Bernanke Said Taper And Free Money Addicts Felt Withdrawal Symptoms

Includes: TTFS
by: TrimTabs

Stock and bond prices both here and abroad have been going up and down like a yoyo lately. Some of you must be wondering what the heck is going on here? Well, here is my opinion. Investors globally have become addicted to newly created free money ever since 2009. Therefore, when Federal Reserve Chairman Bernanke intimated on May 22 that the free money will "taper", the markets have been acting similar to how heroin addicts would respond if they knew their drug would not be available anymore.

Specifically stocks and bonds have both been rising and falling, depending upon the most recent rumor about when the Fed will Taper. U.S. stocks have gone down 1%+ when it seems as if tapering is imminent, and then rebound 1% when it doesn't. As to bonds, the 10 year Treasury was yielding well under 2% before the "taper" comment and is now trading around 2.2%. As a result of the threat of higher interest rates and lower bond prices; bond funds since May 22 have had record outflows. Remember bond funds, both mutuals and ETFs, had $900 billion of inflows starting in 2010 through May 22. So far this June, bond funds have had a whopping $36 billion in outflows, even though the average bond fund is only down less than 1% in price, and even high yield bond funds are down all of 2.5%.

The real damage has occurred in Japan and the emerging markets. Japanese stocks are down 20% since May 21 and all emerging markets are down 10%. All this volatility is solely because of a Bernanke comment that at some point the Federal Reserve will stop creating $85 billion monthly of new money. Why that is so important to the markets is that central bank new money creation is the sole reason why global stock markets are so high in price. Therefore, any threat to stop the free money has caused stock and bond markets to act as if their future heroin supply is in doubt.

It got so weird that when last Thursday, the Federal Reserve's unofficial PR guy-- the Wall Street Journal's John Hilsenrath-- reported that the Fed is unlikely to stop creating new money anytime soon, the stock market spiked 2%. In other words, the druggie investors need the reassurance from their drug dealer's mouthpiece that they would still be able to still keep scoring free their drug, free money. Isn't that precious.

Meanwhile, the U.S. economy is sputtering along and barely growing. As we have documented time and time again, wages and salaries of all U.S. workers subject to withholding taxes has been growing about $200 billion yearly in each of the past three years, not much more than the growth in inflation. Even to get to this anemic growth rate, the economy has been totally dependent upon the trillions of free money created since 2009.

So how does one invest in this kind of crazy market? Well, Biderman's Market Picks recommends being 36% long U.S. equities and being 19% short emerging markets, Europe and the big banks. One quarter of the portfolio is in gold and will remain so given that the global economy is barely growing and that stock prices are solely dependent upon central banks debasing their currencies.

Still, in a world where the global economy – absent government nonsense – is fundamentally sound, my biggest long position remains TrimTabs Float Shrink ETF. TTFS is up 30% over the past 12 months versus a 22% gain in the S&P 500. Companies reducing the number of shares outstanding solely due to free cash flow growth not only outperform when the market is rising, but in our back test did even better during bear markets.

Disclosure: I am the portfolio manager of TTFS and chairman of TTFS sub-advisor.