By Charles Biderman
In my last video I opined that the secret of my success has been an ability to accurately describe the conditions of the financial markets and economy exactly the way they are and exactly the way they are not. Why is that useful?
Smart investors have always been willing to pay big bucks to know what is going on right now and what is not. Why is knowing what is happening now so important to the smart guys? Because future performance starts from where we are right now. And if you have to guess where we are right now, the odds of being successful in the future diminishes rapidly.
So where are we right now in the market and the economy? Well the market value of all US and global stock markets are back around the same $60 trillion peak reached in 2007. That’s about double the 2009 low. Why are stocks up? Simple. Central banks have created trillions of new money with which to buy bonds and stocks.
At the same time, despite the trillions in money creation, global economic growth has been marginal after inflation. In other words, while both the global economy and stock markets crashed in 2008 and 20099, the value of all stocks has soared since then while the global economy is barely holding its head above water.
That is where we are right now – a surging stock market and a global economy that is barely growing after inflation. So, knowing where we are now, where are we headed? Well for the immediate future, for as long as the central banks keep creating money at the same pace, what is most likely is that stocks will keep going up. But without any new catalyst for growth the global economy will barely grow.
Remember, I use a supply and demand framework upon which I overlay my what is happening, what is so, right now analysis. TrimTabs has reported that since 2010 the total number of shares in the US stock market has grown by less then 3% in total, which translates into a few hundred billion dollars of share supply. At the same time the Federal Reserve has pumped grown it’s balance sheet by around $3 trillion. So what happens when trillions more money – starts chasing a few hundred billion dollars supply of shares? That right stocks go up.
It really is that simple. Stocks go up when the demand from trillions of more money – even if it is newly created – overwhelms a few hundred billion dollar supply of shares. Looking back over the fast few years, whenever the Fed pumped new money into financial assets, stocks went up. When it stopped printing stocks went down. And when the Fed started printing again stocks went back up.
And right now the Fed keeps creating money, although at some point the pace will slow. Obviously the Fed has been hoping that the US economy will start to grow faster without all the new money creation. Unfortunately I see no evidence of that occurring. It’s possible, I just don’t see any reason as to why.
So for as long as the world continues to accept newly created money as being sound, it looks to me as if this bi polar surging stock market and a depressed economy will coexist for a while longer.
But if as and when the Fed starts to slow money printing, two things are likely to happen. Bond and equity buyers will stop buying and start selling. And companies are likely to become net sellers and not net buyers.
A topic for another time is why robust economic growth is no longer possible given how big the government has gotten as a percentage of the total economy.
Finally, my only comment about the current so-called government shutdown is that it should continue for ever, with the proviso that only current taxes can be used to fund what is absolutely essential to the US.
Tags: Biderman Economics Economy Investing Stock Market stock prices Stocks Trading TrimTabs Wall Street