Märkte / Aktien 11:02 - 26.05.2015

«A Global Recession Is Inevitable»

Charles Biderman, founder of the research firm TrimTabs spots a warning sign in the drop of the commodity prices and mistrusts the paper money of the centrals banks.
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US-Zentralbanksystem, dem die zwölf Federal Reserve Banks angeschlossen sind. An der Spitze steht das Direktorium (Board) in Washington, das auch die Mehrheit im Offenmarktausschuss stellt, in dem über die Geldpolitik entschieden wird.

In every market supply and demand are determining the price. Charles Biderman uses this simple logic as the foundation for his investment philosophy. The outspoken founder of the research firm TrimTabs is convinced that stock prices are a function of liquidity—the amount of shares available to buy and the amount of money available to buy them—rather than fundamental value. Therefore, he carefully tracks the announced actions of companies. In his view they are among the biggest players in the stock market and the driving force behind today’s bull market. For now, Biderman thinks that this trend will push stock prices even higher. For the medium term though, he cautions that the financial markets are poised for a severe crash. He spots the first signs of a global recession in the drop of the commodity prices and warns of the moment when people don’t trust the paper money of the central banks anymore.

About Charles BidermanCharles Biderman says point-blank what he thinks. Back in 2009 for example, he made waves for being the first person on prime time financial TV to tell that the Federal Reserve is heating up the stock market. He began his career as Alan Abelson's assistant at Barron's from 1971 to 1973. There, Mr. Biderman predicted the collapse of real estate investment trusts (REITs) and first shorted REITs on their way down in 1972. After REITs went bust, he became a successful real estate entrepreneur, orchestrating various deals in Tennessee and New Jersey. But then came the savings and loan crisis and he had to start over.

In 1990, he founded the investment firm TrimTabs which originally specialized in short-term selling. In 1994 he began tracking mutual funds flow twice a week and the firm developed into the only independent research service publishing daily coverage of US stock market liquidity. The premise of TrimTabs' approach is that stock prices are a function of liquidity rather than fundamental value. Based on that theory, in October of 2011 it launched the TrimTabs Float Shrink ETF which invests in US stocks. A similar ETF which focuses on international stocks is going to be launched in early June. Mr. Biderman (born in 1946) holds a BA from Brooklyn College and an MBA from Harvard Business School. He lives in the idyllic coast town Sausalito, near San Francisco.
Mr. Biderman, once again the economy is not doing well. Nevertheless, the stock market in the United States seems to be in record setting mood.
What’s behind the rally?
What’s present in the stock market in the moment are companies, their transactions, buyers and sellers of stock. That’s all what happens in the market. So if you count the number of shares available and how much money is available you might get a sense of what’s going to happen. Since 2011, the amount of shares in the market has been declining every year. Even though individuals are taking money out of the market, companies have spent around $1.6 Trillion in cash on takeovers and stock buybacks.

And what does that mean for stock prices?
The efficient-market hypothesis states that all information about the market is already reflected in today’s share prices. Therefore, the only way you can invest successfully is to broadly diversify at very low cost. But one important fact is being overlooked: In every market the house has an edge or else the market wouldn’t exist. In the stock market the house is the public companies which have an undeclared edge. Top insiders at a firm know more about its fundamentals than the general public, and these insiders can influence the price of their employer’s shares by timing equity issuance and stock buybacks to their advantage. So what we have discovered quantitatively is that when companies, in aggregate or individually, are reducing their share count and there is more money chasing fewer shares, prices must go up.

Is that the only indicator you pay attention to? What about standard instruments for valuing stocks like the P/E ratio? Don’t they matter in your view?
Most fundamental investment approaches, such as the discounted cash flow method, attempt to calculate a company’s intrinsic value. That may work when you compare two companies with each other. But it’s irrelevant for the market as a whole, since earnings have never predicted future market prices for the market as a whole. Therefore, instead of guessing about intrinsic value, I contend that in the short term the prices of stocks, like the prices of other tradable goods, are set by the underlying conditions of supply and demand. And that’s what we track. The fact that the P/E ratio might be high or low is more a function of supply and demand than a determining indicator on its own.

Thus fundamentals aren’t important at all?
Some people say in the long term it’s all about earnings. But in the long term we’re all dead. So even if you’re right you could go broke by the time the long term happens.

So when should investors be careful?
During the few times when the supply of shares was greater than demand the market usually went down. But there was an exception in 2009 when all the money form the government started going into the market. So despite that companies were huge sellers of stock and the supply of stocks rose, prices went up. I had a very bad year in 2009 because I didn’t see that the first time ever in the history of the markets the government made the difference. I was among the first to say publicly on TV that the Federal Reserve was the reason the market was going up. But at that time it was shrugged off as conspiracy theory.

Today, investors are obsessed with monetary policy. How do you cope with that?
Historically, the money in the market has come from income. But today, companies are not growing very fast and we’ve had low income growth since 2011. However, the market has tripled. The only reason for that is that companies are taking excess cash which is earning zero interest and reducing share count instead of spending it to build capacity for future demand growth. So it could keep going like that for another few years. That’s why in the short term I’m bullish.

But what will happen if the Federal Reserve is going to raise interest rates later this year?
Everybody looks at what the Fed says, what the ECB says, and what the IMF says. But if you go back the last four years they’ve said over and over that the economy is going to be growing sustainably soon. They say that year in year out. Also, all the economists have said they expect interest rates to raise because the economy is going to be growing. And they’ve all been wrong. But nobody ever points to that. As long as the stock market keeps going up it doesn’t matter that they’re wrong.

When do you think the Fed will raise interest rates?
Based upon the current economic data they’re not going to raise interest rates anytime soon. They might decide to raise rates just to see what happens. But if the Fed is data dependent, as Chair Yellen says, I can’t see them raising rates anytime soon.

On the other hand, Fed chief Yellen affirmed that she still expects to raise interest rates this year.
Our macroeconomic indicators basically suggest that growth has been flat for the last six months, sequentially. So I just don’t see where the growth would come from. For instance, autos are one of the sectors doing best in the US economy. But the growth there is coming from the amount of junk auto loans that have been issued. They’re leveraging up auto buyers. And you know what’s going to happen. We saw that movie before with the subprime crisis in the housing market. And then there is a $100 Billion. of additional student loans every year which people are living on. There’s no way that those loans are going to be repaid.

At least, the labor market seem to be doing better. Since the beginning of 2014 there are 240,000 new jobs every month on average.
But that’s the only good number. So instead of questioning all the other numbers why don’t we question that number?  It’s a bad number and you have to understand where it comes from: The government surveys around 160,000 employers including all government agencies and a lot of big business. They claim that they also track smaller companies. But in reality that’s very difficult. So they get maybe a 100,000 responses and that’s just a survey of a small minority of all the millions of employers in the United States. What’s amazing to me is that everybody reports that number as a fact and nobody looks at how they come up with it. Every other number is bad. But no one seems to care.

So how bad does it really look like?
I think a global recession is inevitable. How do you know we’re going into a global recession? The first sign is a collapse in commodity prices. The initial drop in interest rates and China deciding that they want to build millions of homes that no one is going to live in have created a pickup in economic activity. And because there was a pickup in demand oil prices went over $100 a barrel and iron ore and all kinds of commodities went up in price. Subsequently, the supply of all commodities grew because it didn’t cost anything to build new plants, new mines or new oil wells. But now that demand doesn’t grow we have excess capacity.

What are the ramifications of that?
Right now, we’re living in a make believe world. Debt can’t be the main source of growth. Without a pick-up in final demand a lot of bad debts are out there. As long as you have excess capacity in the commodity production you have bad loans throughout the system. That means you have governments who can’t repay their debt without selling new loans and all their bad loans are funded by the central banks. For example, if you look at all the money that Chinese banks have invested in real estate, there’s no way that they are going to be repaid. China is bankrupt.

But after all, in Europe things are starting to look somewhat better, since the ECB launched its stimulus program.
Sure, we have a little bit of activity in Europe. But where would Europe be if it wasn’t for lower oil prices and the lower Euro? You just can’t devalue your way to prosperity.

Is there no way out of this dilemma?
Almost all governments are bankrupt. Supposedly, with the economic contraction we had you would think the world would deleverage. But there’s a lot more debt globally now than even at the peak of 2007. In the United States for example, the present value of all future liabilities is something like $70 Trillion. if you add up all the future payments to Medicare, Medicaid, Social security and government pensions. That’s more than the net worth of the United States. So there’s no way that money can get repaid. You would need something like  10% growth in income every year. And that’s just not going to happen. That’s why we are going to have a bad time when we realize that the emperor is naked: All the money that the central banks have created is worth nothing.

When do you think that’s going to happen?
Nobody knows until afterwards. And then, of course, after it happens everybody will know why it should have happened. But it’s all hindsight. As long as the number of shares keeps declining, stock prices are going to go up and nobody cares. That’s why I’m saying in the short term I’m bullish even though in the long term there has to be a major correction.

What should investors do on this kind of environment?
What we have discovered looking at historic data is that when companies reduce the share count with free cash flow they’ve tended to outperform, particularly if they’re not borrowing to buy those shares. Therefore, I only want to invest in companies who are growing cash and giving it back in the US with shrinking the number of shares or outside the US in dividends. To me that’s the safest investment.

So how does your personal portfolio look like if I may ask?
I have 40% of my assets in the TrimTabs Float Shrink ETF which is investing according to that strategy. Another 5 to 10% are invested in gold and around 10% are in long term inflation protected bonds. The remainder of my equity are growth stocks like Salesforce.com, Facebook, Amazon and Apple.