Surging Stocks and Slumping Economy Duality To Continue For a While

Oct
03

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.

 

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4 Responses to Surging Stocks and Slumping Economy Duality To Continue For a While

  1. Katie on October 4, 2013 at 6:15 am

    Thanks Charles. It’s insane that the stock markets get special “help” from the Fed to keep on rising up and up while the rest of the economy stays in the dumps, fewer people are employed, of those that have jobs, more of those jobs are part-time, no benefits, no future and require workers to work several part-time jobs.

    Those on the inside, are having one hell of a party being able to keep markets levitate on command. The rules of investing are broken, what’s up is down, good news is bad news and bad news is great news on Wallstreet.

    Wallstreet is happy because the good paying jobs in the US are gone, never coming back because of offshoring, outsourcing, and they’re not paying any taxes either.

    I wish I had come across your blog years ago before I lost money in the markets thinking that the bad news in Aug 2011 would certainly mean that stocks would go down and keep going down, that is when I thought bad news would mean bad news in the stock market, not more funny money to goose equities on command by the Fed.

  2. Dan on October 4, 2013 at 1:14 pm

    A topic for another time, but how about now? I’d love to hear you explanation of how our economy can’t grow, because of the size of the government. Too bad the hacks in DC wouldn’t pay attention. They might learn something.

  3. Ed_B on October 7, 2013 at 11:23 pm

    If Ben Bernanke really wanted to find inflation, all he would need to do is look at the US stock market, where a struggling US economy is producing ALL TIME HIGHS for stock share prices. Does that disconnect bother anyone else? It should. There was a time when a surging economy fueled strong job growth and increased company earnings. Today, this has been put on hold while largess from the Fed / public treasury is used to inflate both the stock and bond markets. This is not capitalism as history describes it. This is something else. Some call it “crony capitalism”, but I don’t because I believe that the term “capitalism” is sufficiently special that it ought to be reserved to its classic definition of people freely meeting and agreeing to exchange property with each other with no outside interference or coercion. It is simply a trade of this for that, with this and that being virtually anything imaginable. No, what we have today would be better termed as “crapitalism”. I understand that this is not a real word but when we consider what is happening in the US these days, perhaps it should be.

  4. Joey Anchovey on October 11, 2013 at 5:57 pm

    There’s a certain amount of cognitive dissonance that the country’s economists have become comfortable living with. I don’t understand how the fundamentals of the economy (percent of working aged people actually working is at 58% which is at Carter era levels and income wages have been flat for years) are horrendous but we are kept being told by MSM, to include the finanicial media which I have more respect for, that we are in a recovery. Apparently we’ve been in a 5 year recovery because that’s what they keep telling us! Is the term “recovery” an out for the media to suggest that things still suck, but they don’t suck as bad as yesterday so you needn’t worry. Is this going to be a 10- 20 year “recovery” kinda like Japan has gone through and we develop a Zombie economy kept alive by Fed money (or brains to keep the zombie analogy)?Either way, society is beng misinformed by their political representatives and the media, of course.

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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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