The Game We Know is Over – A New Game About to Begin!?!


By Chris Hamilton

Since 2009, a lot of analysts have learned the hard way not to play Chicken Little and scream the sky is falling.  However, after last week’s FOMC meeting as a capper to so many other economic and geopolitical issues brewing, seems things are getting serious.  Take a looksee at yet another chart…

First chart shows the year over year (in Billions of $) change in Gross Domestic Product, Federal Deficit, and Federal Reserve Balance sheet.  Should be pretty clear Deficit and Federal Reserve Balance sheet since ’08 are growing much faster than GDP.

The quick commentary on this 2nd chart incorporating further elements along with first chart:

In the previous four recessions of ’81, ’90, ’01, and ’07, there was a simple pattern…

Oil prices spike —> recession follows —> Federal Reserve lowers interest rates plus the Federal government provides deficit spending to accelerate GDP —> Fed then raises rates (but to a lower rate than previous) and deficit spending is reduced—> oil prices spike —> wash, rinse, repeat.

How to read chart…

  • Left side = Oil priced in dollars per barrel, Fed funds rate indexed from 100-1 from peak in ’81
  • Right side = Compares year over year change in Billions of $’s for Gross Domestic Product, Gross National Debt, and Adjusted Monetary Base (proxy for Federal Reserve balance sheet), and price of gold in $’s). 
  • Grey shaded vertical columns = Recessions


Low and behold, in ’08 the Federal Reserve lowered rates to zero, the Federal government ran a gargantuan budget deficit, but this was not adequate and the Fed’s new “tool” of Quantitative Easing was initiated (bond buying to monetize “demand” for the great supply of bonds @ below “market” yields) to allow accelerated economic activity.

Now in 2014, oil prices are maintaining recession inducing levels, rates are still zero, deficits and QE are large but less than half their peak, and not surprisingly GDP is slipping…another negative quarter and US is officially in recession.  Typically, this is where the Federal Reserve would begin looking to the next cycle of lower rates and increased Federal deficit spending to accelerate GDP and economic activity to shorten the next recession.

However, the Federal Reserve can only increase QE (absent paying lenders to take money in a Negative Interest Rate Policy) in conjunction with a Federal deficit providing new stimulus…but the Federal Reserve’s balance sheet and Federal Debt are in need of economic growth to allow them to be serviced.  Janet Yellen meet slippery slope!  But Mrs. Yellen implied exactly the opposite policies last week!?!

Mrs. Yellen and the Federal Reserve are suggesting GDP “growth” can continue without Budget deficits and QE???  But even more correctly, the Federal Reserve is suggesting the economy can not only thrive in the absence of an “accommodative” Federal Reserve but in the midst of anti-stimulus while rates are raised and Fed’s balance sheet shrunk???

According to “sources” in the Federal Reserve, the Fed’s goal is an Effective Funds Rate of 3.75% and a Federal Reserve balance sheet of $1.5 Trillion.  This means, beginning in 2015, continual rising rates for likely 2 to 5 years and 5 to 10 years of Fed Balance sheet sales or roll-off of $350 to $700 Billion per year in Treasury’s / Mortgage Backed Securities.

This anti-stimulus would likely have the following impacts…

30yr fixed mortgage rates (based on the 10yr Treasury) rising easily to 6%…For example, a $200 k house financed today at 4% for 30 years, assuming financing of $200 k has a Principal & Interest payment of $955/mo.   With 30yr mortgage rates at 6%, the same payment of $955/mo finances a $160 k home, a reduction of nearly $40 k in the amount financed.  Unless salaries rise by 20%, the value of a house…or housing in general is going to fall by that same 20%.  This would put some 20% or more of homeowners back under water and in danger of restarting another round of strategic defaults and bank collapses.  This would mean the $11 Trillion of mortgage debt banks and GSE’s and the Federal Reserve hold would be going very sour…again.

Also would mean interest payments on Federal government debt (assuming a blended 5% interest rate) would rise to $900 Billion…up $675 Billion from ’13…consuming 30% of 2015 projected tax revenue just to pay the interest…up from just 6% in 2013.  This leaves two choices based on this increased interest cost…

  • (A) Increase budget deficit from $500 Billion to $1.2 Trillion just to service the interest but with no “stimulative” economic impact
  • (B) Cut the same amount from the budget (in essence, cut everything but Medicare/Medicaid, SS, defense, and interest payments…no welfare, no education, pretty much nothing else).
    • Or some combination of deficit and/or budget cuts.

Oh, and by the way, US has had 11 recessions in 69 years since 1945, occurring on average every 6.5 years…this would mean the cyclical business cycle is well under way and counting down to the next recession…while the Fed hasn’t even begun a “normalization” of its balance sheet or raised rates.

If all this leaves you feeling like this is crazy talk on top of silly notions, you understood it all correctly.  Last weeks move in Gold / Silver may be saying the Federal Reserve and Federal Government have run out of time and the issues / resolution path are far too transparent.  The economy is not growing anywhere near enough to pay for the debt.  The debt is far too large to be financed at higher yields.  So, we now are very likely near a non-linear point which few of us have seen in our lifetimes.  A monetary solution to a non-monetary problem.  Bond buying, money printing, and the much hyped hyper-monetization or potentially hyperinflation.

So, the die is cast and time is short.  Strange days are likely to get far stranger before some sanity hopefully returns.  Always glad to hear opposing views or corrections or any omissions.


5 Responses to The Game We Know is Over – A New Game About to Begin!?!

  1. EARL CARROLL on June 24, 2014 at 3:38 am

    I have been following you for about 4 years,, you called market top about 40 percent or so lower over a year ago…you changed your mind and done well sense need to publish this, a personal email would be fine…but I would like to know what your GUT is telling you and when do you expect this party to end…

    • Charles Biderman on June 24, 2014 at 12:49 pm

      Predictions taken out of context do not prove anything. TrimTabs Float Shrink ETF first traded at $26.44 per share on October 5, 2011 and closed at $51.49 per share June 23,2014, for a gain of 95%. Over that same time frame, the Russell 3000 rose 83%. As long as more money keep chasing less shares stock prices will keep going up.
      When more shares starts chasing less money stock prices will go down.

  2. Tom Hamilton on June 25, 2014 at 5:11 pm

    Has there ever been a distinction between made between real demand from organically generated funds and demand created by “funny” money? With approximately 3 trillion of “stimulus” money having created demand, won’t the mere expectation of less “pumping” ultimately reduce demand? Or, do the laws of supply and demand apply no matter the source?

  3. TR on June 25, 2014 at 5:39 pm

    I’ve been incessantly preoccupied with the above pieces–and others–of this puzzle for some time. It’s been like what the French call a dérive–lost and trapped in a surreal/unreal labyrinthine urban landscape unable to find your way home. Until you do.
    So if I play devil’s advocate and argue a happy homecoming, here’s what I’d say: debt has been growing faster than GDP but debt is now falling and GDP–never mind that Q1 blip; the weather outside was really frightful–is accelerating. And it will continue to accelerate. And the Fed has the ability, if the economy does weaken, to keep interest rates low for a very long time and to do lots more QE with no worries about debt becoming a problem–you know the everlasting poster child of Japan. So why not a happy homecoming? What could be wrong with 2% GDP, cheap interest rates, especially with boomers who can thereby never retire and thereby never become a problem with their SS and Medicare? It’s a whole new equilibrium that can go on like a perpetual motion machine.
    Thanks for your blog. It’s a regular stop for me.

  4. joel on July 2, 2014 at 11:01 am

    As long as this disfunctional congress and administration continues without a plan, it leaves the Fed without a plan to do no more than swat flies. Should or until, voters mature at some point, clean the entire slate to start fresh, then we as a nation might have a chance. Chart watching is all we have to occupy ourselves as all else is just flapping lips.

Leave a Reply

Your email address will not be published. Required fields are marked *

Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

Biderman’s Practices of Success

I recently launched a new online course, Biderman's Practices of Success, on ( The key to the practice of success is to be fully present in the moment and to be totally engaged in the important areas of life, particularly when we do not want to be. Read More.

Mr. Charles Biderman is an associated person of Trim Tabs Asset Management, LLC, an SEC-registered investment adviser. All opinions expressed by Mr. Biderman on this website are solely those of Mr. Biderman and do not reflect the opinions of Trim Tabs Asset Management, LLC, Trim Tabs Investment Research, Inc., their affiliates (collectively, “Trim Tabs”), or any other associated persons of Trim Tabs. No part of Mr. Biderman’s compensation from Trim Tabs is related to opinions which he expresses on this website, elsewhere on the internet, or in any other medium.

You should not treat any opinion expressed by Mr. Biderman as a recommendation to make an investment in any company discussed or cited in any of his postings. Mr. Biderman’s opinions are based upon information he considers credible, but which does not constitute research by Trim Tabs. Neither Mr. Biderman nor Trim Tabs warrants the completeness or accuracy of the information upon which Mr. Biderman’s opinions are based.