I recently showed you why "don't fight the Fed" is likely the most profitable investment advice you can get.
Now I'm going to show you why it works so well.
And while I do that, I'm going to blow the door off the hinges and expose how the Federal Reserve's outsized influence and tight relationships with some of the planet's biggest, most powerful banks can make or break markets…
…and lead you to some of the biggest gains you've ever seen: 100% sure money.
Meet the Fed's "Accomplices"
Big surprise: The U.S. Federal Reserve does things a little differently than your "usual" bank.
You see, the Fed handpicks a small group of (very) privileged dealers to trade with.
They are officially called "Primary Dealers," and today there are 23 of them. These banks are based in Canada, France, Switzerland, Japan, Germany, the United Kingdom, and of course, the United States. The foreign banks the Fed deals with maintain a presence in New York City.
The primary dealers have accounts at the Fed, just like you and I have deposit accounts at our bank. When the Fed buys bonds from the dealers, it pays for those bonds by crediting the dealer's account in the amount of the purchase.
This cash is instantly the dealer's to do with as it sees fit. The dealers know what the Fed wants, but it's the dealer's money.
The Fed prints the money. The dealers decide what to do with it – how to deploy it.
The dealers are also known as market makers. Their business involves buying and selling all kinds of securities, not just bonds. They buy at one price with the goal of marking up the cost a bit and selling at a profit.
This is what they've done, day in and day out, for hundreds of years. Most of the time, they're very successful at that business.
They are, in essence, the owners of the markets, just like the big casino companies own Las Vegas.
We are the players at the tables; the customers of the dealers. You and I? We're minnows. Hedge funds and institutions – the big customers – are the whales.
Naturally, the primary dealers use all kinds of psychological tools to manipulate both the small customers like you and me as well as the big whales. The goal is the same: To mark up their securities inventories and sell them to minnow and whale alike at a profit.
When the Fed constantly injects money into this system by buying bonds from the dealers, two things happen:
- The dealers get cash, which they then use to purchase more securities and derivatives; or
- They can leverage the cash to borrow even more money and buy even more securities or derivatives. These include stocks, bonds, commodities, futures, and options.
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.