By Nomi Prins, Editor, Inside Wall Street with Nomi Prins
Ever since Silicon Valley Bank (SVB) and Signature Bank collapsed last month, the Federal Reserve has been contradicting itself.
Through its emergency lending programs, the Fed has been inflating its book of assets.
In other words, the Fed is printing money. A lot of it.
As much as the Fed doesn’t want to admit it, this action is called quantitative easing (QE).
Yesterday, I explained why the practice of QE is at odds with the Fed’s interest rate hikes. As a reminder, the Fed has been raising interest rates since March of 2022 to bring down inflation…
I also described the three main things QE accomplishes.
Today, I’ll further delve into who the direct recipients of the Fed’s latest money printing are… how the Fed’s actions widen the gaps between the stock market and the real economy… and one way to profit from the Fed helping Wall Street.
The Fed Is Lying to You
To understand how, let’s step back to where the Fed’s latest lie began.
By March 16, banks had borrowed approximately $300 billion from the Federal Reserve.
About half of that money, or $143 billion, went to SVB and Signature Bank. That was to shore up depositors whose deposits weren’t fully insured. In other words, depositors with account balances above the standard $250,000 FDIC deposit insurance cap.
And the other half?
Well, in shades of its usual secrecy, the Fed did not reveal which or how many banks received the rest of that money.
You see, the Fed doesn’t provide detailed information on where the money it prints goes.
For instance, there’s no report that says Bank A got X amount of money or Bank B lent out X amount of money to small businesses or individual borrowers. There are also no records of whether these banks buy their own shares of stock.
As such, the Fed doesn’t disclose what banks do with the borrowed cash. That’s especially true of banks that get money from the Fed through the discount window.
Think of the way that banks get their hands on the Fed’s money like a fast-food drive-thru window. Of course, the discount window at the Fed isn’t really a window…
Instead, it’s a central bank lending facility meant to help commercial banks borrow money for up to 90 days. It offers banks readily available, short-term loans.
In addition to the discount window process, the Fed provided financing to banks through the Bank Term Funding Program (BTFP).
The only difference between the BTFP and the discount window is that the BTFP offers loans up to one year versus 90 days.
Yet, both the BTFP and the discount window allow the Fed to engage in money printing. And they both increase the Fed’s balance sheet.
What’s more, banks other than SVB and Signature borrowed about $153 billion through the discount window.
In less than a week.
That’s a new record pace. In a typical week, banks borrow about $4 to $5 billion through this lending facility.
So far, the Fed’s money printing in the wake of the SVB collapse is already at half the amount it printed during the financial crisis of 2008.
That shows you just how much the Fed can jump in and print money when it deems necessary.
Remember, the Fed’s money printing isn’t some conspiracy theory. It’s the world of Permanent Distortion unfolding in real time.
Plus, the Fed and other central banks use the process of printing money to cover their own mistakes. Here’s how…
How Money Printing Covers Fed and Government Incompetence
By hiking rates quickly, the Fed allowed banks, pension funds, and other financial firms to see the value of their government bonds drop.
For instance, both SVB and Signature Bank held billions of dollars’ worth of Treasury and other high-quality bonds on their books. What caused those banks to fail was gravity.
When the Fed hiked rates, the value of these bonds fell. So the total value of their bonds wasn’t enough to cover the amount of money that depositors sought to withdraw.
The result was a classic bank run and collapse.
That’s why the Fed decided to create money for the banking system.
When the Fed prints money, it buys bonds from financial institutions. And when the Fed buys bonds, it increases bond prices. This, in turn, reduces bond rates.
(Note: This is basic bond math. When prices of bonds go up, their rates go down.)
Now, it’s likely some smaller or weaker banks have used the Fed’s money for depositors withdrawing funds. It’s also possible that some banks used the money to buy shares in the stock market.
We can’t be sure of the exact amounts.
And the Fed sure isn’t going to tell us.
The good news is, you can profit from the Fed’s shadiness…
The Fed’s Discount Window Impacts You and Your Money
First, you must understand one thing. The Fed injects money into the financial system with no strings attached as to where it goes after.
Savvy market players watch what the banks do with that money.
And banks use that money to buy assets that can appreciate quickly – like stocks.
That’s why the stock market rises in tandem with large bouts of QE.
You can see this in the chart below. As banks accessed the Fed’s discount window, a mini-stock rally occurred.
When the Fed prints money during a crisis, the markets rally. Wall Street can use that money to speculate in the stock market.
One way to take advantage of this new period of Fed money printing is to buy the SPDR S&P 500 ETF (SPY) in increments every Friday.
Why in increments? Because the Fed is still in an uncertain stage of its policies. On one hand, it’s raising interest rates. On the other, it’s printing money and engaging in QE. These are contradictory actions. And until it stops raising rates entirely, the Fed will trigger volatility in the markets.
Nobody can fully predict what the Fed will do. So to hedge yourself against more uncertainty, practice dollar cost averaging. That’s when you buy smaller amounts of a position in defined intervals.
This way, you’ll gain slow exposure to the exchange-traded fund. And if you see any dips or rallies along the way, you can build up an average of these price levels. Best of all, you won’t have to worry about timing the markets.
You also might also be wondering, why Friday? Well, the market usually dips on Fridays. That’s when large investors cash out of options positions to take any profits or cut any losses for the week.
This is not a hard and fast situation, as any event or piece of data can change this trend. However, it’s a rule of thumb I’ve followed since my days in Wall Street.
(Note: This is not the case for options positions, which I don’t recommend buying on Fridays. It’s the case for stock or ETF positions. In general, though, you can choose any day that works for you.)
Next week, I’m going to tell you about the big Fed cover-up by digging into the Fed’s H4.1 reports. Every Thursday at 4:30 p.m. ET, the Fed releases this report, and it tells you all you need to know about what the Fed’s really doing.
I’ll also show you one way you can use this information to your advantage.
So please, stay tuned for more.
Regards,
 |
Nomi Prins
Editor, Inside Wall Street with Nomi Prins