By Charles Biderman
Is the Bernanke Put dead or at least dying? I think so. Over the past seven trading days, the market value of all stocks is down half a trillion dollars, meaning that a quarter of the $2 trillion gain from the current easing has been given back.
At the recent Monday, September 17 market top, the market cap of all stocks was up about $2 trillion from the June 5 low and the S&P 500 was up 15% over that same time frame. What happened on June 5 was that the Fed's unofficial PR guy, Wall Street Journal reporter John Hilsenrath pre-announced the current Fed easing. Stocks then kept climbing from early June until Monday, September 17 two days after the Fed made the current easing official. Since then stocks have been selling off, although still at a modest rate.
Will this sell off turn into a rout, or is this just a minor correction? As I have been saying, with companies and insiders both selling many more shares then they are buying, I find it hard to believe that stocks can rally from here. While a new rally is possible, the odds in my view favor a drop below the prior low. So if stocks do give back the remaining $1.5 trillion gain in market cap since June 5, that would mean to me that the Bernanke Put is indeed dead.
Let us look back at what the Federal Reserve and US government money printing has accomplished. The only real accomplishment is a $10 trillion net increase in the market cap of all stocks since the March 2009 low. How much did it cost to achieve that gain, The US government has borrowed and printed $5 trillion in deficit financing since the start of fiscal 2009. Over that same time frame, the Federal Reserve has grown its on and off balance sheet assets by $3 trillion, making for a combined growth of $8 trillion. So printing and borrowing $8 trillion has boosted equity values $10 trillion. That is not all that bad if it would continue.
But if the Bernanke Put is dead and stocks go down despite the current perpetual easing, what else has the $8 trillion accomplished. The answer, much less then the amount of money spent.
Currently after tax income is about $6.6 trillion annualized, and that is up about $550 billion from just over $6.05 trillion in early 2009. For the record, we are still about 7% below the 2007 peak of $7.1 trillion in take home pay.
So, we have a $550 billion annual gain in take home pay in three years, or about a 3% annualized growth rate. To get this 3% growth, or $300 billion this year, the government and Fed combined will borrow and printed a combined $2 trillion in deficits. Wow! Spending 2 trillion to get $300 billion. What a disaster!
Do you get it? To boost take home pay by $1 the government and Fed prints and borrows $7 to $8 and spends it. It is gone. That was not so bad when the market value of all stocks kept rising by trillions of dollars as the Fed eased. But what happens if the stock market no longer goes up on easings? Particularly when the real economy is growing much slower than the amount of borrowed and printed money spent on fixing the economy. Given what is happening in the rest of the world these days, I do not think this insanity can go on for very much longer before the world wises up to the naked US emperor?