Investors think the Federal Reserve is omnipotent

Jan
22

 

By Charles Biderman

 

The Federal Reserve has now admitted that five years ago, just days before the start of the financial meltdown, Mr. Bernanke and others at the Fed did not have a clue as to the impending financial disaster. Now contrast that with the results of an astonishing poll by a Chartered Financial Analyst Institute publication that 59% of investors now believe that because of what’s happened during the last five years: central banks and governments will be there to bail out troubled creditors.

 

In other words, because of what’s happened in the last five year, 59% of investors now believe that the Federal Reserve will save their butts in terms of their investments if anything goes wrong.

 

Add to that insanity the fact that Investor’s Intelligence has reported that the percentage of bearish newsletter writers is now near its lowest point since it was started 50 years ago in 1963. Which means that most everyone now believes in the market’s version of the tooth fairy — that the Federal Reserve is omnipotent.

 

Remember, five years ago the premise behind all the money printing was that it would be a temporary bridge to get over the difficulties created by banks owning more bad paper then their total capital worth. So instead of allowing the big banks to go broke, they were bailed out.

 

If we bailed the big banks out, we also have bailed out everyone else. The only reason unemployment is down is that more people have gone on disability or gotten student loans then have gotten jobs. After tax income, net of inflation, has barely been growing over the past five years and is likely to decline this year. But so what? The Central Banks will save our butts regardless of reality.

 

The Obama administration has embraced a weird kind of economic religion that has no basis in reality. It believes deficits do not matter since the markets now appear to be willing to let central banks determine interest rates, and therefore bond prices. Since the Obama Administration also believes that government spending can be effective at getting stuff done, it plans to keep growing government. Obama has admitted that spending will keep growing in areas such as medicare, social security and government pensions. Of course no one mentions that entitlement spending will cost over $1 trillion this year and that employment taxes that are supposed to pay for this year’s entitlements as well as entitlements in future years, will be less then $600 billion, even after a big tax hike.

 

In other words, besides a $700 billion deficit on current government activities, there is a more then $400 billion deficit on entitlements this year that will keep growing to infinity and beyond. But no one cares.

 

All bull markets end when new share sales from companies and insiders swamp corporate buybacks. That is close to happening, but has not yet happened. Therefore, for now the emperor is still clothed. However, at some point soon, I expect new offerings to swamp corporate buying after which the market will crash regardless of whatever the Federal Reserve tries.

 

Historically reality has always won out. The only problem is staying financially solvent to be able to profit from the coming plunge in prices. That is why I started Biderman’s Market Picks.

 

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7 Responses to Investors think the Federal Reserve is omnipotent

  1. Cornel Campeanu on January 23, 2013 at 12:29 am

    Hi Charles,

    Your patience in waiting for the looming CRASH is soon to be vindicated.

    My current stock charts show that many stocks are now entering what I call “parabolic traps”.

    I suspect that January 2013 will not end well.

    If i’m right, then watch for “blank stares” from Obama and Bernanke when they face the media.

    Perhaps Roubini will be asked to comment on the CRASH and he will probably want to say ” I told you so”

    I’ll be watching the action on the “Mini Shorts” in the next few days.

    techpro.com.au

  2. Wayne Jett on January 23, 2013 at 2:26 am

    Charles,

    I write to make a point about the Fed chairman’s “admission” to which you refer at the outset. BB was not focused on admitting ignorance as much as he wished to assert his innocence of complicity in the orchestrated financial destruction which was 2008. An originally classified Pentagon report called it financial terrorism, and concluded it might be domestic or foreign in origin.

    My book The Fruits of Graft details the role played by the Fed in setting up the housing, mortgage and financial industries as targets for looting by those who planned it all.

  3. Quinn Ronin on January 23, 2013 at 5:59 am

    Thanks, Charles, for great insight, as always.

    Two conditions always precede a crash, as I’m sure you know:

    1. Markets must have an unsupportable run up.

    2. There must be a greed-based delusional preception that conditions have changed (BB will always fix everything)and that “this time it’s different” (in spite of the obvious flaws in that thinking starring us squarely in the face!)

    I watched it happen in 2000 and in 2007-08. When greed enters through the window, common sense goes out the door.

    My own guess is that after a pull back later this year, the big decline will begin sometime in 2015. At some point BB will be forced to raise interest rates to try to rein in the excessive inflation that his policies are even now creating.

    That will burst the bond bubble and create a final upward thrust in the equity market (hot money looking for a safe haven) ending sometime in 2015, followed by the crash that higher interest rates eventually lead to.

    At least that’s what my crystal ball is telling me! ;^)

    Thanks for the blog!

    • Ed_B on January 28, 2013 at 5:06 am

      Interesting comments about market perceptions. My favorite from the Internet bubble days was “valuations no longer matter”. Upon hearing this, I understood immediately that a market mania phase was underway and went to 100% cash to wait it out. Things like this happen but rarely do they happen in a vacuum. There will be signs of an impending crash. In many cases, they will be subtle but it also pays to watch for them.

  4. Ed Hamilton on January 23, 2013 at 6:44 pm

    Look at this:
    http://www.showrealhist.com/begun.gif
    It is rarely shown … Why?

  5. Ed_B on January 28, 2013 at 5:01 am

    Good comments from Charles, as always, and from readers as well. I too am trying to wipe the dust from my crystal ball but it is reluctant to come clean. Perhaps it was previously owned by a politician?

    In any case, most of us are quite aware of all of the slight of hand that has been done over the past 5 years in order to hold together a house of cards economy with little basis in reality. If not for the Fed shamelessly conjuring money out of thin air and either giving it to banks at little to no cost whatever or loaning it to the Gov at interest, albeit at minimal rates, this so-called recovery that we are now in would resemble 1933 quite closely.

    The trick is, like a dying brontosaurus, this economy can still lumber in the direction it was headed when last under conscious control. It can do this thanks to the wonders of inertia with no effort on anyone’s part, with only gravity as its opponent. So, then… how are investors to know when the great beast will finally collapse, kick a few times, quiver, and be done for? The answer, of course, is that we cannot. Given this, investing is pretty much an effort in futility. Cash pays nothing. Short bonds pay nothing. Medium bonds pay next to nothing. Big cap dividend stocks retain a glimmer of profit that careful investors might extract for a time but beware of hanging on too long. REITs? Maybe, but again only for a short time and with emphasis on multi-family housing. Physical gold and silver are likely to be better bets in this world of massive money printing, for as money tonnage spirals upwards and national production does not, each of those little paper coupons tends to buy less and less of anything worth having. Guess I will be in metals, the biggest of the big cap dividend stocks, some energy and utility stocks, and a REIT fund. If possible, all of these will be as ETFs with reasonable trailing stops set to capture the bulk of any available profits before the cards start falling. I offer this advice for free and claim that it is worth every cent it cost!

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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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