Podcast

Charles Biderman: The Problem with Rigged Markets

Friday, March 30, 2012, 8:34 PM

"Even Wile E. Coyote had to come back down to earth sooner or later", says Charles Biderman, founder of TrimTabs Investment Research. In his opinion, the prices of stocks and bonds - enabled by excessive financialization of our economy and central bank money printing - have been defying gravity for a dangerously long time. 

If we continue to do all we can to preserve the status quo -- to maintain "phony" asset price levels as Charles calls them -- at best we will restrict overall growth and handicap the economy.

The problem isn't so much the unfairness and malinvestment evident in a rigged market. As Charles shrewdly asks: what happens when the market becomes un-rigged?

We've never experienced the unwinding of an entirely manipulated financial system, so we can't predict for sure. But at this point, a painful collapse of our markets and loss of the US dollar as the world's reserve currency seem entirely plausible.

On Market Manipulation

The market is rigged. In January of ’10, I went on CNBC and on Bloomberg and said 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. 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).

On the Future of the Dollar

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 phoney money. And of the investor class or those with capital, which right now seems to be the emerging markets, they are buying gold and bullion 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 -- seeing a non-US dollar alternative currency by those countries.

On the Challenge Facing Investors 

We are in strange, uncharted territory.

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, four or five times take home pay is up -- but the market is up 19-20 times.

Over that time, we have the boomers entering their peak earning years, as well as technical advances like the Internet. 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, and 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. 

Click the play button below to listen to Chris' interview with Charles Biderman (runtime 36m:10s).

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Charles Biderman is the Founder and Chief Executive Officer of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS). After earning his MBA from Harvard Business School, he began his career as Alan Abelson’s assistant at Barron’s from 1971 to 1973. There he predicted the collapse of real estate investment trusts (REITs). After Barron’s, he worked in the Wall Street short selling community and recommended shorting REITs on their way to perdition. In 1990, Mr. Biderman founded Market TrimTabs in Santa Rosa, California. 


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7 Comments

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
I love Biderman, Simple

I love Biderman,

Simple approach

Simple logic

Simple math

Simply very entertaining, this Podcast ,I laughed allot.

Note: For the first time in my life I paid cash for a new truck. I get clearence from my surgeon to chip and putt (only) this coming Friday, and baseball is in the air. Life with my Lady has never been better. I wish you all well.

BOB

KugsCheese's picture
KugsCheese
Status: Diamond Member (Offline)
Joined: Jan 2 2010
Posts: 1469
Mark-to-Market is Answered and Let's Party

So Charles B. confirmed that American banks still have a suspension of mark-to-market for property assets.   What really surprised me is that Japanese banks still have suspended mark-to-market after twenty years.  Wow!  

The fiat money, especially after 1971, has so distorted the market that nothing makes sense.  So a bunch of core wealth was diverted to finance which was then juiced with leverage via fiat money printing and franctional-reserve multiplying.  When it is discovered that the King Has No Clothes, one would expect a building spiral of panic as selling builds.  Or can we just declare it a new world, and what was X is now 3X in fiat terms so all its well?

   LA Dodgers sold for $2B???

   $600M Mega Jackpot???

Let's get the party started!!!

RJE's picture
RJE
Status: Diamond Member (Offline)
Joined: Aug 31 2008
Posts: 1369
Biderman says gravity will eventually take hold...

...yep, he's right.

Back from Paris
David Kotok

We are back from Paris. The head is filled with new info. For the publicly available portion of the conference, see the GIC website, www.interdependence.org. The remaining comments will be my personal "takeaways" from both public and private conversations. By Chatham House Rule and Jackson Hole Rule, these words are attributable only to me. All errors are mine.

1. In my view, the situation in Portugal is unraveling. This may be the second shoe to drop in the European sovereign debt saga. Now that Greece has paved the way, the speed of unwind with Portugal may be much faster. I do not believe the markets are prepared for that. Runs are affecting Portuguese banks. Euro deposits are shifting to other, safer countries and the banks that are in those countries. Germany (German banks) is the largest recipient. Remember, deposits in European banks are guaranteed by the national central banks and the national governments, not the ECB. There is no FDIC to insure deposits in the Eurozone.

2. The issue is that Greece was supposed to be "ring-fenced." Notice how European leaders have stopped using that word. Their new word is firewall. If a second country (Portugal) restructures, the sovereign debt issues become systemic rather than idiosyncratic. That becomes the second game-changer. Systemic risk needs big firewalls. We learned that the hard way with Lehman and AIG, which were systemic, vs. Countrywide and Bear Stearns, which were "ring-fenced" – or thought to be ring-fenced at the time.

3. A game-changer was the use (not threat) of the collective action clause by Greece. CAC altered the positions of the private sector. It rewrote a contract after the fact. That is why Portugal's credit spreads are wide: the private-sector holders of Portuguese debt know that a CAC can be used on them, too. The same is true for all European sovereign debt. A re-pricing of this CAC risk is underway.

4. Private holders of Greek debt had several years to get out before the eventual failure. Those that did not get out were crushed in the settlement. Greece is now a ward of governmental and global institutions like the ECB, IMF, and others. It is unlikely to have market access for years. This is another game-changer. In the old crisis days, the strategy was to regain market access quickly and restore private-sector involvement. In the new Eurozone-CAC crisis days, the concept is to crush the private-sector holders, and that means no market access for a long time. Instead, we will have ongoing and increasing sunk costs by governmental institutions. Caveat: government does not know how to cut losses and run. Government only knows how to run up small losses until they are huge. Witness Fannie Mae in the US. Witness the sequence that allowed Greece to fester for years. Government does not know how to take the "first loss," which is usually the smallest lost. Government does know how to run up moral hazard.

5. The term moral hazardmeans the action is done today and the price is determined later, after the chickens come home to roost and crap all over the coop. That is the nature of government everywhere. By the time the chickens return, the political leaders have changed. Those who took the moral hazard risk are gone. Those who inherited their mess are blamed during the cleanup. That is where we are today in Europe. Hence, the political risk is rising daily. Elections could change these governments, and the new governments may repudiate the actions of the old ones. We expect more strikes and unrest. That is how elections can be influenced.

6. European debt-crisis issues are lessons for the US. They belong in the political debate. Both political parties are responsible for our growing debt issues. Bush ran up huge deficits. Obama continued them. Each party blames the other. Neither takes on the responsibility of their actions. We shall see how this evolves between now and November.

I am more pessimistic about peripheral Europe than I have been. All that my co-author Vincenzo Sciarretta and I wrote in our book several years ago is now being reversed by policies. In the beginning, the Eurozone benefited immensely from economic integration and interest-rate convergence. Now it faces disintegration and divergence. Reverse the chapters in the book and play the film backwards.

Can Europe find a stabilizing level and resume growth? Time will tell. Meanwhile, political leaders and central bankers are going to be tested again.

This ain't over. Yogi is correct.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Titters at the Bank.

I was listening to the radio this morning. They were talking about energy efficient houses.

The dictor said " And energy efficiency needn't cost a fortune. Take this small energy efficient dwelling for two with one bedroom; it only cost $400 000." (US$414 000).

Only half a $$Million? (forget the lifetime interest payments.) For a piece of tin to cover you head? Is it just me?

Later I heard the builder complaining about very tight margins! If the builder cannot turn cheap iron and cement cladding into a single bedroom dwelling for a half a million dollars, just who is laughing all the way to the bank? Could it be the Bank?

Woodman's picture
Woodman
Status: Diamond Member (Offline)
Joined: Sep 26 2008
Posts: 1028
market value

 I like the profound statement too about price being a function of liquidity not fundamental value.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
The Hollow-Point Argument.

Look what happened the last time someone tried to by-pass the Bankers.

Hitler's Germany was broke. He by-passed the banks and dealt directly with places like Argentina on a barter system. Meat for technology. No money, just a straight swap.

We can expect the worlds great nuclear power to lay about with a stick if another region tries the same trick.

It is my belief that Gadaffi was a salutory lesson to any country that wants to trade using gold.

And then the media will go into overdrive to rationalise the evil.

We cannot expect the big interests to go quietly into the good night. The American equivalent of the Gestapo has just bought millions of  .4 hollow-point rounds.

timeandtide's picture
timeandtide
Status: Bronze Member (Offline)
Joined: Apr 3 2010
Posts: 67
There is a tide in the affairs of men...

 The money flow of $1.8 billion a day is a compelling indication of disaster ahead given that it is not even being borrowed from other countries but is mostly being borrowed from itself i.e. thin air. In that sense the market is being rigged in the same way, for example, that naked short selling is a market rig.

I doubt the Fed is directly intervening in the market - it really does not need to. The banks have massive excess reserves which are not being loaned out and are only receiving 0.25% interest rate from the Fed. It seems far more likely that the banks and other institutions that have been the beneficiaries of Fed largesse are trading on their own accounts. The equities markets have been rising because every time there is a dip in the market, it is followed by a short squeeze. This is really quite normal.

The reason that the short squeezes are making hay for the short squeezers is that the majority of the sellers are short sellers rather than longs selling off their positions. If they were longs getting out then it would not be possible to squeeze them because they are already out of the market whereas the borrowed short needs to buy back to close the position. This says to me that the market is still essentially bullish. A top will hold when the shorts have had enough.The psychology of the market is still being driven by bullish sentiment which is, perhaps, a fear of missing out rather than a straightforward optimistic belief in the health of the future.

The idea, though, that the share market prices are driven by supply and demand is hard to entertain. As share markets rise, more and more stock enters the market as high prices induces existing companies to go to the market with offerings to raise more capital as well as the initial offerings that that increase as the market goes higher. Despite the fact that the market is only 10% from its all time high and has been rising for 3 years, the IPOs and raisings are quite limited. The bulls like to talk about the wall of worry, I am sure this is just a bear market correction - albeit a very deep one.

The market price is driven at the margin by psychology. All it takes is one buyer or seller to bid or offer a higher or lower price and the whole market moves. It does not take volume (i.e. demand) to do that. It does take volume to sustain a direction and volume has for the most part been quite low. However, the volume spiked up on Friday March 16th which was a down day for the Dow and Nasdaq but an upday (just) for the S&P500.  I would like to see volume increasing on a turn down from a top to have any faith in its significance.

Of course, there will be plenty who do not agree with my view of the way the market works. My view is essentially counter-intuitive in that I believe that as long as the shorts (who borrow stock to sell and have to buy back to close their positions) are active without the aid of longs selling out, then the market will always have a solid support level. It takes both of these groups of sellers to sustain a turn in the market - which is why an increasing volume on the downside is a very important indicator of whether any sort of significant top is in place.
 
The importance of psychology to the market is that, in my view - which owes to ElliottWave/Robert Prechter theory, whoever is driving the market is doing so because they are still in thrall to an optimistic mindset. This is where psychology gets complicated. Is it an optimistic/optimistic mindset driven by a simple optimistic belief or is it an optimistic mindset driven by fear of missing out? The latter is a mindset of hope rather than real belief. I believe that since March 2009 we have been in a market driven by hope and fear of missing out.
 
This is the classic pull back or dead cat bounce of a bear market.  I believe that this is a mass phenomenon ( and always is) which not only propels peoples investment decisions but also propels decisions made by Congress, CEOs, central banks - in short everyone. It is really very similar to a tide and will eventually turn. There are no feedback loops - is just what happens. This leads me not to believe in the idea of market manipulation or any kind of conspiracy. I certasinly believe in the idea of insiders and special interests all doing their very best to take advantage but they will fail because there are stronger "tidal" forces which will overcome anything they might do.

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