth $180,000 but actually worth less because what you can purchase for 180,000 is watered down all in name of govt maintaining it’s debt servicing….all while healthcare, food, gas etc rises faster than wages. In all scenarios you get a diminishing quality of life.

  2. Chris on November 20, 2012 at 8:42 pm

    Great article! What’s even funnier about CNBC is their dumb “Rise Above” campaign for politicians to put aside politics for the greater good. Hard to swallow from a conglomerate media outlet that was anything but bipartisan during the election….taking turns bashing Romney and propping up Obama without shame.

    As stated in this article they really want everyone to believe that any agreement will solve the issue of debt and we can all continue upward on hopium…..because there sure isn’t any real growth going on. Unfunded liabilities go up approx 6.5 million a minute according to USDEBTCLOCK.ORG

    • Ed_B on November 23, 2012 at 11:39 pm

      Hope = what you have left AFTER all else has failed.

      CHANGE = what you have left AFTER all your hard-earned tax dollars have been squandered by FedZilla.

  3. Jonny on November 21, 2012 at 8:13 pm

    Wouldn’t an increase in interest rates seize up and implode the world’s financial system like a field full of dominoes though? I’m sure TPTB understand this. Or am I completely off target?

  4. [...] Market’s Dead Cat Bounce Fooling the Short Term Greedy (TrimTabs) [...]

  5. Akolea on November 26, 2012 at 5:29 pm

    LEt me start by stating that I agree with you. However, I am dumbfounded as to why this rant is making the rounds now?

    Stop watching CNBC and open your mind to other opinions – yeah the TEA party, FOX, Thomas Sowell, Rush Limbaugh, Glenn Beck, etc. They have all been saying that we will go broke, if we spend more than we take in. Everybody knows that simple budgetary BS.

    So, why bring this up after the damn elections? You supposedly have a pulpit and followers, were you trying to stay neutral to not lose your followers and subscribers?

    Elections have consequences and we are all about to meet up with them.

    This just sounds like a FB rant. A day late and a dollar short.

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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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