Mr. Buffet – If Bonds Overpriced So Are Stocks


By Charles Biderman


Warren Buffet says bonds are a horrible investment because prices are artificially high due to the Fed creating phony money. And at some point, says Buffet the Fed will stop. To my way of thinking, that also makes stocks a horrible investment.


So, if stocks are just as vulnerable as bonds to the Fed withdrawing the narcotic known as free money, why does Mr. Buffet say stock prices are reasonable? To me, logic says stocks are just as overpriced as bonds.


Let us look at what really is happening in the money creation world. The US government is running a current deficit of around $900 billion year, down from $1.1 trillion last year, still enormous. At the same time, the Federal Reserve Bank buys bonds and pays for them by creating a credit in the seller bank’s checking account.


In other words, the Fed is buying up the entire US Government deficit and then some. That means there is lots of extra cash floating around the financial markets bidding up the prices of not just bonds but stocks as well. So while I agree with Mr. Buffet that at some point bond prices have to drop significantly, so do stocks.


Meanwhile I guess I should comment about last week’s very bullish Bureau of Labor Statistics April jobs number, which at 165,000 is more then double our 70,000 job estimate at TrimTabs. In a perfect world, I would ignore the BLS initial monthly nonsense and so would everyone else. However, since the markets move big when the jobs number moves big, it is important to understand the BLS initial report is widely inaccurate.


The BLS surveys only 145,000 employers monthly out of millions, mostly big companies and virtually all government entities. Believe it or not, it takes three months for each monthly survey to be returned – just over half comes in the first month. So each month based upon a survey of less than 100,000 employers, the BLS makes nothing more than a guess as to how many jobs were created.


Then once a year at the end of March the BLS adjusts the prior year’s survey with actual job numbers obtained from state quarterly unemployment insurance filings. Lo and behold, our initial monthly job estimate ends up being much closer to the annually revised final number then the initial monthly BLS garbage. In other words, the BLS initial monthly jobs number is just a guess and a wild guess at that.


For those who care here is how we create our monthly job estimate: First, we track withheld income and employment taxes paid by all employers and reported daily by the US Treasury. Currently actual withholding tax payments are up by just under 11% year over year over the past month or so. But that doesn’t mean that pretax wages and salaries are growing by 11%. The recent employment and income rate tax boost accounts of 8 percent. Therefore, pretax wages and salaries are growing by just under 3 percent before inflation when you subtract the 8 percent in higher taxes.


Wage and salary growth of just under 3% before inflation is consistent with new job creation of about 70,000 new jobs.


Jim Bianco says that Q2 and Q3 expected year over year sales and earnings of US public companies are dropping towards zero and below. To me, that is also consistent with wages and salaries barely growing after inflation.


In my opinion, the global economy grew rapidly as a result of broadband internet linking the world starting in the early years of this new century. However, starting from 2007 through today broadband is now virtually universal. China is more than built out and emerging markets are not growing nowhere near as fast as they did five years ago.


Combine slower growth world massive amounts of government intervention, and you get a world looks exactly like this.



6 Responses to Mr. Buffet – If Bonds Overpriced So Are Stocks

  1. Pam on May 8, 2013 at 3:20 am

    Appreciate the detailed explanation!

  2. Richard on May 8, 2013 at 3:50 pm

    Thank you in the past for your explanations of your methodology. You write:

    “Wage and salary growth of just under 3% before inflation is consistent with new job creation of about 70,000 new jobs.”

    A different Analyst, Lee Adler, uses the same primary data that TrimTabs uses and arrived at a conclusion very different from you (he implied a forecast of +300,000 jobs, taking the same +11-12% increase in withholdings & adjusting for increase in tax rates & earnings inflation).

    I’m just confused how two researchers taking the same primary data can end up with such starkly different conclusions. You had been so kind as to respond in the past and I’d kindly appreciate your help on reconciling this?

    Thank you.

  3. Gordon on May 10, 2013 at 1:37 am

    Mr. Biderman, Warren Buffet said years ago that his formula for arriving at when the stock market was over valued was simply taking the total market Capitalization of al stocks and comparing it as a percentage to GDP. When the capitalization of stocks equals 80% of GDP then stocks are overvalued by 13% , I believe our GDP is around 16 trillion now and the capitalization which you probably have the correct number as it changes daily is somewhere around 19 trillion or so which would be about 119% of GDP. Warren Buffet’s fair value for stocks per him is 67% of GDP so that makes the market about 52 % over valued if the 19 trillion is correct. Mr. Buffet’s been all over tv lately saying stocks are cheap but no one will ask him about this. Warren Buffet is a liar.

    • Pam on May 10, 2013 at 3:40 pm

      Interesting! I guess the “old”, i.e. mathematical, methods of evaluating the market don’t apply in this Treasury inflated “new normal”. Out of curiosity, where did Buffet say this? Is it in one of his books or from a particular interview?

  4. Ed_B on May 12, 2013 at 7:59 pm

    It does not take a rocket scientist or even a brilliant investor to recognize that UST bonds are a terrible investment now. Even if we are dumb enough to accept the Fed’s warped idea of how inflation should be calculated, we would find that with a 10-year bond paying about 1.7% interest these days and admitted inflation is 2% or a bit more. Right from the start, a bond buyer is losing 0.3% of their money. As if that were not enough injury, along comes Uncle Sam who then add some insult via taxing the meager 1.7% “gain” as if it was a real gain, reducing it even further.

    Of course, we can all just stop right here if we recognize that the Fed’s inflation calculation is a totally bogus number because it does not include either food or fuel, two classes of items that ALL people MUST have in order to live. Excluding them for any reason is mathematically insupportable, although I have heard them try to explain this in various TV interviews. Had any of them tried this on their college professors back when they were students, it is likely that they would have been flunked on the spot. I KNOW that my professors would have done that as a service to their profession. If, as they claim, the prices of these things are too volatile to calculate successfully, allow me to introduce them to the concept of a “rolling average”. This allows the inconvenient food and fuel numbers to be included but averaged over say a 3, 6, or 12 month time period to dampen out the volatility that seems to cause so much consternation. If one were to do that, however, one would soon discover that real inflation is not around 2% but is actually closer to 9%. Unfortunately for those of us who appreciate the truth of a situation vs. its political expediency, this is not acceptable as it could raise a lot of embarrassing questions that would make the incompetence of the Fed Gov admins since about 1995 obvious to one and all… and we just can’t have that, now can we?

    As to stocks, yes, they too are over-priced by perhaps 1/3 or so. The level of the stock market is not due to vigorous economic growth, as one would expect from a market that is at all time highs. No, it is due to the Fed pumping the market up with free money to the tune of $85B a month. This money flows to the big banks in New York that then use most of it to buy UST bonds in an incestuous relationship with the US Fed Gov. The US Fed Gov then squanders… er, spends, that money on all manner of things, the banks are relieved of the near-worthless toxic assets that had been on their books but that are being sold to the Fed. Of course, not all of this money goes into bonds. Some of it slops over into the stock market. Thanks to the reduction in available stock shares due to company buy-back programs and billions of extra dollars chasing even fewer shares, how can this be rationalized? Well, the market only has one way to do that and that is higher share prices.

    Clearly, this approach to running an economy is strictly useful for emergency short-term measures, perhaps as we had in 2008-2009. But what about the longer term? There it is not so good. In fact, it is unsustainable. It is a lot like a engine that has finely machined parts that spin nicely at very high speed but only as long as they are well oiled and perfectly balanced. The Fed is oiling for all they are worth, which is helpful for a year and perhaps two, but longer term than that is doing more harm than good. After a while, the machine will go out of balance and then the amount of oil added becomes irrelevant. In short order, such a machine will become less balanced with time and either must slow its rate of spinning (recession), stop spinning altogether (depression), or explode (collapse). None of these alternatives look especially good to me but one of them WILL happen because they must. While those in charge of the Fed and the Gov can certainly influence what happens, them ignoring the problem will not “make it go away” or result in a successful resolution of the problem. This engine of ours needs a serious tear down and complete rebuild before it is once again ready to do the serious work required of it. What it is getting, however, is some very minor tuning.

  5. Pam on May 12, 2013 at 11:42 pm

    Interesting analysis of Labor Force Participation Rate.

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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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