This is the transcript for the podcast Charles Biderman: The Problem with Rigged Markets
Chris Martenson: Welcome to another Chris Martenson.com podcast. I am your host of course, Chris Martenson. The issue before us as investors are as daunting today as they can possibly be. And my position has been that today, we are all speculators, not investors. Because we have been placed in the uncomfortable position of trying to guess what the Central Banks are going to do next. Also weighing on investors today is the fact that our official data is what I call fuzzy. That is, it is often statistically massaged to make things look a little bit rosier than they otherwise might. To help us sort through both of these investment challenges, is Charles Biderman, Founder and Chief Executive Officer of TrimTabs Investment Research, an independent investment research firm based in Sausalito, California. He is routinely interviewed on all the big financial media, and is someone I follow quite closely because his approach is to follow the base data and let that tell the story. Founded in 1990, TrimTabs Investment Research is the leading independent institutional research firm, focused on the supply and demand of shares and stock and money available for investment, that base data, I really want to get to that today. Welcome Charles, it is a real pleasure to have you as a guest today.
Charles Biderman: Well, good to be with you.
Chris Martenson: Thanks. Hey let us begin with your background so the people can appreciate first the depth of your knowledge and experience, and then why it is, that you follow the fundamental data sources that you do.
Charles Biderman: You mean you want me to fess up that I am really very old.
Chris Martenson: If that is how you want to approach it, sure.
Charles Biderman: Well my first job after graduating Harvard business school was not what everybody does. I became Alan Abelson’s Assistant at “Barron’s Financial Weekly.”
Chris Martenson: Hmm
Charles Biderman: And so as the terrific post graduate education in how the markets really work, and from there I ended up having to become an entrepreneur because Harvard wanted me to repay my student loans at the time, which you could not do on a journalist salary.
Chris Martenson: They did
Charles Biderman: So I actually had been predicting a collapsed in the REITS market in the early 1970’s so all the money had gone in and then a huge amount of construction and interest rates in 1973 went from 7% to 20% as the first energy price shock hit, and oil prices went from $3.00 a barrel to $30.00. And so I participated in the collapse of the Real Estate Market and then bought bunches of properties, six shopping centers, a thousand apartments, two office buildings out of foreclosure in the south when I was in my late twenties. And I moved back to New York, whatever, ended up going broke in ’87, when the real estate market, I had reinvested, sold most of the south, reinvested in Jersey, and when the REITS and the banks collapsed, the S&L’s collapsed, I mean in ’87 my banks went under. I had a positive net worth but I was forced to declare bankruptcy. And I realized that price as a function of liquidity having nothing to do with value. And I was not foreclosed on, and I could have sold my properties for a nice profit but my banks went under and the banks, and all the loans were called. So using that background, I decided to look at the market based on supply and demand and realized no one had ever been looking at the stock market in terms of well there is not a market, it is shares of stock, and there is money available to buy those shares. And so that is what we have been tracking ever since.
Chris Martenson: Well, I like that idea a lot, that price is a function of liquidity, not fundamental value. So let us move now to some of that data and what it is telling us. And that might be different from what, both I guess, two things I want to track today if we have the time. One is how our official unemployment numbers maybe are tracking differently from the based tax data. But for now, I would like to start with what stocks are signaling. Hey they are just 10% away from their all time highs. We are looking at that, is this truth or fiction.
Charles Biderman: Well, it, if the Fed and the other global central banks had not created ten trillion dollars of paper money in the last, since ’09, we would not be talking about a stock market 10% below the all time high. Since last October, last six months, the value of all stocks is up like almost four trillion dollars. And since last October, the increase in take home pay for everybody who pays taxes on a job, is up maybe 200 billion, at a 200 billion annual rate of increase. So we are talking about a huge increase in wealth, only for people who own stocks. And why did that happen, we the Fed pumped huge amounts of money into the economy, companies ended up with huge amount of cash on their balance sheets, and starting in August, they have been spending huge amounts of money, billion eight a day net of all new share sales, buying back their own shares. In other words they are reducing the number of shares out there, giving shareholders cash for their holdings, and so shareholders, 80% of the Russell 1,000, the largest companies, are held by institutions. And those institutions typically have 3% cash so if someone buys back their shares, they have to replace those shares, so there is more money chasing fewer shares. So supply and demand, more money chasing for your shares, the price of the remaining shares should go up.
Chris Martenson: So many of these companies have been tapping the capital markets as well for debt, obviously generational interest rate lows, so they have had access to this liquidity which is coming through the Fed. What did you say, a billion eight a day?
Charles Biderman: A billion eight a day since August.
Chris Martenson: Wow, where had the retail investor been in this story?
Charles Biderman: Taking their money out and spending it probably on living.
Chris Martenson: And what, how does those money flows track, how do they compare.
Charles Biderman: Well we see out flows of U.S. Equity Mutual Funds. I was just talking before we spoke with Bob Pisani from CNBC, him wanting to know, when are individuals coming back. I said well, they came back in the first quarter of last year and then got slammed as the market sold off in April. Last year the market was up over 10% the first four months and then got slammed, this year the market is up over 10% and individuals are saying, hey I have seen this movie already, I do not want, this sequel is not appealing to them.
Chris Martenson: Well in the work I do, I get to interact with a lot of people who are investors and they have, there is a fundamental lack of faith out there. There is actually more than that, there is fear. There is concern that the markets are rigged in some important ways, that there is asymmetry of information that the computerized bots, what ever it is that is going on out there, maybe that the regulators are not really watching out for everybody with equal interest. Whatever the source of fear is, I know a lot of people have lost faith in the markets, but not the institutions apparently and not the companies who are buying back shares, huh?
Charles Biderman: Well the market is rigged. I mean in January of ’10, I went on CNBC and on Bloomberg, that there is no money coming into stocks, and yet the stock market keeps going up. The law of supply and demand still exists and for stock prices to go up, there has to be more money buying those shares. There is no other way in aggregate that that could happen. So I said it has to be coming from the government. And everybody thought I was a lunatic, conspiracy theorist, whatever. And then lo and behold, on October of 2011, Mr. Bernanke then says officially, that the purpose of QE1 and QE2 is to raise asset prices.
Chris Martenson: Uh-huh
Charles Biderman: And if I remember correctly, equities are an asset, and bonds are an asset. So asset prices have gone up as the Fed has been manipulating the market. At the same time as the economy is not growing, or not growing very fast or growing roughly at the rate of inflation, and I am talking about wages and salaries, I totally ignored GDP because it is a ridiculous number if anybody looked at it. And the only reason everybody uses it is because everybody does not understand what they are talking about, and no one wants to do the work to understand that GDP is a useless indicator. So we look at wages and salaries, real time income, to me is the best indicator of income.
Chris Martenson: What a preposterous notion, but since we are there, what are wages and salaries telling us right now?
Charles Biderman: Wage and salaries are growing at between a half, you know, under 1% faster than inflation. Wages and salaries, and our most recent data, like 3.5%, 3.7%, in that range, and inflation is whatever, 2.93%, pick a number. So if nominal wages and salaries for everybody who has a withholding, who has income taxes and employment taxes withheld from their paychecks, which is all 132 million people on the payroll, included in the payroll survey by the BLS, and emphasis on the word survey, that wages and salaries are barely growing. In reality, we are at about at $6.3 trillion after tax income for everybody. While that is up from $5.9 trillion at the annual rate of the early 2009 low, it is still well below the $7.1 trillion peak. In ’07, $7.1 trillion take home pay for everybody who pays taxes and the gap between the two right now is still a capital gains have disappeared as the real estate market disappears. And you know, the bureau of economic analysis does not include capital gains in their income data, because it is only dirty capitalists who have capital gains I guess, I do not know.
Chris Martenson: Uh-huh alright so, in this…
Charles Biderman: I do not know why they do not include it.
Chris Martenson: Alright well we do not include the increase in debt when subtract that off of our GDP, so I do not know, maybe we just ignore very big things sometimes.
Charles Biderman: Well they use that bogey again, GDP.
Chris Martenson: Yeah, I know, with the fourth quarter deflator at .8% I was, that was all I need to know about that number. It just, obviously very far off of my personal experience, but also what I think a lot of very solid inflation data is coming to us through the companies that actually have to buy things and report their cost of goods sold. It is, we are seeing some extraordinary inflation, especially on the commodity exposed companies out there, you know, double digit, 10%, 11% kind of stuff, it is amazing.
Charles Biderman: Yeah, well you know, if you think about it, the dollars being debased by the printing of hundred you know, U.S. Government is spending $300 billion a month on everything. It pays bills, salaries, it collects $200 billion a month in taxes and everything else and it borrows $100 billion a month. But it does not really borrow $100 billion a month, because the $100 billion is added to the debt. It prints $100 billion and calls that debt.
Chris Martenson: Uh-huh
Charles Biderman: And then, you know, I would like to be able to run my business by printing money to pay my bills, a third of them, that would be good.
Chris Martenson: I would too, I would too. So in their collection, you mentioned the $200 billion a month that is coming in, talk to me very quickly if you could talk to us about the tax receipts and what those are signalling. And can we compare those to the unemployment figures that have been released.
Charles Biderman: Well the Bureau of Labor Statistics, the Bureau of Economic Analysis, and the Department of Census, use 1960 technology, surveys of the present compared to hard data from the past. The same way they have done this for 40 years, to determine income, sales, consumer discretionary spending, the savings rate, all those numbers are fudgy at best, to use your phrase. Since they ignore real time data like they do, the bureau of labor statistics does a survey of 400,000 employers, of which say 70%, only 70% is backed by the time they report the number of jobs for the month. And they true that survey to hard data that comes from state quarterly unemployment insurance collections, which is a quarterly number that gets to the BLS. The soonest is five months from the end of a certain quarter. Five months later, the BLS gets the valid number and then it benchmarks the past to that data. So in other words, the real numbers that they use is just a survey, and it can get 50% to 100% modified with, nine months, a year later and nobody even realizes or even, those numbers are pretty much ignored, but everybody focuses on their initial guesstimate, which even they say is not meant to be considered a real number.
Nevertheless, the Wall Street Journal says oh, 200,000 jobs have been created, like that is the truth, and not even that it is a seasonally adjusted number, which is another chance for mischief. Because to do seasonal adjustments, you have to, you know, why do you not use year over year numbers and forget seasonal adjustments, and why do you not use, and so, I am sorry, I am going all over the place. But to go back to the wages and salaries we track, when anybody who is on a job that gets a W-2, when the amount of income and employment taxes are withheld from our paychecks, it gets wired to the treasury from our banks. And when that money gets wired to the treasury, they report how much they collected. And so we track that data to report in the daily treasury statement with a lot of other daily treasury activity. However, embedded in that income and employment tax, collection package is how many people were working, what was gross pay, what was take home pay
Chris Martenson: Uh-huh
Charles Biderman: And by zip code, and by industry classification. So you have this huge amount of real time data on what is really going on in the economy, available, but ignored. And when I have been, for six years I have been saying, why do you ignore this, and their answer pretty much is mind your own business, we do not care what you think, and this is the way we have been doing it. And we like our paychecks, thank you very much.
Chris Martenson: So this data though, I love the idea of real time data, are there flaws in this, what are the wrinkles in this data set or are these wrinkle…
Charles Biderman: Well there is a lot, it is a survey.
Chris Martenson: No, no, no, not the BLS one, but in the daily treasury statement, the W-2 flows.
Charles Biderman: Well it has to be, we only get what the actual amount withheld. There are three reasons why the amount withheld, year over year would change. One is, that the people with jobs made more money so the amount of withholding goes up. Two, the people with jobs might have changed brackets because they made more money and so they are at a higher bracket, that is called bracket creep. Three, there might be more employees or less employees as people get hired and fired. So each month, on average, 4,000,000 people enter and leave the job market. In other words, on average, four people are fired, 4,000,000 people are fired, 4,000,000 are hired, and then in January and February, there are huge seasonal adjustments because of the weather. And so based upon like 1.7 million seasonal adjustment adds, in other words, there is, according to the geniuses at the bureau of labor statistics, they add a 1.7 million phantom jobs to those people working in February to balance, to make it like a level number with the rest of the year. And why 1.7 million, well based on the past, that is our best guess. And the fact that the weather was so great this winter, that does not, they will factor that in next year where in the numbers will be worse, whatever.
Chris Martenson: Uh-huh, so on the one—
Charles Biderman: Does that make sense what I am saying?
Chris Martenson: –absolutely, so on the one hand we have this survey which is seasonally adjusted on top of that, and on the other hand we have this base data, which might change for a number of reasons, bracket creep, people might actually be earning more in that case, or hiring/firing, things like that. But generally speaking we have these two things that we can compare. One is a survey that is adjusted, and the other is this W-2 income flow statement stuff that comes through the daily treasury statement. What is that data telling us right now?
Charles Biderman: Well, that the economy is limping along, it is barely growing, and if it was not for levitating equity and very low bond prices it probably would be even slower than it is. So in reality, all it looks to me what this $100 billion creation of new money a month, has been creating $200 billion a year increase in take home pay. Now, is that not weird, $100 billion, it takes $100 a month of newly created paper to boost take home pay by or a trillion deficit this year is going to be a $1.3 trillion I think is the current estimate.
Chris Martenson: Uh-huh
Charles Biderman: And it takes $1.3 trillion of newly created money to boost take home pay by $200 billion? What is wrong with this.
Chris Martenson: There is some sort of hole in the boat I guess.
Charles Biderman: You know, and if they stop the deficits, or and then now they want to increase taxes next year by about $200 billion to plug the deficit so wait a second. So incomes are up by $200 billion, and these smart people want to reduce incomes by $200 billion to raise taxes. And the stock market is within of 10% of all time highs, there is logic there isn’t there?
Chris Martenson: Well so this creates that growing sense of anxiety in the investor class, because obviously there is something that just does not quite add up here. And just to switch, open our view up just a tiny bit, jump across the pond for a second, is Europe fixed?
Charles Biderman: Well if by fixed you mean guaranteed to go down the toilet, yeah.
Chris Martenson: Okay,.
Charles Biderman: Yeah, Europe is the problem, I mean and Greece, the numbers I have read, doing some Google, is that of the little over 11 million Greeks still left who have not immigrated, close to 3 million are retired, and half of everybody else work for the government.
Chris Martenson: And of course with the austerity they are talking about slashing pensions and squeezing government salaries and thing.
Charles Biderman: And in Spain and Portugal, half the teenage, half the people under 25 apparently are unemployed. And what does that say for the future stability of that region.
Chris Martenson: Well, a generation lost, I do not know if that is a good thing or not. You know, my prescription on all of this, years ago, was that we suffered from something I can summarize in three words, which was too much debt. And this is a decades long phenomenon that this could build up.
Charles Biderman: Well I do not think it is really too much debt, I think it is the fundamental belief that government can be effective at providing cradle to grave, or even any services for its people. And all, even at that, name me one activity that government has ever been cost effective at providing one service. I mean the Post Office, fighting a war, look at these horrible tragedies, thousands, hundreds of thousands of people are being killed because this government thinks it knows how to fight wars.
Chris Martenson: Uh-huh well so when I say too much debt, what I mean is, well I do think an aggregator was too high, but I was watching our economy both at the private and the public levels, increasing its debt loads at a faster rate than nominal GDP growth, if we wanted to use that bogey right there. But however we track national income, we are increasing our debts faster than our income was increasing, and that is a math problem. Sooner or later that thing runs out of steam. And it was not just the U.S., it turns out a lot of Europe was doing that and Japan was a poster child for that. And it seems to be a phenomenon that is quite easy to fall into at the national, even the global level.
Charles Biderman: Well I do not disagree with the facts as you state them, but if you go back to why, if you go back to like starting in ’82, when the IBM PC or the personal computer first showed up, through ’07 you had a period of very rapid economic growth globally, and incomes grew very rapidly. You know you had PC, the internet, broadband, all that stuff. So when incomes grow rapidly, people take on more debt because oh look, my income is going up, I can borrow more. So you take on more debt and then all of a sudden, incomes crash and you have taken on all this debt because we kept assuming that our incomes would grow so we could handle the debt service. But the problem with assuming incomes are going to keep growing, if they stop growing, you are broke.
Chris Martenson: Uh-huh, well sooner or later you are going to have a slowdown, right, that is…
Charles Biderman: Yes, so that is my point, my point is it is not just income growth by itself, but it was income growth, I mean debt growth supported by rapid income growth. But then the income growth disappeared.
Chris Martenson: Yeah, so let us pretend I am an investor, which I happen to be. What does an investor do in this market, particularly if they have kind of, I have lost faith in a number of dimensions, one that our official data is telling me useful things that I can trust. And the second would be that the markets are operating in a fundamentally fair way, meaning you know where I lost it, was when I watched the big banks turn in 100% win ratios off of their trading desks, for whole quarters. Anything that has even the slightest bit of risk in it, you cannot have 100% win ratio in it, it is statistically off the charts.
Charles Biderman: Unless the market is rigged.
Chris Martenson: Unless the market is rigged. So I could go on, I have many other data points that suggest rigging is happening, so if we take that as an opening proposition, that the Fed is basically saying listen, we are going to do whatever it takes to get higher asset prices. Should an investor just say okay, I am along for the ride and follow, or how does somebody protect themselves against what seems to be a very, very risky proposition. If the Fed either succeed or fails at this, and if they fail, it is easy to conjure up some fairly dark scenarios for wealth destruction I think.
Charles Biderman: Well, we are going to be starting a retail newsletter where we are going to sell, I am going to sell my $10 a week, $9.99. What is Charles Biderman buying, selling, and thinking about the market. And so, if this were that, and the preamble to all of this is right now, well you have a situation where in reality the economy is not growing very fast but the government, but money is, paper money is, so a third of my assets are in gold and a small percentage of that in Silver, but mostly gold. And then given all that money printing, has to end up in inflation at some point in time. I have about a third of my assets in inflation-protected securities. And then since companies are shrinking the float, we started a fund called Trim Tabs Float Shrink ETF, traded on the New York Stock Exchange, ticker symbol TTFS, and it invested in 100 companies that are shrinking the trading float the most, and growing free cash flow and not borrowing to buy. So the average company in our portfolio is growing free cash flow at 11% a year, shrinking the trading float by 6.5% on an annualized basis, and while maintaining strong balance sheet. So we believe that the price of the share should go up by, in my opinion by 6% a year, even without more than the market, simply because those companies, the value of those companies, has not been diminished by the float shrink, if that makes any sense.
Chris Martenson: It does.
Charles Biderman: So I would dollar, if you are a long term investor, and I think that we are three to five years from the market bottoming, but I would still recommend buying stock if you have longer than a five time horizon on a monthly basis. And that is the type of equity exposure I would want. I also own some apple and some salesforce.com. Apple because you know the social media trends use it, everybody is using Apple, and salesforce.com is the most effective cloud participant. And those are two big growth areas, because I think the globe is going to continue to expand economically, but it has got this albatross of government created messes around our necks.
Chris Martenson: Uh-huh
Charles Biderman: And so I think I would have, I still have, even though I have a big loss, I have a small position and shorting the big banks. Shorting Europe and shorting the emerging markets, but totaling my 15% of my portfolio. So I am a little bit leveraged and the leverage is short, which I am losing money on but I am also making money on the other stuff.
Chris Martenson: Right, so that is your hedge in essence.
Charles Biderman: Yeah, I think at some point, when companies stop buying back shares and start selling more than they are buying, the market is going to crack regardless what the Fed does, at least initially.
Chris Martenson: Uh-huh
Charles Biderman: And so I just want to have some shorts in the water just in case I want to increase my exposure.
Chris Martenson: Okay, big macro question then, because a big exogenous risk here is that the U.S. Government has to fund $1.3 trillion a year, the Fed has been enabling that with their liquidity. Do you see anything out there that could force the hand of the Fed and the Federal Government, meaning is there any circumstance you can imagine, coming in the next year, where the wanted bond market could rebel. But what I really mean is that foreign participation in our bond markets would dry up and there would be some set of pressures that would prevent the Fed from doing QE3, QE4, QE5, whatever is necessary. Is there anything you could see that could create that kind of a risk. Because I still note that roughly 10% of our current GDP is deficit spending by the federal government. Maybe 8% I guess if I am being a little bit more accurate. But it is a pretty high number. Do you see anything that could possibly upset that gravy train as a real risk?
Charles Biderman: Yes, I think it will be, at some point the world is going to recognize the Emperor is naked. The only question is when, will it be this year, I do not think it will be before the election, I think there is too much vested interest in keeping things rosy and positive. And I just do not see it happening soon. However at some point, hard money wins out over phony money. And of the investor class or the capital, those with capital, which right now seems to be the emerging markets, they are buying gold and bouillon and they are not buying dollars. Or China appears to have slowed their buying of dollars, even though China might be having their own growth problems, or their own bad debt problems. But Singapore and all those other countries with huge cash flows, the emerging world, I would not be surprised maybe by 2013 of 2014 a non-US Dollar alternative currency by those countries might, you know, something will happen.
Chris Martenson: Uh-huh so you know, a market that is fundamentally running on fumes or in this case liquidity, which you call the funny money coming out, this is not a market my grandfather would recognize at all.
Charles Biderman: This is a totally unique market, we have never before had a market officially rigged. And acknowledge as such, and what is amazing to me is when you watch CNBC or even or Bloomberg TV and these guys come on bullish, the look at PE. Well the PE from or, when was the last, what was the PE the last time the market was rigged.
Chris Martenson: Hmm, we do not know, do we?
Charles Biderman: And what happens when the market is un-rigged.
Chris Martenson: Right.
Charles Biderman: You know, we are in strange, un-charted territory. You know the last thing I want to say, that I think is very important for people to realize, in 1981, before the market crossed 1,000, the Dow crossed 1,000 in early ’82, and stayed above that, the value of all U.S. Stocks was about $800 billion. And in October of ’07, it peaked at $22 point something trillion. And it is back up to $19.4 trillion. So in 1981, there was maybe 100 hedge funds or less, I am sure less. And maybe 100 or so equity mutual funds. And 3,000 stocks, you know, institutional size and sorts back then. Now there is still 3,000 stocks, but there is 4,500 equity mutual funds, 10,000 hedge funds. The real wealth created in the last 30 years has been in the equity market, not in earnings. I mean earnings are up several times, yeah, four or five times, take home pay is up, but the market is up 19-20 times.
Chris Martenson: Yep, on the back of all those boomers entering their peak earning years and pushing all that money into equity markets was one force.
Charles Biderman: Yeah, and we had technology breakthroughs.
Chris Martenson: Uh-huh
Charles Biderman: You know, the internet, broadband. Broadband, you know more people in the last 30 years have gone from calorie insufficiency to calorie sufficiency as a percentage of the population than going back to the first time we industrialized in the 19th century. So it is like this huge increase in wealth and calories and our goal across the globe, all that money went, a lot of that money went into the real estate markets and went into the equity markets, and boosted home prices, and stock prices dramatically, and now it is unwinding. All booms create excesses and excesses are painful as the excesses from the boom are worked off and worked out. And that is the process we are in, and in the past it has taken 13 to 17 years to work off those excesses. And we are still not even through year five.
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