By Charles Biderman
Fear and greed rule markets. Always have. Always will. Since the start of this year, when the Fed was creating $4 billion of new money daily, $85 billion monthly and $1 trillion annually, and saying it would be keep doing that forever, investors got very greedy. Investors kept buying stocks, bonds, emerging markets, gold, all that stuff. On May 22 almost all markets were at multi-year if not all time highs.
That all changed May 22, when Taper Time began. All it took was for Fed Chairman Bernanke to say that the Fed sometime soon it will be creating less new money daily. That is if economic growth improves as the Fed is predicting.
That simple comment created a tsunami. First Japanese stocks started plunging – remember I have been saying in these videos that Japan is the canary in the central bank money creation coal mine. Why did Japanese stocks plunge? Because Japanese trust banks, realizing how important Fed money creation is to overall investing, panicked and sold such huge amounts of Japanese stocks as to overwhelm U.S. buyers. U.S. buyers had been the big net buyer of Japanese stocks ever since the Bank of Japan announced an easing boost. Guess what, Americans are now also selling Japanese and emerging market stocks.
Here in the US, stock market volatility surged as Taper Time began, but believe or not the S&P 500 closed this past Tuesday down just 1% from the May 22 high. What is particularly fascinating to me is that U.S. equity funds started getting big inflows over the past couple of weeks, both U.S. mutual as well as U.S. Exchange Traded Funds. Maybe this will be another time individuals, who are notoriously bad market timers, poured back into the market at the top.
Look. There is only one reason why stocks, bonds and all that are trading at such lofty market capitalizations today. That is because of central bank money creation in the face of a global contraction. And the truth is in the history of currency, going back around 3,000 years, there never, ever has been a positive outcome from extended money debasement.
That said, the Fed has made very clear that tapering will only happen if the U.S. economy does improve, which is what the Fed is predicting. But what if the U.S. economy does not improve? The Fed has been predicting a second half economic improvement each year since 2010 and in each of the past three years, the U.S. economy actually weakened as the year wore on. In response to each of the past three second half slowdowns, the Fed did something new to hopefully boost the economy via the wealth effect.
And there is nothing different now. Both the Fed and most economists are so fully invested in believing that an economic recovery is happening that they can’t fathom that it may not be in the cards..
Another important factoid. All economists including the Fed define the U.S. economy in terms of GDP. But GDP is probably one of the worst real time indicators. How many of you know that GDP is just a bunch of government guesses based upon surveys and then updated via historic quarterly data? If you go the Bureau of Economic Analysis web site, you will notice that GDP is the combination of personal consumption expenditures, another phrase for everything we buy, plus guesstimates as to all investments and government spending. There is no income being measured here, just spending and government activity. Even more bizarre, the spending data is not real time from credit cards but based upon surveys refined by historic results.
Ok even though GDP is such a lousy number, very few really understand what it a 2% growth rate means anyway. At the current level of GDP of $16 trillion, GDP growth at 2% is all of $320 billion a year after inflation. By the way, we estimate wage and salary growth of about $350 billion a year – pretty close to GDP growth.
The Fed is creating money at the rate of a trillion dollars a year, and the U.S. government is running a deficit of around $800 billion, adjusting for a $200 billion one time pop. In other words it takes $1.8 trillion of money debasement to increase GDP by all of $320 billion. Growth is less then 18% of money creation. There is no way the U.S. economy can repay this year’s $1.8 trillion in new debt with growth of just $320 billion. And we are not talking about the $6 trillion growth is U.S. & Federal Reserve debt since 2008.
Bottom line, the U.S. economy is barely growing and highly dependent upon zero interest rates and deficit spending to maintain such a meager growth rate. Those who believe that the U.S. is just as productive now as it was before the Obama Administration are wrong. There is no way the U.S. growth rate can return anytime soon to the 3% to 5% levels of 1983 to 2006. Why? All the structural and procedural bullshit put in the way of business, in addition to the higher taxes and health care and pension costs forced upon our society by an incompetent government.
So don’t expect to see an improving economy until, of course, we change the way we manage our government.