Bernanke, Black Swans, and Perceived Truths
Charles Biderman is the CEO of TrimTabs, one of the top flow of funds trackers, and he recently released a video about perceived truths in the market. All markets, and those who manage the bulk of other people’s money within them, have always had their share of perceived truths, e.g. tech stocks can’t lose in the 90’s, and home value have nowhere to go but up in the 00’s. The problem with these shared beliefs is that market truths come and go (see below) almost always ending badly. Heck, even buy-and-hold is dead.
A recent example of a dying truth is that the rapid growth of China and other BRICs would, as Mr. Biderman puts it, “be the engine that would continue to pull the global economic choo-choo train for the foreseeable future into everlasting prosperity”. As seen below in the charts of industrial production, inflation, investments, and loan demand, China’s growth has already cooled substantially.
What’s the current perceived market truth that money managers are still clutching to? In the video, Mr. Biderman tells the story of a fortune teller who recently told him that a black swan will soon kill the “Bernanke put”. For those of you who don’t know, the Bernanke put is simply the idea that Fed Chairmen Bernanke and the FOMC will not let equity prices drop by very much. Why would portfolio managers be anything but fully invested, regardless of what is going on in Europe, when it is believed that the Fed will “always” the buyer, or really the provider of cash, of last resort. Clearly this is what is going on since the recovery in equities has been significantly strong than the recovery in economic data over the same period and every new substantial leg higher for the S&P 500 has followed central bank activities (see below).
The belief in the Bernanke put has been in place since 2009 and the Chairman basically admitted in October 2010 that the Fed was “committed to levitating stock and bond prices”. After being around for almost 3 years now, The cult of the Bernanke has managed to survive for almost 3 years now, and maybe through the end of 2013 at best, because underneath it there is another belief that sooner or later the US economy will grow fast enough to allow the fed to stop pumping newly printed money into stocks. However, as Mr. Biderman stresses, the headwinds are just too big and global and that rapid growth is almost impossible to happen any time soon. With most of the developed world printing money to pay bills, the amount of money being printed, created, borrowed, or whatever you want call it is just too big to ever be paid back by rapid growth and it has to be written off.
Finally, as with the death of most perceived truths, at some point in the future the black swan (in actuality a grey swan), reality, will bring about the eventual end of the Bernanke put and the whole thing will seem egregiously obvious with the benefit of 20/20 hindsight.
Source - Exabyzness