Supply and Demand Always Works in Equities – Missing Fed-Created Demand Has Hurt


By Charles Biderman


Driving down to Sausalito this morning I was listening to someone on the radio talk about how, in hindsight, he wished he’d acted differently.


That resonated with me, considering how I have misjudged the impact of central bank money creation on stock prices since 2009. That’s because I did not know, along with most everyone else, that Fed money creation had been invisibly increasing demand for equities. However, I did know enough to realize that there was something seriously out of whack in terms of normal supply and demand and the markets’ big gains. So while I did get the direction of the markets wrong, I knew enough to consistently hedge. And that has minimized capital losses for both me and Biderman’s Market Picks model portfolio.


For the record, as long term TrimTabs Investment Research clients know, I had been correct on market direction over 80% of the months between 2000 and March 2009. When I was wrong it was because I could not identify the source or reason why supply or demand had changed.


Before 1995 when I started what then was known as “Liquidity TrimTabs,” no one had analyzed the stock market in terms of supply and demand of cash and shares. A major reason was that before the internet it was virtually impossible to track real time supply and demand of cash and money, as well as withheld income and employment taxes.


What I missed starting in March 2009, was that there was a new source of money impacting supply and demand in the market’s — the Fed creating new money with which to buy assets, including equities. More dollars chasing the same number of shares creates an ever rising stock market, everything else being equal.


There is an old saying, “Never Fight the Fed.” But usually all the Fed did in the past was raise or lower interest rates. That is why I had said early last year on these videos that with interest rates as low as they could be, new Fed money creation would do nothing for the stock market. Well I obviously was wrong.


Remember, historically demand for shares ultimately came from individual investors. And investors got the new money to invest from what was left over from current income. Well in 2009 that all changed. Income growth net of inflation has been barely positive and investors had been net sellers of stock, up until the start of this year.


So instead of individuals providing the money for stocks, the Fed is printing $4 billion of fake money daily, some of which is adding to the demand for equities. And in a zero interest rate environment with no real economic growth, companies are using record balance sheet cash to reduce the float of shares.


So, if you look at what is actually going on, all that is happening is the Fed is creating $4 billion per day and the banks on the receiving end of that cash have no problem today, emphasis on today, accepting each of those new dollars as the equivalent of an existing dollar.


Bottom line, for as long as the global banking system is willing to treat a newly printed dollar as the same as an already existing one, the game of ever rising stock prices can continue.


Two ways the bubble can burst. Any day now, the Fed could stop printing dollars. When that happens, I believe the demand for equities propelled by the Fed’s “fake money” would disappear overnight. The second scenario: The rest of the world could say, wait a minute, your new dollars are not worth the same as your old dollars.


While I do not expect either scenario, in the short term, over the long term both are inevitable.



4 Responses to Supply and Demand Always Works in Equities – Missing Fed-Created Demand Has Hurt

  1. Lincoln Hawks on February 12, 2013 at 6:02 pm

    IMO, the Fed is not the only reason the markets continue to rise. There has been a “game plan” in place these past four years: The Fed provides 0% lending so that the Govt. can continue spending. In return, the Fed gets to maintain its’ existence, and provide banking colleagues with easy money making capabilities.

    Why do you think Republicans have caved on every policy decision that would disrupt this game plan? Because the markets are held hostage, and any disagreement would result in a major piloted correction. The media would then blame them for the resulting recession. You could see these actions take place at the end of Dec 2012.

  2. Ed_B on February 12, 2013 at 7:14 pm

    My perspective on this is a bit different from Charles’s perspective. I don’t see this so much as demand created by printing money as inflation caused by so many more new dollars chasing the same number of shares. The market will always absorb more capital via rising share prices and respond to capital reductions with falling share prices.

    This situation is being complicated by the mechanism at work. The Fed prints a trillion new dollars each year. This money is then used to buy mortgages and other drek from the banks to clean up their balance sheets. The banks are then STRONGLY encouraged (ordered?) to buy US Treasury paper with this money, earning a small income on it for virtually no effort on their part. Making loans to individuals and businesses is much more work and even though it pays a little more, bankers can still make money via bond purchases. The money received by the Gov from these bond sales can then be blown on whatever pet projects / entitlements / other Gov spending. Wash, rinse, and repeat. The circuitous route by which money is “injected” into the economy creates an illusion of growth in the stock market when in actual fact it is merely inflation… as in expanding share prices without any real added value. As many others have pointed out, this is an unsustainable model for an economy. The unintended consequences are likely to be many, terrible, and inevitable.

    An interesting question arises at this point and that is, “How will the collapse of this business model affect the US dollar, economy, and government? The effects will be severe because the damage is pervasive and the violations of sound economics egregious. My thought is that the US Treasury bond bubble will burst and either collapse the dollar as a viable currency or cause it to to be significantly devalued. Significant in this context means a 50-75% reduction in the buying power of the dollar. The Gov of Zimbabwe thought that they could print themselves to prosperity and discovered that they could not. All they succeeded in doing was destroying their currency and converting their country from what was one called “The Bread Basket of Africa” to a complete dung heap. Did we learn anything from their actions and the results they achieved? Something tells me that we did not.

    Some people say that they buy gold and silver because they are afraid of what might happen. I say that precious metals should be purchased because of what we KNOW IS happening. The combination of trillion dollar annual deficits with no end in sight, borrowing and printing excessive amounts of money, a do nothing congress, a do the wrong things president, $16.5T in debt, an expanding Fed balance sheet, and way too many laws, rules, regulations, and taxes all combine into a very explosive economic mixture that has never before been seen. This is very likely to go horribly wrong and in the not too distant future.

    Many have stated what can be done to correct the current economic situation but in my view, it is politically impossible to take the very bad tasting medicine that is needed. Those who even care about this seem to want a “painless solution”. There is no painless solution to problems of this magnitude. The Gov literally has to be cut in half, if not even less, so that the vast resources it consumes can be used in the private sector to create wealth and jobs. We have come to a fork in the road where we MUST choose between growing the economy OR growing the Gov. We very much appear to be choosing poorly.

  3. Nicholas Pardini on February 14, 2013 at 4:30 am


    Assuming the Fed never hikes rates and the rest of the world joins in with easing, when will the bubble break? Waiting for a Fed announcement makes it seems way too easy for bulls to find a way out of this market. I think either a panic related to a commodity price jump or acknowledging a likely 2013 recession will trigger a sell off. The Fed may double down with QE5, and that will be chance to buy gold, buy emerging market stocks, buy ag commodities and short the USD as it will fall precipitously. The US will decline in real terms unless if technological innovation can save us to converging living standards with the Chinese and other developing nations.

  4. Katie on February 20, 2013 at 7:57 am

    HI Charles,

    thanks as always for this very insightful commentary. I came across this youtube post of FL congressman Alan Grayson back in 2009 who had the chutzpah to question the Fed if they are (and can) manipulating the stock market. Once he finally starts to get a real answer, time’s up:

    “Has the Federal Reserve Ever Tried to Manipulate the Stock Market?”

    It all makes sense now, nearly 4 years later. And yes, I agree with you, once the Fed market pumper, aka PPT, stops printing new money, markets will fall just like that, with no news, since they’ve been overvalued for many years.

    Meantime, the financial markets are awash in money, newly printed or real money and also new money from corporate buybacks plus hedge funds and retail trying to get a piece of the action.

    keep up the good work, I wish more people followed your work, and even if I have lost too much money to be able to do anything now.

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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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