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.
Tags: Biderman Bonds buffet Economics Economy federal reserve Stock Market Stocks TrimTabs Wall Street