«Negative interest rates are a total disaster»

Charles Biderman, founder of the research firm TrimTabs speaks up against monetary interventionism and spots a concerning development in the US stock market.

Around the globe investors are getting nervous. Upcoming central bank decisions, questions about the world economy and next week’s UK vote on EU membership are putting weight on stocks. In the US, recent market action has dragged the S&P 500 back from near-record levels. But according to Charles Biderman something else is going on beneath the surface: US companies are announcing fewer stock buybacks. That’s a reason for concern since buybacks have been at the center of this bull market, as the founder of the investment research firm TrimTabs explains. The outspoken American is also concerned about the lack of growth in the United States and warns that in Europe and Japan negative interest rates could end up causing a disaster.

Mr. Biderman, tensions in the financial markets are rising. What’s your take of the situation?
The stock market in the United States has been run by companies adding money through stock buybacks and cash-takeovers. But ever since the Federal Reserve hiked interest rates and started to talk about further moves we have seen a slowdown in buyback announcements. For the first five months of this year the volume of announced stock buybacks is around 30% lower at $280 Bn. That’s a significant decline. There are two reasons for this slowdown: First, earnings are down and free cash flow is down. Second, it’s harder to borrow money to do buybacks for companies with a junk rating. So less leverage is possible. Also (ALSN 280.00 +1.63%), there is a lot more scrutiny of companies doing buybacks and why they’re doing them. The companies that are being punished are those which are doing buybacks with leverage.

What does this mean for the outlook?
Since the end of 2011 there has been zero new money going into the US stock market if you add up mutual funds flows and ETF flows. But at the same time there has been $2.1 trio. of float shrink, meaning cash takeovers and stock buybacks minus all new share sales of companies from insiders, IPOs and  secondary issuances. So obviously leverage from the float shrink is what has boosted share prices and if there is less float shrink going to happen that’s a concern for the market.

Could this even be a sign that the bull market is over?
What we’re also seeing now is a big pickup in companies selling stocks. There are lots of new shares coming out of the woodwork hitting the market. Especially energy companies have been crazy to issue shares. And not only are there more new share sales. One thing we are noticing as well are lots of very big cash takeovers of public companies. The $26 Bn. takeover of LinkedIn by Microsoft (MSFT 331.32 -1.58%) is a perfect example. On the one hand you would think that’s bullish because it reduces the share count. On the other hand, the confidence level to do this type of very expensive deals usually occurs at tops.

And what’s going on when you look at the fundamentals?
Real-time tax data indicates that US economic growth has not accelerated this spring. That’s why I predict that within twelve months we will see rates for long term US mortgages under 2% and under 1% for ten year treasuries. Despite the economy keeps slowing most economists still think it’s going to grow. But these guys are the best contrary indicator ever. They have been predicting rising interest rates for 30 years now and they have been wrong all the way. Yet, people still keep listening to them. How many Wall Street morons still say that we are going into a bond bear market? Really? If they had bet on that trade with their own money they would have been broke a long time ago.

Also, it also looks like the job market is cooling down as the most recent numbers from the Bureau of Labor Statistics suggest.
Those numbers are basically random generated. They are based on a small survey. So we’re just getting the small statistical sample they use to come up with the monthly job market report. They poll around 100’000 employers each month and the highest percentage of respondents are public sector enterprises and big companies. Small companies don’t really participate in this survey. So there is no reliability. In addition to that they seasonally adjust the numbers. Because of that, the monthly numbers can be off by 100 000 jobs either way. So what’s the value of those numbers, other than they give traders something to trade against?

What’s really going on in the job market?
You have to consider that in the US every month 5 million jobs are lost and around the same amount of jobs is newly created. On the balance, for the ninth consecutive month now net employment growth was below 200’000 jobs in May, according to estimates based on real-time income tax withholdings. Also, it appears that the old jobs people are losing pay more than the new jobs that are being created. So in essence, we’re having more jobs but no income growth. That makes sense because how do companies make more money in a no-growth world? They pay their workers less.

This summer, it will be seven years since the Great Recession officially has been declared to be over. Why is the economy still stumbling?
The economy is growing slower than people have been expecting because of what I call the politics of fairness. With politics of fairness I mean basically that people think they should be entitled to get free education, free healthcare, not to lose their jobs because that’s only fair. Since President Obama has taken office he has increased food stamps, increased free loans to college kids and increased phony disability claims. Also, he has introduced all these add-on regulations that help his consistency. More people are on the doll than ever before and economic growth is as slow as it has ever been – and that’s related.

The politics of fairness have created the economics of hopelessness. We’re following the European model which is to maintain the status quo: Don’t let competition damage or disrupt existing businesses. The politics of fairness create anti competitiveness because if you are guaranteeing workers a job for a lifetime you want to make sure the company they work for doesn’t go out of business. Therefore, you can’t allow new competition to come in. So you install tests, regulations, rules and barriers to block market entry.

So what should be done to revive the economy?
What we really need is the politics of hope: Let’s figure out how to make it easier to start a business. Let’s remove anti-competitive rules and restrictions. Let’s have communities get together and look at how can we help this economy. Unless we do that, the economy is going down the toilette. I’m not advocating sweatshops. I say: make it easier for people to start something new. Growth occurs only when more new happens than existing shuts down. Right now it’s the opposite. There are more businesses shutting down than starting up in the western world. For example, 80% of Greek businesses say they wish that they could leave Greece.

In the meantime, the central banks keep printing money. What are the consequences of these super easy monetary policies?
Cutting interest rates and printing money won’t solve our problems. What the central banks are supposed to do is basically to provide a stable money supply and not to try to be the engine of growth for the world.  It’s not working. Free money is the fairness method of handling economic problems created by the politics of fairness. Because if you have below market interest rates you’re giving money away – and you create asset bubbles. But asset bubbles don’t create real growth. That’s the one thing central banks can’t do. They can create assets bubbles, they can slow the economy, they can prick asset bubbles, but they can’t grow the economy. Zero interest rates only raise the market value of financial assets. But they don’t raise incomes. So it’s basically welfare for rich people.

And what about negative interest rates?
Negative interest rates are a total disaster. They don’t prompt people to spend more, they prompt people to save more because they’re fearful about the future. People can’t earn anything, they lose money on their savings. And if you push negative rates far enough down what happens is that people just hoard physical currency. You can see that already to some extent in Japan: People buy safes and they put currency away. Ultimately, if you push interest rates far enough into negative territory, people take money out of the banking system and the banking system could collapse. So far, negative rates are not very negative but if you start having negative interest rates of one, two or three percent, that’s when the banking system really gets exposed.

So far the Federal Reserve seems to dismiss negative interest rates. What’s next for monetary policy in the United States?
If the economy is as weak is I have been saying than I would expect a new form of Helicopter Money coming to the US. I’m not sure exactly what it will look like. But given that the economy is slowing and our wage and salary numbers say that there is no growth in income I would expect Helicopter Money. And since what really runs the market is the Federal Reserve and other central banks this would then levitate stock prices once again. Therefore, I expect market volatility on both sides to be rather severe.

How should investors prepare for that?
As a long term investor you should buy stocks of companies which generate strong free cash flow. Don’t worry about the market volatility because longer term the design purpose of businesses is to growth cash. In a fiat currency world, companies that are growing rapidly are a good store of value. Also, historically, if you had only bought companies growing free cash flow you would have outperformed the market. So if you buy free cash flow companies in a volatile time you will do better than the market and you will sleep better. That’s also why I wouldn’t touch stocks like Tesla (TSLA 1'129.28 -0.68%) for example.

What stocks do you own personally then?
Around 10% of my portfolio consists of gold because it’s a store of value, too. With respect to stocks, I recently sold my position in Apple (AAPL 162.66 +1.51%). But other than that, I have owned the same stocks for three or four years now. I still own Facebook (FB 328.95 -2.69%), Amazon (AMZN 3'522.92 -1.09%), Salesforce.com and Google. So in essence, my portfolio consists of gold and companies that are growing rapidly, even if it doesn’t look like it sometimes. Salesforce.com for instance doesn’t have earnings but their cash is growging a lot. Amazon invests its cash flow in growth. [info 3R]Not every venture they do works out but they’re very successful in creating rapidly growing new sectors and Mr. Bezos is a brilliant entrepreneur. Also, Google is creating demand in areas that didn’t exist before.