Nothing lasts forever, apparently not even quantitative easing.
On Wednesday, Fed Chairman Ben Bernanke threatened to take away the massive punch bowl that's been spiked with easy money juice.
There's no set timetable, but maybe there is. It's hard to interpret Fedspeak.
So maybe they'll start paring back their $85 billion a month buying spree, or maybe they'll jack it up, which is what Benny said only a few sessions ago.
What the heck is he doing? What are they doing? And who are "they" anyway?
Here's the deal…
"They" are the rulers of the free world. They are the money lenders, the money changers, the carpetbaggers. They are the bankers and bosses of governments.
They lowered interest rates so untold trillions of dollars could be lent out, for interest, for fees, for the creation of products that could be sold and bought – in other words, traded.
That is what "they" do. It is the business they are in. And like a lot of businesses, they took a wrong turn. They took on too much risk and leveraged it and doubled down and lost.
Only, we all lost.
But that doesn't matter; you see, it's their business, not ours. We're just pawns they move into positions where we can be used to further their business interests.
So after we were driven over the cliff, with them at the wheel, they needed a parachute. And, of course, the Fed provided it. Call it "mo' money, mo' money, mo' money."
If you haven't figured it out, here's how it works.
The Fed flooded the banks with money to save them from all going under and freeing us from their shackles. Long after the crisis-era alphabet soup of liquidity programs were wound down, it kept showering the banks with mo' money, mo' money, mo' money.
The Fed now buys $45 billion A MONTH of Treasuries to fund the government. Because if there was no one to buy the government's debt, interest rates would rise and our idiot government might realize they have to cut spending.
But there's another reason the Fed is buying Treasuries. They wanted the banks to have more money, to make more money. And boy, has that worked out well… for them.
The banks buy the government's bills, notes, and bonds, on credit, and the Fed buys the bills, notes, and bonds from the banks and issues them credits. So the banks have a ton of money to leverage their balance sheets back into the black.
The Fed buys $40 billion A MONTH of "agency" paper. (Agency means mortgage-backed securities that are essentially guaranteed by agencies of the federal government, like Fannie, Freddie, and Ginnie, and the FHA – basically the gang that bankers talked the government into creating to take the real risk of lending off their hands and shove it onto taxpayers, when the dam breaks). Where do they buy all that paper, all those packaged loans from? From the banks, stupid.
Why? To give them mo' money, mo' money, mo' money, because it's about the banks.
Oh, you didn't realize that the banks still have hundreds of billions of dollars of mortgage-backed securities on their books? Who did you think was going to buy them?
That's why there is a Fed – or a heaven, if you're a banker.
Starting to get it? The Fed buys the toxic waste the banks were choking on and holds it until the housing market heals. Then the banks get it back so they can mark it up on their balance sheets. In that way, they can show they're flush, so they can get big bonuses… same as it ever was.
What happens with a lot of that money that's sloshing around is that it works its way into the stock market.
The markets go up, and that creates the "wealth effect." That's actually an articulated Fed policy, creating a wealth effect by making the markets go higher. And like the special effects in a Steven Spielberg film, this makes us all feel good, and we go out and spend, spend, spend.
And that brings me back to what Benny was saying on two days ago. Just a few weeks ago he said maybe they would buy more, or maybe less. On Wednesday he hinted that less may be more the way to go.
Why now, why did he come out and say the opposite of what he said a few weeks ago?
Because the markets are at all-time highs. And if his trial balloon was to pop the markets' upward trajectory, what better time to test the waters than at the highs?
The manipulation is brilliant.
I love the Fed. I want to be the Chairman of the Federal Reserve. The power trip must be an ungodly high. Then, of course, I'd move my chair over to JPMorgan and make the big bucks.
Is the beginning of the end of the market's rise upon us? Is the Fed done easing?
No, and no.
If there is a correction – which there could be and there should be – it could be a few hundred Dow points or it could be few thousand Dow points.
Look at what Japan did yesterday. Its stock market fell over 7%… in the blink of an eye.
It can happen here, too. The markets have been propped up, and the wealth effect is an illusion.
Continue to dance while the music is still playing, because it ain't over til it's over.
But two things…
Don't forget to have your stops in place and some downside protection at the ready.
Related Articles and News:
- Money Morning:
The Great Rotation Makes Stocks a Generational Buy
- Money Morning:
The Next Bank Meltdown Won't Be an "Accident"
- Money Morning:
What You Absolutely Need to Know About "Their Paper Money"
- Money Morning:
What Everyone Absolutely Needs to Know About Money
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
He helped develop what has become known as the Volatility Index (VIX) - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of 10X Trader, Shah presents his legion of subscribers with the chance to earn ten times their money on trade after trade.
Shah is also the proud founding editor of The Money Zone, where after eight years of development and 11 years of backtesting he has found the edge over stocks, giving his members the opportunity to rake in potential double, triple, or even quadruple-digit profits weekly with just a few quick steps.
Shah is a frequent guest on CNBC, Forbes, and Marketwatch, and you can catch him every week on Fox Business's "Varney & Co."
He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.