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Feds Injection for Dummies Like Me

First, the Fed is not allowed to DIRECTLY buy stocks. It IS allowed to buy treasuries, bonds, and corporate bonds and for a period of time, it was allowed to buy certain ETFs. I believe that the Fed indirectly buys indexes via the Devil - JPM et al.

Since I have been asked this a lot, here are the simplest ways the Fed is putting liquidity into the market.

First a primer: QE is Quantitative Easing. QT is Quantitative Tightening. Easing means the Fed is adding liquidity/money into the economy and tightening means that it is pulling money out. Since 2008, the Fed has been easing in order to exit the GFC and then to manage the economic pressures due to Covid.

Last summer the Fed started to Tighten or remove money from the system. But then March happened.


That FUBAR'd the Fed and they havent stopped since then.

So, who cares? Well, remember one of the mandates of the Fed is to manage inflation. Their target rate is 2% (and I want to be a professional baseball player - chances are about the same).

I follow the PPI or the Producers price index bc thats what manufacturers are paying for raw materials, etc. It is considered more of a leading gauge whereas the CPI, or the Consumer Price Index is considered a lagging gauge.

At the same time, CPI has gone down:

This makes sense because the drop in CPI SHOULD happen when the Fed is tightening because there are less dollars in the system and therefore less demand for product. Simplification but still works.

Ok, back to injection.

The Fed has neverending tools to put money indirectly into risk assets.

  1. The Discount or Overnight window. This is the facility where banks can borrow money directly from the Fed at ridiculously low rates. The original purpose was to meet a bank's withdrawal demands or provide monies to lend. But since 2008, what the Investment Banks (remember Glass Steagell eliminated the WALL between Investment Banks (riskier) and Banks (safer) allowing JPM et al to borrow from the Fed. And we all know they didn't lend that money out.

  2. The Fed buys treasuries, bonds and corporate bonds in the open market via their trade desk in NYC. They also in the past have been allowed to buy ETFs. While they are prohibited by law from buying stocks, they can do whatever they want under Emergency Operations, without the approval of Congress. but sure, I trust them.

  3. The easiest way is that the Fed literally creates money out of thin air. All they have to do is create Bank Reserves on their balance sheet. In order to do this they need to WRITE A NEW LINE ON THEIR BALANCE SHEET. It would be sort of like you and I being able to call our bank and say hey, make my account worth $XXXXXX. Then the Fed takes these new monies and buys Treasuries from primary dealers, who then take that money and well, speculate with it. Pretty neat? Terrible.

  4. There are other methods but these are the ones that dummies like me can grasp.

Putting liquidity and inflation together:

In the simplest terms, inflation occurs when there is a lot of money chasing products. Supply and demand.

So when the Fed makes new money/liquidity available, it CAUSES INFLATION.

But I thought you said the Fed wanted inflation down? Well I want to be a pro ball player too.

They have to say that shit bc thats their public mandate. But in reality, the Fed is more interested in supporting the big banks and stocks and risk assets. WHY? Because if they dont, depression.

Bloomberg March 16, 2023: New Fed Bank Backstop Has Scope to Inject as Much as $2 Trillion - Bloomberg

Ask yourself this: if you had the ability to mint new money out of thin air, what would you do with it? would you put it in a savings account or would you speculate with it? Exactly. And what if you knew that you could not lose because you could just call the bank up and get some more? And what if you figured out that if you did this, you could make a stock go up? Exactly.

And that is why much of the market advance is pure bullshit. Its called MORAL HAZARD which means what happens when you provide unlimited money to institutions? They do riskier and riskier things with it. Like 0dtes, like derivatives, like bad mortgages, and the list goes on and on.

Some other tidbits:

  1. A bank used to have reserves to borrow from the Fed, a certain ratio. Well that requirement was removed in 2011 (I think - might be off on the date). So now its no collateral borrowing. Yay!

  2. Now you see why I HATE JPM. They are cheating.

  3. Guess who gets to pay when banks fail? YOU and I. How? Higher taxes, debased currency, reduced purchasing power. A lot of ways.

Finally, remember inflation? So when there are more dollars chasing product, the prices of the products go up.

Now, replace the word PRODUCT with STOCKS. Your welcome.

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Whenever I hear someone say the US just cant default, it has never defaulted, it would be a complete armageddon, it makes me laugh. Being a student of history, or at least the history I am aware of,

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