- Charles Biderman, a 30-year market veteran and founder of TrimTabs Investment Research, thinks we’re in the midst of one of the craziest equity bubbles in history.
- Biderman leans on unprecedented Federal Reserve policy, peculiar consumer behavior, and blatant market speculation to bolster his thesis.
- He says the economy “is probably going to be underwater for several years.”
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It’s safe to say that 2020 has been a peculiar year for markets.
Despite a global pandemic, a 30 percent-plus stock plunge, 13% unemployment, and an economy that’s mostly still closed, the S&P 500 is trading less than 5% lower year-to-date.
Charles Biderman, a 30-year market veteran and founder of TrimTabs Investment Research, can’t believe his eyes.
“What I really see is a lot of air going into a balloon — and that bubble, or balloon, is growing and growing,” he said on the “Money Life with Chuck Jaffe” podcast. “Did we have the ultimate pop the other day, or a temporary pop?”
The “pop” Biderman referred to was the June 11 drawdown that occurred after the Federal Reserve warned that the pandemic could permanently damage the economy. The S&P 500 closed 5.9% lower, the Dow Jones Industrial Average lost 6.9%, and the Nasdaq dropped 5.3%.
All three indexes have since rallied.
“Money is going into financial assets,” he said. “Most of that money is being created by the central banks.”
He continued: “There’s so much liquidity. And, no surprise, the markets are up by several trillion dollars in market value … the equity markets — and that has nothing to do with the economy.”
In essence, Biderman thinks Federal Reserve policy has widened the chasm between the prevailing market environment and the underlying economic reality, which in turn is leading to some incautious conduct. But in his mind, that disparity can only last so long.
Here’s a quick recap of the Fed’s major actions since the beginning of the COVID-19 crisis.
- Returned interest rates down to zero
- Announced unlimited quantitative easing
- Started purchasing corporate bonds
- Announced an initiative to buy state and local government bonds
“We’ve been in a 1% or 2% growth rate, sustained only by money printing by the central banks,” Biderman said. “And how do we counteract all the laying off and shutting down of the economies? ‘Let’s print more money!'”
To further back his thesis, Biderman cites unusual consumer behavior that he thinks is attributable to appreciation in asset prices.
“Would you believe that pre-tax wages and salaries are down 12% year-over-year?” he said. “In a world where it’s 12% down, car sales and new home sales are spiking. So there’s no money, no income, but car sales are going up. Housing prices are going up. That can only mean that people are using money, borrowing money, or putting excess liquidity into assets and not worrying about making an income. Now how sustainable is this?”
In addition to bizarre consumer behavior, Biderman also notes blatant speculation taking place in markets.
Hertz shares more than tripled after the company announced bankruptcy on May 22, bottoming out near 55 cents per share on May 26.
“I got to mention my favorite story. I mean, this is one of the classic, all-time classics — called Hertz,” he said.
To Biderman, market participants are simply trusting the US government and Federal Reserve to bailout institutions that have come under pressure due to the virus.
“This is going to be written up as one of the nutsiest bubbles in the history of bubbledom,” he said.
With all of that under consideration, Biderman isn’t forecasting a quick, snap-back recovery in the economic outlook. In fact, he says the economy “is probably going to be underwater for several years.”
“Even if it gets back to 90% next year, a 10% decline is enough to bankrupt many companies,” he said. “Margins are not 10% over costs across the globe.”
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