Liberated Balance Sheet Cash, a Steroid Boosting Stocks & Economy

Feb
19

By Charles Biderman

 

Here’s some good news, I think. After tax wages and salaries are still growing faster than I had been expecting. We are now seven weeks into the new year and wage and salary growth is not slowing by much. After tax income, year over year, grew by $200 billion over the past 90 days through February 12, 2013, two and a half times the $80 billion after tax income growth during the third quarter of last year. I had been expecting that year over year wage and salary growth – the best real time indicator of the US economy — would be slumping by now. My reasoning for a slump is based on higher employment taxes this year and the fact that some of the late 2012 income surge had to be 2013 income taken early.

 

But the slump is not happening. While wage and salary year over year growth is down from 10% in January, wages and salaries have still been growing by over 7% year over year for the last couple of weeks. That 7%+ growth is well above inflation and well above anything I had thought possible. I even checked with my favorite senior government economist and he also has no idea as to why wages and salaries are still growing so robustly.

 

The only possible reason both of us can come up with is that many non-public businesses, expecting higher 2013 taxes, stripped their companies of excess cash at year end. That extra cash is being recycled throughout the economy, boosting overall activity and even hiring. My preliminary guess is that over 200,000 jobs will be added this month, better than anyone expects.

 

Talk about inadvertent consequences. Many privately held companies had been keeping more cash then necessary on the balance sheet because taking it out would have triggered a huge taxable event. Therefore, with taxes going up, that could have given the ultimate owners of that corporate cash the incentive to take it out and recycle it back into the economy. How I know it is being recycled and not saved, is that, surprise, bank savings have stopped growing so far this year. That means that all the extra income recognized late last year is being spent. Obviously some of that that year-end cash also has been the source of new money going into stocks. And some might even be reinvested in the economy to the extent there are some business opportunities out there.

 

So, historically a pickup in wages and salaries has sourced a pickup in corporate buying. No surprise that corporate buying is surging. So far this February about $100 billion combined of new stock buybacks and cash takeovers of public companies have been announced, led by the $23 billion Heinz and $20 billion Dell takeovers. June 2008 was the last time there was more corporate buying announced in one month, when Budweiser was bought by InBev for over $50 billion in cash.

 

To me, this market is very similar to the steroid era in baseball. Stocks are going up further than they should, similar to how much further baseballs traveled due to steroids As we have pointed out many times the global central bankers have become steroid dealers to the stock and other asset markets.

 

Now, money created by central banks is and has been flowing into equities, boosting demand for stocks. And investors, like baseball fans did, are cheering the steroid aided results. Barry Bonds is still popular here in the Bay Area.

 

And now it appears that there might be another steroid aiding stock prices, although this one, liberated balance sheet cash, is a one time event and will run out sometime soon. How you and I can both find out when the slowdown in wages and salaries will happen is via watching real time changes in wages and salaries. You can follow this by clicking on the US Individual Taxable Income link on my blog site, which gets updated monthly.

 

Remember, not one suspected steroid user has been elected to the Baseball Hall of Fame. What do you think will happen to the steroid pushers after the stock market is forced to go cold turkey?

 

 

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One Response to Liberated Balance Sheet Cash, a Steroid Boosting Stocks & Economy

  1. Ed_B on February 22, 2013 at 9:51 pm

    “But the slump is not happening. While wage and salary year over year growth is down from 10% in January, wages and salaries have still been growing by over 7% year over year for the last couple of weeks. That 7%+ growth is well above inflation and well above anything I had thought possible.”

    Actually, that 7%+ growth is above the official Fed inflation number of 2.4% but well below the true rate of inflation when one counts food and fuel, as the US Government used to do ca 1980. This provides a number that is much closer to the true cost of living that many Americans experience. This is published by economist John Williams on http://www.shadowstats.com. His number for 2012 was 9.4%… nearly quadruple what Uncle Ben says we have. Of course, anyone who shops for food or buys gasoline or heating oil is well aways that inflation is higher than the official rate of 2.4%… a lot higher!

    “To me, this market is very similar to the steroid era in baseball. Stocks are going up further than they should, similar to how much further baseballs traveled due to steroids.”

    Maybe this is one of those delayed effects that we see in an economy that takes time to develop? Some people used to compare action / result behavior of the US economy to that of trying to steer an aircraft carrier by using an oar. Sure, it can be done but it takes a lot of time. Changes in policy often do not show their effects for 6-9 months, so maybe there was some economic growth building in 2012 that was delayed by the election or some other factor? Hard to say for sure but 2013 does not look like a great year for stocks. I would love to see a lot of great news for the US and world economies but considering all of the problems that confront us and the mis-steps and lack of competent policy by the various central banks and governments, this seems unlikely to me. Perhaps the last 5 or so years have converted me from a glass half full guy to a glass half empty guy? Stranger things have happened.

    “What do you think will happen to the steroid pushers after the stock market is forced to go cold turkey?”

    We will likely see the mother of all withdrawal symptoms. Scapegoats WILL be sought and those steroid pushers will be at the very top of the list of those scrambling for political cover.

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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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