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.
Tags: capital gains Census Bureau federal reserve liquidity Market Sentiment Money NYX Stock Market Supply and Demand TrimTabs