A 30-year market veteran explains why we're in 'one of the nutsiest bubbles in the history of bubbledom' — and warns of an 'underwater' economy for the next several years
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." Click here to sign up for our weekly newsletter Investing Insider. Click here for more BI Prime stories.
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." Read more:
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Billionaire Seth Klarman says Fed aid 'infantilized' investors and decoupled the stock market from fundamentals
The Federal Reserve's emergency relief efforts are driving a "surreal" stock rally as prices decouple from...The Federal Reserve's emergency relief efforts are driving a "surreal" stock rally as prices decouple from fundamentals, Seth Klarman, the manager of the hedge fund Baupost Group, said in a letter seen by Bloomberg. The S&P 500 surged on the central bank's policy announcements in March and continues to stay near highs despite worsening economic data. "Investors are being infantilized by the relentless" relief efforts, Klarman wrote. "It's as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene," he added. Visit Business Insider's homepage for more stories. The Federal Reserve's unprecedented monetary easing is fueling a "surreal" market rally and treating participants like kids, the hedge-fund billionaire Seth Klarman said in an investor letter seen by Bloomberg. The central bank's credit facilities, liquidity injections, and rate cuts helped stocks reverse their sharp bearish tumble in March. The S&P 500 now stands slightly higher year-to-date, though COVID-19 infection rates have recently soared and economic data has pointed to a longer-than-expected recession. The Fed's measures are to blame for such rampant dislocation between stock performance and economic trends, said Klarman, who runs the Baupost Group. Read more: 200-plus money managers pay thousands to set eyes on Jim Osman's stock buy list. Here are 2 he says are set to soar — and an under-the-radar IPO to keep a watch on "Investors are being infantilized by the relentless Federal Reserve activity," Klarman wrote. "It's as if the Fed considers them foolish children, unable to rationally set the prices of securities so it must intervene." He continued: "When the market has a tantrum, the benevolent Fed has a soothing yet enabling response." The fund manager noted Baupost gained in the second quarter by selling positions "as prices rallied strongly." Still, Klarman raised concerns about how the market would trend as economic gauges sour. Read more: GOLDMAN SACHS: Buy these 26 stocks now to crush the market as an 'overvalued' dollar continues to weaken in the months ahead Business fundamentals "are often dreadful," and one has to wonder when prices will once again react to the greater economic backdrop, he said. "As with the 30-year-olds still living in their parents' basements," Klarman wrote, "we can only wonder whether the markets will ever be expected to make it on their own." Now read more markets coverage from Markets Insider and Business Insider: Portfolio manager Jason Tauber is outstripping the market's returns in 2020. He says these 3 high-growth companies have 'hidden assets' that could make them far more valuable than most investors believe. Oil prices tumble 6% amid fading hopes for a smooth improvement in global demand 'All rests on the iPhone 12 supercycle': Here's what 5 analysts expect from Apple's quarterly earningsJoin the conversation about this story » NOW WATCH: Why electric planes haven't taken off yet
The stock market climbed for a second straight week, ignoring gloomy economic forecasts and bleak data...The stock market climbed for a second straight week, ignoring gloomy economic forecasts and bleak data as traders find a silver lining in the Federal Reserve. In recent weeks, the Fed has used both old and new programs to ensure credit flows where it's needed, signaling to investors that the public health crisis won't necessarily translate into a financial-market collapse. While the central bank's spate of relief efforts haven't directly lifted stocks, the policies "definitely had ripple effects into the equity market, no question about that," said Liz Ann Sonders, chief investment strategist at Charles Schwab. The Fed's policies "precluded the prospect of a complete economic collapse," leading traders to revive their risk-on views, Goldman Sachs analysts said in a recent note. Visit the Business Insider homepage for more stories. The stock market seems unshaken as signs of a deep coronavirus recession pile higher and higher. As quickly as the S&P 500 spun out of its 11-year bull run, it's soared out of bear-market territory and surged 29% in just over three weeks. This recent divergence between stocks and the economy has been jarring. How is the market so nonplussed by the mounting recessionary wreckage? Look no further than the Federal Reserve. Over the last several weeks, the central bank has shown it will go to unprecedented lengths to stimulate the economy and prevent further market disruption. Those signals have, in turn, stabilized stocks and allowed them to retrace a significant chunk of their post-coronavirus loss. Put simply, the Fed has been indirectly backstopping the stock market by reducing investor worries around how much the coronavirus lockdown will hurt corporate profits and strain outstanding debt. More than ever before Monetary relief efforts kicked off in mid-March when the Fed announced plans to inject up to $5 trillion into stressed money markets. Days later, the Fed slashed its interest rate close to zero for the first time since the financial crisis. In the following weeks, the authority created lending programs for small employers, households, and large businesses to aid cash flow. Purchases of Treasury bonds and mortgage-backed securities added additional liquidity to the crashing markets. Read more: 'I've gone to cash': Mark Cuban outlines his coronavirus investing strategy ahead of another 'leg down' in markets — and says now is the time to buy real estate The Fed announced a $2.3 trillion package on April 9 to bolster lending and begin buying corporate debt across a range of credit ratings. The policy salvo surpassed the Fed's entire financial-crisis playbook in a matter of weeks. Stock prices continued ticking higher over the period, with traders cheering relief programs as an indirect safety net for the battered equities market. The central bank was responding to a historic glut of negative economic data, all of which points firmly to an imminent recession. Many experts have said the US is already mired in one. Unemployment claims made over the past four weeks have nearly erased all jobs created since the financial crisis. Retail sales plunged by a record 8.7% in March as the virus kept shoppers at home. Consumer comfort suggested weak revenues were still to come as Bloomberg's index slid to its lowest level since before President Donald Trump was elected. The International Monetary Fund projected on Wednesday the world economy would shrink by 3% in 2020, making the "Great Lockdown" the most severe recession in nearly one century. The economic downturn could even last through 2021 in the event of a COVID-19 resurgence, the organization said. Still, when cracks began to appear in the Treasury market, the Fed stepped in by buying notes. When small businesses showed increased risk of bankruptcy, the central bank formed new credit facilities. In the wake of credit-market chaos, the Fed said it would begin buying bonds. Read more: Bank of America breaks down how to build the perfect post-coronavirus portfolio — one designed to recover losses and get ahead of an eventual economic recovery The corners of the economy may not be directly linked to the equities market, but the message is clear: pain is being addressed. "The carnage being alleviated there, by virtue of what the Fed did, definitely had ripple effects into the equity market, no question about that," Liz Ann Sonders, chief investment strategist at Charles Schwab, said in an interview. The turning point for Goldman The Fed's latest stimulus effort — the aforementioned $2.3 trillion economic aid package geared towards small businesses and local governments — was a major turning point in Goldman Sachs' stock market outlook. In the days after the announcement, Goldman published a report saying the central bank's stimulus efforts have set a sturdy floor under risk assets, and declared that the stock market had already bottomed. The analysts in turn boosted their year-end S&P 500 forecast to 3,000 by year-end. "The Fed and Congress have precluded the prospect of a complete economic collapse," the team wrote. "The numerous and increasingly powerful policy actions have spurred equity investors to adopt a risk-on view." They continued: "The Fed and Congress have precluded the prospect of a complete economic collapse. Investors have been encouraged by the 'do whatever it takes' approach of the Fed." Read more: GOLDMAN SACHS: Stocks are expected to see unprecedented moves this earnings season. Here are 18 under-the-radar trades that could pay off big. While the central bank never directly aimed to boost the stock market, its actions have sent a clear signal to investors worried of rising default rates and closed-off credit lines, Seema Shah, chief strategist at Principal Global Investors, said in an interview. By consistently providing monetary aid, investors see the bank living up to its promise to act "forcefully" in keeping the economy afloat. "They have, in some ways, set up a backstop," Shah said. "For example, if you feel like there are significant strains building up in one important segment of the market, at this stage it's fair for a lot of market participants to expect the Fed to intervene in that part." After trillions in aid, what comes next? One drastic additional step for the Fed would be to directly prop up the stock market by buying stocks. But Rich Steinberg, chief market strategist at The Colony Group, thinks this is unlikely. He believes such a measure would throw too large a wrench into regular operations. "Investors are conditioned for markets to buy dips, and I think it would be problematic if the Fed directly supported the equity market," Steinberg said in an interview. "I think they're going to try to stick to their mandate as much as possible." So can other additional stimulus efforts from the Fed continue to boost stocks? Shah says that ultimately depends on whether the coronavirus threat subsides to a point where economic activity can resume as normal. In other words, no matter what the Fed does, the virus will dictate the terms of further equity gains. The Fed's policies "are able to help the market functioning," Shah said, noting that a return to normal corporate profitability relies primarily on how quickly the economy can recovery. Read more: Morgan Stanley handpicks the 18 best US stocks to buy now while they're cheap to enjoy profits for years to come Profits — historically the biggest booster of share prices — depend on revenue recovering to pre-outbreak levels. Consumer activity will react on its own once lockdowns are lifted, "with or without the Fed help," Shah added. But don't count the Fed out completely. There's still time for the market to enjoy more Fed-induced optimism. The Fed has roughly $250 billion of available capital it can lever up as much as 10 times to either enhance existing stimulus programs or launch new ones, according to Bloomberg. Recent history also shows the central bank isn't afraid to write its own rules when the situation requires it, Sonders said. "Based on what they've already announced, they haven't exhausted all of the bullets," Sonders said. "Let alone the fact that, as we've learned, they can launch a whole new set of facilities if they need to." 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'Don't be stupid right now': The legendary author of 'Rich Dad, Poor Dad' breaks down why a coronavirus-led depression is inevitable — and shares the 3 investments he's making to stay safe
Robert Kiyosaki, author of the best-selling book "Rich Dad, Poor Dad," wants to have his money...Robert Kiyosaki, author of the best-selling book "Rich Dad, Poor Dad," wants to have his money as far away from Wall Street as possible. He thinks the US is "obviously" on a one-way street to depression as the coronavirus exposes inherent weakness and inefficiences that have built up within corporations. "Don't be stupid right now," Kiyosaki said. Click here for more BI Prime stories. "We've been warning people for years." That's what Robert Kiyosaki — the legendary author of "Rich Dad, Poor Dad," one of the top-selling personal finance books of all time — said on the "The Pomp Podcast." He was referring to the disarray in financial markets that's been prompted by the coronavirus. Kiyosaki's long-felt uneasiness is easy to explain: He's seen questionable practices being implemented on Wall Street for years — and he hasn't been particularly keen to put his hard-earned dollars to work in an environment he doesn't trust. He's instead loaded up on assets that are either largely immune from the broader financial system, or outside of it entirely. Kiyosaki is especially skeptical of the stock market. His reluctance to investing in stocks and other traditional risk assets stems from what he describes as a toxic combination of bad leadership, short-termism, easy money, and mismanagement. He's particularly perturbed by the level of debt taken by companies without a clear long-term plan. In Kiyosaki's mind, the coronavirus outbreak was simply the final catalyst that kickstarted a broader unwind and exposed the bad actors. "They've basically taken AAA corporations, dropped them to BBB, next stop is junk — and those are CEOs of Ford Motor Company, AT&T, GE, IBM," he said. "They've ripped off not only you and I, they've ripped off the pensions; they've ripped off their shareholders; and they've ripped off their employees. They're bad leaders." What Kiyosaki is implying is that corporations have long feasted on easy lending conditions to amass unsustainable debt loads ill-equipped for a sharp economic downturn. He also argues that — through practices like share buybacks — these firms are boosting stock prices at the expense of reinvestment, then hitting the eject button when the going gets tough. Both practices have drawn the ire of experts since the coronavirus meltdown began in earnest. Firms like Charles Schwab have warned of BBB-rated bonds — which sit on the lowest rung of investment grade and are at risk of downgrades to junk — swelling to a record portion of the market. Meanwhile, share repurchases — long utilized by companies to boost stock prices during times devoid of other positive catalysts — have come under renewed fire. As industries such as airlines clamor for a federal bailout, many high-profile officials are trying to ensure that money can't be used for buybacks. "The big crash is in shadow banking system and corporate credit," he said. "Trust in the CEO who's borrowing corporate money, taking a corporation — like GE — from AAA to BBB, buying shares, boosting their share price, exiting with stock options … paying capital gains tax versus ordinary income taxes. The average person has no idea what I just said. What I'm saying is: You just got ripped off." Today, the confluence of coronavirus, a shutdown economy, and overly-leveraged corporations leads Kiyosaki to only one conclusion: "Obviously, we're going for a depression." Where he's putting his cash to work Back in January, due to his inherent skepticism over the actions he was seeing manifest on Wall Street, Kiyosaki warned that investors were "being set up" and that he "wouldn't touch mutual funds, ETFs, and stocks." Today, he's positioning his capital as far away from Wall Street as possible. "We were prepared for it," he said. "It's gold, silver, and bitcoin. The reason is your off the central banking system." Kiyosaki thinks the extreme stimulus measures taken by the Federal Reserve in recent months are destroying the soundness of the US dollar. In fact, he refers to the Fed as a highly-educated "cartel owned by the richest people in the planet." With the implementation of trillions more in economic relief coming down the pike, Kiyosaki wants to make sure his assets' value won't be eroded the Fed's printing press. What's more, in addition to the assets mentioned above, Kiyosaki also advocates for an investment in real estate to help weather the impending economic storm. "With this the crash coming up again, there's going to be a lot of good real estate coming up" he said.SEE ALSO: 'The great unwind': A hedge-fund chief overseeing $2 billion explains how a ripple effect could take down the housing market — and says 'we're just at the beginning' Join the conversation about this story » NOW WATCH: A big-money investor in juggernauts like Facebook and Netflix breaks down the '3rd wave' firms that are leading the next round of tech disruption