Last week the Dow fell 200 points when Federal Reserve Chair Janet Yellen dared to suggest a timetable for raising interest rates.
But then it recovered and ended down only 114 points on the day.
Gee, that was a close one, the 1% sighed.
What most people don't understand is that the 1% in America - and by the 1% I mean the really, truly rich who consistently make (not have) $5 million or more a year - have been the principal beneficiaries of the Fed's zero interest rate policy for the past six years.
But they pale in comparison to the "Too Big To Fail" banks (many of which employ plenty of the aforementioned 1%) who are making record profits off the zero interest rate policy and the Fed's "quantitative easing."
Now, I don't have a problem with anyone making a ton of money.
But I do have a problem with "redistribution" as the means by which wealth is transferred - including the transfer of wealth by "entitlement" programs from workers to unentitled lazy people. And especially when it's transferred from America's middle class to the TBTF banks and the 1%.
That's what the Fed's zero interest rate policy is all about.
Do you want the truth about what's really happening? Sure you do, that's why you read Wall Street Insights and Indictments.
The truth is America's middle class is the teat from which banks and the 1% engorge themselves. And it's the Federal Reserve that does the milking.
The whole reasoning behind the Fed needing to keep interest rates low (pretty much near zero) to stimulate the economy and get America going again is a ruse, a farce, a disguised plan to enrich their constituents, the big banks, Wall Street, and the 1%.
Here's the thing.
Over the past six years, interest rates would not have risen much on their own anyway. Sure, they would have been higher without Fed manipulation. But without artificially being squashed, they wouldn't have impeded economic growth at all. None, zero, zip.
Maybe the Fed Funds rate (the interest rate that banks charge each other when they lend each other money, usually just overnight) would have been 1%, 1.5%, or let's get crazy, maybe 2%. So what? You know what the Fed Funds historical average is? It's 4%.
Now here's a lesson you need to learn, one that will change the way you see the Fed and interest rates and how they affect you:
The Fed doesn't "dictate" what interest rates should be. They only have direct control over a few interest rate benchmarks.
For example, they determine the "discount rate," the rate the Fed charges banks who borrow directly from their Discount Window.
And they set margin rates, the percentage of cash that has to be put up in order to buy stocks on credit.
Contrary to popular opinion, the Fed does not tell the banks what the Fed Funds rate should be, nor do all the banks march in lock-step. Rather the Fed sets a target for the Fed Funds rate and they then have to work to get it where they want it.
But banks have their own agenda. They don't care what the Fed says it wants the Fed Funds rate to be. They want to lend money and make interest on it. Money sitting idle in their vaults doesn't earn any interest. So they'll lend it out overnight if they can, and compete with each other to lend it out to other banks. How do they compete? By lowering the interest rate they charge.
At the same time, if the Fed's target goes up, banks may hesitate to make as many loans, since the Fed Funds rate is really the cost of money for banks.
But here's the dilemma...
The Fed wants the Fed Funds rate to go up, not down. That means, to raise rates, the Fed actually has to conduct "open market operations."
The Fed will go into the market, to its "primary dealer" banks, those banks the Fed deems big, important, and healthy. So, it's prestigious to be a "primary dealer" bank. And the Fed will sell you government securities, usually Treasury bills, notes, or bonds. You have to buy them, that's your deal with the Fed.
What does a bank use to pay for the Treasury bonds it buys from the Fed? It uses its cash. That's how the Fed takes cash out of the banking system. If its operations are big enough, enough cash comes out so those big banks don't have as much to lend out overnight. And when another bank comes to borrow overnight, they raise the interest rate, magically to somewhere around 2%.
That's your lesson on the Fed Funds rate.
Now, let me tell you what all this means for you.
You see, the interest rates we all deal with everyday are priced off the Fed Funds rate. A bank that has a higher cost of money itself (because the Fed Funds rate is higher) will pass that along and charge you more for your car loan and mortgage.
But since the financial crisis, the Fed has manipulated interest rates down, not up.
They wanted to help the banks who had become virtually insolvent because of their greed. So the Fed lent the banks money from the Discount Window and lowered the Fed Funds rate to zero by buying whatever Treasury bonds banks wanted to swap.
And because banks held so many other bad debts, like bad mortgages and mortgage-backed securities, the Fed bought those from the banks and gave them more cash, and more cash, and more cash.
And when the banks were still looking like they weren't going to make a lot of money because there just wasn't much demand from consumers or businesses for the money they had to lend because the Fed helped them so much, the fed came up with "quantitative easing," or QE.
QE is nothing more than open market operations on steroids.
The Fed began buying $45 billion a month of Treasury securities and $40 billion a month of mortgage-backed securities from the banks, paying with cash for all their inventory, good bonds and bad bonds.
The banks got trillions of dollars. Their cost of that money? Pretty much ZERO.
Did they lend it out? No. They bought new government bonds, notes, and bills issued by Uncle Sam who has to regularly sell bonds to cover its deficits and rollover it's old debts.
And what did the banks do with the government bonds they bought which paid them a little interest?
Well, thanks to the Fed, they all had so much money, they lent each other more cash overnight (at zero interest) so they could buy more government bonds, collect more interest, and sell them to the Fed each month.
That's called leverage. The banks leveraged themselves up with government bonds and mortgage-backed securities that they bought at no cost in terms of interest, and they made themselves flush again.
That's why they're making record profits (while still charging exorbitant fees) and want to pay out more to shareholders in dividends.
Why pay more in dividends? To say, "Look at me, I'm in great shape, I'm making so much again I can pay dividends, aren't I safe? You bet I am, come buy my stock so it goes up and since I get paid in stock, I deserve it; look how good I am."
Bottom line: The banks became flush again thanks to their milking maid, the Fed.
And the middle class? How did low interest rates help them?
Low interest rates cut returns on their savings. There's not much to make when you get 1.75% or less a year to put your money away.
And when their old bonds matured, the middle class had to buy new ones with piddling little coupons. And the middle class' pension and 401(k) assets, the fixed-income portions of them? Eviscerated. Cut to shreds.
It's the middle class who got their savings raided just so the banks and the 1% could borrow at the same cheap rates the banks enjoyed.
Remember, the banks lend to the 1% because they have the collateral and the money in the first place. So they get to borrow cheaply to buy stocks and financial assets that have appreciated because of the Fed's zero interest rate policy.
Today, there's a whiff of this game ending.
But don't count on it. The Fed isn't likely to let the market fall too much. It would upset the 1%. It would upset Congress - too many of which are 1% club members being bought by the very same banks they are supposed to protect us from.
There's only one way you can beat these crooks. It's by understanding their game and playing it the way they do.
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.
The work he did laid the foundation for what would later become the 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 Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.