“Like a drug addict, the stock market needs zero interest rates. So if the Fed does some more drug dealing it will get the market high again on a new form of monetary heroin.”
Tensions in the global stock markets have calmed. In the United States, the S&P 500 (S&P 500 4'464.33 -0.22%) has advanced more than 12% since the correction, and the index already takes aim at its record high again. In sharp contrast stands the economic development. Even in the US there are more and more signs of an accentuated weakness. «Things are crazy», is how Charles Biderman sums up this bizarre situation. «We’re seeing the impact of the global slowdown on the US and that’s going to continue», adds the founder of the research firm TrimTabs. In contrast to the mainstream view on Wallstreet he doesn’t think that the Federal Reserve is going to raise interest rates. The outspoken American even believes that the Fed is going to start a new stimulus program which will give stocks another boost.
Mr. Biderman, the US economy is sending mixed signals. How concerning is this situation?
The global slump is impacting the US economy more significantly than people realize. Our real-time data on the economy is declining and wage growth is the lowest it’s been all year. The TrimTrabs Macroeconomic Index for the US peaked in January and has weakened recently. It was up every year since 2011 but now it’s down year to date.
Is it even thinkable that the US will fall into recession?
It’s obvious that we’re in a significant slowdown. According to the technical definition, a recession is two quarters with negative growth in a row. So will the economy grow below zero? Could be. But anyway: What’s the big difference between minus 0,1% or plus 0,1% growth given how lagged the data is from the quarterly GDP numbers?
What does this mean for the Federal Reserve and its intention to raise interest rates?
Very few people would even consider this possible. But what I really think is going to happen is that the next Fed move is not going to be a hike. The next Fed move will be another form of easing. They’re not going to call it Quantitative Easing or QE, since QE has a bad reputation by now. So they’ll call it something else. I don’t know what they are going to do exactly. But it’s not going to be a tightening. As the global economy goes into a recession and the US follows, the Fed is going to do something.
For more than a year, the Fed is trying to prepare the financial markets for a rate hike. What would that do to the credibility of the central bankers if they back off now and actually take a U-turn?
Who says they have any credibility? The real problem is that the people who run the central banks are either economists or bankers. If you look at the record of global economists, they’ve been consistently wrong on the market and on the economy. At least in the United States, 95% of the economists surveyed have said at the start of each of the last five years that interest rates are going to end the year higher. Although they have been wrong each year, people keep listening to them. And when it comes to bankers, consider this: I went to Harvard Business school. The top students there went to firms like McKinsey, Boston Consulting or to the top Hedge Funds. So where did the graduates go who couldn’t get the top jobs? They went to the banks. So what you end up with is people just as greedy but not as smart.
The Fed already blinked at the September meeting. Why are they so hesitant to make a move?
If the economy continues to slow down going into an election year, the Fed will be under tremendous pressure to do something. They will not let the economy and the stock market slump. That’s why I think there will be further easing.
Why are today’s stock markets so heavily focused on monetary policy?
A simple way to look at market valuations is earnings divided by interest rates or cash flow divided by interest rates. So even if you raise interest rates only a quarter of a point that lowers the value of stocks. Also, once the Fed starts raising, it keeps raising. That decreases the attractiveness of flow trades into the stock market because now you can earn some money on your other assets. Right now, if you’re a corporation, your cash earns nothing. So you might as well use some of it to reduce your share count or to do a takeover. Both have been essential drivers of the bull market.
When it comes to the real economy, cheap central bank money seems not to be that beneficial.
Governments are creating headwinds for growth. So the best thing central banks can do to promote growth is to cut interest rates to zero or even lower. That can work for a little while. But now it’s creating a global recession because of all the excess capacities. Even if it doesn’t cost to build a new plant or drill new wells, when demand dries up you’re not making a profit. So even if interest rates are at zero you’re still losing money and you have debt on top of it. That’s why I say: Welcome to the first global recession created by central banks.
What should investors do in this environment?
All there is in a market is transactions: In the stock market, shares are sold for money. So if you track the number of shares outstanding and the amount of money available to buy shares, you should have a good sense of the market. And then you also have to understand that in every market the house has always an edge – or else the market wouldn’t exist.
What do you mean by that?
In the stock market, the house are the companies. They started markets to raise money. So they know more than investors by definition. And if companies are shrinking their share count with buybacks or cash-takeovers I want to be buying too. On the other hand, if companies are growing their share count, I want to be selling as well.
So what are you observing right now with respect to supply and demand?
Our data shows that buybacks are still growing. Recently they have slumped somewhat but they are still much higher than share sales.
And what’s going on with regard to cash-takeovers? It looks like that 2015 will set a new record for mergers & acquisitions.
A big cash takeover boom is typically what happens when companies cannot grow internally. So how do you keep growing if demand for your product is not growing? You buy a competitor, you cut costs and you add to profits. You can always cut overhead if you buy a competitor. And you have zero interest rates, so you can buy your competitors to keep growing. But that’s not real growth. Also, this is what happens on the top of the cycle when the economy is turning weak.
Why are you so pessimistic when it comes to the economic outlook?
It’s not rosy and the main problem why sustainable economic growth is not possible is all the headwinds to growth. From the United States to Europe and Japan: Everywhere you have hostile tax policies, regulations and a lot of anti-competitiveness from existing businesses. Ontologically speaking, growth occurs when something new happens. But in the United States for example, the ratio between companies dying and starting is now on the negative side for the first time ever.
So what does all that mean for the stock market outlook?
I don’t disagree at all with anybody who says the market’s overvalued and we’re way ahead of ourselves. So ultimately there will be a major correction. But that could be years from now. Even since the Fed ended QE, the market is still up a little bit. The reason for that is that the share count keeps going down. And as long as the share count keeps dropping, I expect the stock market to keep modestly rising. And when the Fed, instead of raising interest rates, announces some form of more easing next year that’s going to pop the market again.
What kind of equities do you favor with this kind of background?
I wouldn’t try to time the market. Long term, you should consistently invest into companies that are growing free cash flow, whether the market goes up or down. Over the years, if you only bought companies that are growing free cash flow, you would have outperformed, whether in the US or globally. And even though bad things are going to happen and the market goes down, you want to keep buying such kind of companies.
So what stocks do you own personally, if I may ask?
Facebook (FB 352.96 +2.02%), Salesforce.com, Amazon (AMZN 3'425.52 +0.28%), Apple (AAPL 146.92 +0.06%) and Google. These companies make huge amounts of money. Even if Amazon does not have free cash flow, it’s making huge investments in new areas of growth, trying to get some kind of critical mass in those areas. And at some point they’ll make huge free cash flow. For instance, they’ve invested huge sums into the Cloud and now they start to reap the benefits of that. Not every business they put money into worked, like the Fire Phone. But enough of them do.