Chris Martenson Interviews Charles Biderman: The Problem With Rigged Markets

Tyler Durden's picture

Submitted by Chris Martenson

Charles Biderman: The Problem With Rigged Markets

"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.

 

ill 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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kato's picture

no problem: http://www.youtube.com/watch?v=cA94LRnd0r8&feature=relmfu

just be at least connected to a big finance guy.

Vampyroteuthis infernalis's picture

The big boys require a bag holder to dump their overpriced shares on when they move to the exits. Currently, the number of suckers is low. It will be HFT vs insider vs market maker when the fire alarm is setoff.

neidermeyer's picture

I want front row tickets on that day...

Deo vindice's picture

He says, "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."

I vote for that as the understatement of the year.

WhiteNight123129's picture

Just possible: It is almost a certainty that a country which has only around 5% of the world population and see its share of world GDP shrink every year, and with its fiscal situation and irresponsibility toward the reserve currency other countries use, add to this that the second largest economy and largest creditor of the US is excluded from the world monetary discussions, you have aberrations everywhere in the current situation. The US dollar is just a dead man still walking a few steps.

centerline's picture

Don't blink.  When the the first big boy goes for the exits, the bots will squash everything in a matter of seconds.  I figure I will be reviewing it post mortem.  Looking forward to the Nanex report.

DeadFred's picture

You strike at the essence to the situation but are assuming someone does head for the exit.

"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. "

Bidderman is right, but the amount of money does not have to be huge as long as the volume remains a vaporous wisp and as long as NO ONE heads for the exits.

Explore the limits of the current Ponzi system.

SPY has a market cap of 100B selling at just north of $140/share

Two HFTs each have 1,000 shares and they are the only ones trading. To make average volume they have to trade those twenty lots back and forth every 2 milliseconds, piece of cake for them to do. After a full day of HFT meltup they've pumped the price of SPY up 10% (hypothetically). In order to increase the market cap of SPY 10 BILLION dollars each HFT only had to pony up $14,000 dollars from millions of micro-penny installments.

I know the premises here are never going to happen but taking the demise of market volume to the extreme demonstrates that it doesn't take overly much to ramp this market as long as no one jumps ship. This example becomes more realistic if you move the ramp ups to the futures market and let's say drive away futures players by hypothetically making one or more of the futures brokers go broke and vaporizing both the customers deposits and their trust in the markets.

If I were an evil group of Wall Street manipulators with the backing of the Fed and Treasury I would set about:

driving away retail investors (especially in the futures market)

driving away or co-opting the hedge funds

driving away the day traders, pretty much in that order.

But fortunately I'm not an evil Wall Street manipulator so what do I know?

The biggest problem is how do they keep big players from defecting best by defecting first? My conspiratoral mind hasn't come up with that one yet (but I'm still trying)

Peter Pan's picture

Are you serious? It will be like asking to be 500 metres away from where an atomic bomb goes off. Chances however are that trading on the stock markets will cease due to some "terrorist" act rather than allow them to melt. And the rest of the world will follow suit.

cowpieflapjack's picture

I want front row on the bot that rides the wave.

fonzannoon's picture

How about the trillions in 401(k) money? They say the average investor is out of the market? How come no one accounts for this? They get paid every 2 weeks  and they basically are dollar cost averaging in.

dark pools of soros's picture

and so many people dont realize how restricted that 401k shell game really is..  dumb money is what it is

IndicaTive's picture

Very restricted, and vague when it comes to the "market-timing" rules. Sitting in the stable fund for the entire first quarter, watching this joke of a ramp, I started looking through the documentation for the "rules." My plan overview says I can move $ between funds as often as I want, but dig deeper and there is some vague language that basically says if they think I'm timing, they may not allow the action. So I asked my plan sponsor, he said go ahead and move money. So I called Prudential, I could get no concrete rules, but the language is there. So I tested it. I moved money into a S&P Index Fund and a fund that benchmarks Russell 2000. A week later I moved it back. Then I got the letter and the rules. Any amount over 25k being moved out of Stable and moved into those funds, and then back out, in a 30-day period indicates market timing, and although they let the transaction go through, they may not in the future. That scares me. And now I'm probably on their radar. I'd like to now move some of my money into those funds if this Fed pump is going to continue, but with my luck I'll try to pull it back out and they won't let me, claiming market timing. Only the little guys are held to the rules.

spinone's picture

Do you think the money in a 401K is your money?  You misunderstand the way this works.

IndicaTive's picture

If I quit my job on Monday, do I not get a check minus the penalty upon request? I think I get your point, though. I slept in this morning and my sarcasm receptors are the last to catch-up.

LawsofPhysics's picture

There you go.  The paper-pushers have intentionally made sure that only they can "time" or "front-run" their own idiocracy.  Get physical and get to know your neighbors and then sleep well.  If your neighbors are idiots too, it is time to relocate.  There is still time for both as elections take time and so doers the transfer of power (which is really what all this horseshit is about).

Fail2Deliver's picture

I was actually put on "mutual fund probation" for 90 days. I had the audacity to trade in and out of the same fund three times in a 90 day period. They locked me out of moving my funds for 90 days. I would move my account but it from an employer (I am ocked in to using them) and I assume most other funds have similar rules.

They trade using your money, but dont want you to trade using your own money. Dont even get me started on how they let their buddies buy and sell the fund after market closes.

Awakened Sheeple's picture

Use it as a piggy bank via 401k loans until this all gets sorted out. Pay off debt, buy phyzz, land or whatever. There's no guarantee you'll ever see that money or that the guberment won't make you invest in "ultra safe" treasuries in the future. Starve the beast and put your money to work for you NOW.

Umh's picture

I know that most people set it and forget it, but some will have reduced contributions to make up for inflation in the real world, reset their allocations to buy more bond funds, become unemployed.

IndicaTive's picture

I reduced to the minimum match to free up money for hard assets.

I am Jobe's picture

401K is a big scam. The one who are holding 401K are cluless dumb fucks. I was too once upon a time. No longer do I contribute to the crap . How amny millionaires did 401K's make?

LawsofPhysics's picture

I guess that depends what side of the trade you are on.  I know several money managers who are millionaires but this does not make them any less stupid.

barroter's picture

"How many millionaires did 401k's make?"

I'm sure some of those on trading desks did well. The whole point is suckering more and more muppets to keep buying.  Those fees sure can add up and buy that house in the Hamptons!

Amish Hacker's picture

The real scam is that 401k plans let the employer off the hook and shift the retirement burden onto the worker.

It used to be that after 40 years chained to the corporate oar, you got a gold watch and a guaranteed monthly check for the rest of. Now you get "defined contributions" from your employer, but not a "defined benefit" that you can count on in your dotage. The success or failure of your investments is up to you, and will determine whether your retirement menu includes caviar and champagne or hot dogs and near beer.

nathan rothschild's picture

You are responsible for your retirement, always have been.   The very small period of time when companies paid your pension was only due to the large amount of cheap energy available that made it possible.   Those days are over, get over it.  And you'd better be saving somewhere - a 401K with 100% match ain't that bad.   Max it out and then cash it in and pay the taxes on it you still come out ahead.

gjp's picture

They already have their bag holder lined up, and said bag holder has been willingly holding the ever-heavier bag for some time now.  Of course, I am speaking of the public treasury, the 'taxpayer' (though this will never be settled in taxes, only currency destruction).

The big boys don't need retail.  They own the government and can keep stealing indirectly through debasement.  Why try to execute a direct snake-oil sales pitch to retail that is already broke and distrustful anyway?  The idea that retail will be sucked in here, or that the big boys even need it doesn't make any sense to me.

barroter's picture

I believe retail is one or both of the following. Broke and/or leary of Wall St and business in general.

BobPaulson's picture

The mom and pop investors (suckers) still haven't jumped back on board, so the sneaking out the back door by the inside traders has happened slowly. Is it just the pension funds that are getting fleeced? Still no mania.

For a mania to strike, we need a feverish "this time is different" mood to strike, and a sense from suckers that this is finally their chance to get rich fast. Since the housing mania, I haven't seen this at all. It can only happen if all the printed money comes flooding onto the market.

I guess the question is this: If the insiders know that stocks are overvalued and they want to dump them, what will they take in return? Gold? Could be. Will they buy up the real estate that has value for producing commodities? I mean, what the fuck will be worth holding onto if you are one of the mighty banksters trying to scam the retail dope? Clearly you get the government to buy all your bullshit paper that is worthless, then you have to take the money and buy something else before the money house of cards crashes down. Brazilian oil plays? Arctic diamond mines? Firearms manufacturing companies? Distilleries? Opium poppy farms?

oldman's picture

@BobPaulson

There is always a sucker at the table---if you don't see one----------------------------

Well, you know the rest and maybe, you will want to read this:

"The mom and pop investors (suckers) still haven't jumped back on board, so the sneaking out the back door by the inside traders has happened slowly. Is it just the pension funds that are getting fleeced?"

I am always pleased when others do this for an oldman

Respectfully, wishing you the best of luck                  om

mendigo's picture

The Bots must make the bankers a liitle nervous - what they did to BATS, could they pull that off with Facebook?

Retail has no business being in this game - but they will, Bernanke is setting the trap with only the best of intentions.

WTF Facebook 100bn valuation - does it get a seat on the IMF now?

I am trying to undersand the issues with ETF's and destabilizing markets and what I am coming to understand is that even these seemingly mundane investments are full of traps. It is my understanding that the feature that made the US economy resilient was trust.

bartek's picture

Nasty food scandal in Europe. Truly unbelievable. I guess fraud and corruption is the New Normal. http://ireport.cnn.com/docs/DOC-760662

dark pools of soros's picture

childs play compared to the shit in McD's.. and they toss in some lead painted toys as a bonus

FinalCollapse's picture

That's nothing compared to what we have in USA. If it were only the salt. Our justice system is on sale to the highest bidder. The difference between Poland and USA is that here we kill (or at least try) our whistleblowers.

Curt W's picture

How can a stock crash if there is no one there to buy it at a lower price?

RafterManFMJ's picture

Just like a plane when the wings fall off at 12000 feet?

LowProfile's picture

There's always someone willing to pay $0.01 a share.

ltsgt1's picture

If no one were there to buy at a lower price, the price would go to zero in a flash. That is why they call it flash crash.

The Big Ching-aso's picture

 

 

Yelling "Fire!" in a crowded theater of deaf viewers won't stop the show until they're actually on fire.

AssFire's picture

Seems it's 1929 all over again... The fake energy somehow managed to push the coaster to the top the tracks yet again. The potential energy has reached it's maximum and now this energy will be dissipating kinetically rapidly in vertical descent so hang on and keep your arms and legs inside the car at all times.

Keith Piccirillo's picture

As to market manipulation, we regurgitate Ritholtz post on the subject:

"Regardless, the argument that he cannot find the fund flows is easily explained by Mike Santoli — the action has moved away from Mutual fund flows, and to dark pools and hedge funds."

 

http://www.ritholtz.com/blog/2010/01/santoli-biderman-is-clueless/

Yardfarmer's picture

soooo...the Working Group on Financial Markets really does have clothes. what a relief. 

mkhs's picture

Then all retail is funneled through the dark pools?

mkhs's picture

 

"Regardless, the argument that he cannot find the fund flows is easily explained by Mike Santoli — the action has moved away from Mutual fund flows, and to dark pools and hedge funds."

 

This actually supports Biderman.  All the flow is in the dark pools: the FED would not work any other way.

Yardfarmer's picture

remember that actually no one ever recognized the fact that the emperor had no clothes except a little child who everybody tried to silence. no Charles, the world has never and never will recognize anything, but good show anyway and happy trading.

At that time Jesus said, "I praise you, Father, Lord of heaven and earth, because you have hidden these things from the wise and learned, and revealed them to little children.

Dollar Bill Hiccup's picture

I'd like to have a phantom job that pays me real money. When they figure that out, sign me up. It would be like getting paid not to grow Alfalfa (cf. Catch-22)

alexwest's picture

sorry, but even Mr Biderman is way off ..

he said "US gov roughly collects 200 bln per month, spends 300 bln per month"
well I'd agree on spending figures, but he is wrong about federal revenues..

in 2011 fin year (ends on Sept30 2011),. USE fed gov collected 2.040 bln in GROSS taxes, minus 465 bln in refunds... ( according daily treasury statement) , BUT ACCORDING MONTHLY TREASURY STATEMENT , issued a few weeks later, US fed gov collected 2.1 trln $.. so why is difference?

THE REASON IS US FED GOV COOKS THE BOOKS AND mask issued debt as revenues..
also US fed gov includes money made by FRS and count as revenues.

alx

PS
https://www.fms.treas.gov/fmsweb/viewDTSFiles?dir=a&fname=10093001.pdf
http://fms.treas.gov/mts/mts0910.pdf

Yen Cross's picture

 I filled my car up yesterday. Almost 80 usd! 5.0999! 

   And I had to clean my own windscreen! WTF? I should get a bag of peanuts and a hot dog for that.

mjcOH1's picture

A nice dinner and movie used to be customary.   Must be inflation.