Mass Psychosis is Why Fed Has Been Able to Create Biggest Bubble of All Time


By Charles Biderman

The stock market continues to move upward. The market value of all US stocks is $22 trillion, a whopping $13 trillion increase from the March 2009 low and roughly equal to the all-time peak reached in October 2007. The more the stock market has gone up the more investors, economists and financial commentators, all firmly believe that the U.S. economy is on the verge of rapid growth.


And this belief in the growth fairy is not new. Going back to 2010, the Fed, economists and money managers have all been saying consistently, while stock prices kept rising, that the U.S. economy would grow faster over the succeeding six months. It hasn’t happened. For the last four years stock prices have gone up, but the economy has not grown any faster. And while July’s BLS jobs report might not show it, job growth is currently slowing. In fact wages and salaries are growing slower now due to the June spike in mortgage rates on top of higher 2013 taxes.


It is important to point out that the slower growth has nothing to do with the sequester nonsense. Government spending is down less than $30 billion so far this fiscal year. The main reason the budget deficit is down by $250 billion or so is higher income taxes and a 60 or so percent gain in capital gains taxes paid this year on gains taken at the end of 2012.


As many of you know, I track withheld income and employment taxes reported daily by the U.S. Treasury. Adjusting for higher taxes we estimate wage and salary growth has slowed to 2.2 percent year over year before inflation. That is less than one percent after inflation. Before higher interest rates impacted the mortgage market; wages and salaries had been growing by just over 3.5 percent nominally. But following the impact of higher rates in late June the rate of growth has steadily slowed. In other words, while low mortgage rates did boost incomes over the past year, now higher mortgage rates are slowing income growth.


And yes, the Bureau of Labor Statistics has been reporting monthly job gains of 160,000 to 190,000 ever since early 2011. But so what? Many of those jobs are part time and barely over the minimum wage. And while this is being videoed before the BLS reports its estimate of July jobs, the BLS number as well as the ADP number from the other day are likely to be overstating the rate of new July jobs.


Why? The BLS jobs survey and therefore the ADP report, are based on data from the week that includes the 12th day of the month. In July that was the second week. That week was when nominal wage and salary first dropped below three percent. Since then wages and salary growth has slowed even further. That means that the BLS July number is likely to overstate what is really happening. That also means that in August, we should see massive July revisions downward as well as a weak August jobs number.

Again, what evidence is there that the US economy will grow faster in the future? I do not see anything, particularly if mortgage rates stay over four percent. Remember all US and global public companies, other than banks, are reporting, at best, flat earnings and revenue growth.


A bubble in economic terms is when prices soar in relationship to the underlying value. That is what is happening as central banks have been printing trillions with to buy financial assets. At some point the bubble will burst. The slower the rate of growth we have from here, the bigger the bust when it happens.




4 Responses to Mass Psychosis is Why Fed Has Been Able to Create Biggest Bubble of All Time

  1. Pam on August 2, 2013 at 5:54 pm

    What are the chances we just muddle along for another 5 years, with the market bouncing slightly up and down? And as we go, the baby boomer generation gradually actually retires and their full time jobs open up to the younger generation, debt slowly falls and as the rest of world’s wages increase, manufacturing comes back slowly to the U.S.? Just trying to figure this thing out ~ any thoughts. As always, thanks for sharing your thoughts on this blog. Enjoy the weekend.

    • Ed_B on August 4, 2013 at 12:18 am

      My guess is that the chances of this scenario playing out are somewhere between slim and none. The US economy is not growing. It can’t grow because the US government is so large that it is consuming the financial resources needed by business and industry to thrive, grow, expand, and hire workers. We are now at an impasse where we have chosen between more government and more economic growth. We have chosen poorly.

      To cover up this fact, the Fed and the BLS have manipulated the employment and inflation numbers such that both they and their policies look much better than they really are. Does anyone seriously think that US inflation is now 0.7%? What do your own eyes tell you about inflation when you buy groceries and fuel? Oh, that’s right. These must-have items are not counted by the Fed when calculating inflation. It is clear to any shopper, however, that food prices are up considerably and package sizes are shrinking. Gasoline, diesel fuel, home heating oil, nat gas, and electricity are all higher than last year. Ditto for taxes. The only thing that is not rising in the US is personal income!

      It is interesting that the Fed and the BLS have had to resort to multiple changes in the way that they calculate these both inflation and unemployment. As soon as the numbers start looking worse than they want, the alter the calculation method instead of actually fixing the problem. This is like us changing the gear on our speedometer to indicate a slower speed rather than just driving at the legal speed limit.

      Similarly, does anyone really believe that unemployment is actually in the area of 7.5%? Not really. If we include those who have given up looking for work the actual number is probably closer to 14%. Adding the chronically under-employed, either those who want full time work but can only find part time jobs and those who are working at jobs that are below their level of skill and experience, the number jumps north of 21%. We have a very serious job shortage in this country and it is being papered over with numbers that are pulled out of thin air. I guess that this is easier than having a robust economy.

      If we look at the labor participation rate as a percentage of the US population, we find that the current number is the same as it was in 1978. Anyone who is waxing nostalgic for the days of the Jimmy Carter administration can relax and enjoy the current malaise as it is virtually identical with the exceptions of a MUCH larger national debt and balance of trade deficit.

      For real numbers on the economy, check out economist John Williams’s web site, Shadow Government Statistics, sometime. He is a consulting economist who has no political ax to grind and who derives the truth about the US economy in order to serve his clients. He uses the same methods for calculating these numbers as the US Gov did prior to about 1990 when they started monkeying around with the calculation methods for political purposes.

  2. Pam on August 5, 2013 at 4:47 am

    You may be right, Ed. I am familiar with ShadowStats. I guess I am just hoping (and praying) for the best, while preparing for the worst. It’s astonishing how fast things have changed.

    • Ed_B on August 15, 2013 at 12:18 am

      Indeed it is, Pam. I would be VERY happy to be wrong on this but the evidence is substantial. But who knows? Perhaps someone in the US Gov or the Fed will pull a rabbit out of their hat and produce some magic that will benefit us all. That would be good… but I am not counting on it.

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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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