The truth about the Fed’s balance sheet, scams and cycles

Here’s the part 1 of 3 of this week’s Trading With Cody Live Q&A Conference Call transcript.

[“Alexa, play Tom Petty on Sirius XM.”]

[Alexa says, “Now playing Tom Petty Radio from Cody’s SiriusXM.” An obscure blues song starts to play.]

[“Alexa, volume up.”]

Now we have some background music while we are waiting for everyone to call in here. While we wait, I’ll hop over to MarketWatch and the WSJ to see what they’re freaking out about today, too. We are scheduled for 45 minutes on this thing but I’m always willing to stay longer unless of course I go hoarse. Or unless I turn into a horse. Because a horse is a horse of course, unless a horse….never mind.

[“Alexa, stop.”]

Okay, let’s get started.

Stop me if you have heard this before, the stock markets are near or at all time highs. The Federal Reserve is talking about raising rates, slowly but surely. But they have been saying that for 3 years, haven’t they. One of the things that I didn’t detail in the write up I sent out about the Federal Reserve and why markets usually go up when the Federal Reserve is in a tightening cycle (for at least in the last 2 or 3 decades that has been the case) is the fact that in addition to just straight up raising rates, there’s also the quantitative easing and the unwinding of the Federal Reserve balance sheet.

The Federal Reserve took on $4.5 trillion dollars of Treasuries and mortgages since it got creative at the bottom of the 2008 financial crisis. It is all a scam that the US government entity, that is actually not a part of the US government — the Federal Reserve — is using trillions of dollars of taxpayer money to do anything. But regardless of that lack-of-agency issue, an issue that Federal Reserve has inherently, there’s this $4.5 trillion dollars. Almost $3 trillion of it is Treasuries — United States debt.

Which means the Federal Reserve is using taxpayer money to buy debt from the taxpayer from the Treasury. By the way the Federal Reserve has made a lot of money by buying Treasuries and with the other thing I am about to talk about. Then that profit gets sent to the treasury. Which then gets to help fund the budget. So, if you think we are robbing Peter to pay Paul, you would be correct.

We have always done that with the Federal Reserve, but the fact is that the quantitative easing and “emergency measures” and all those scams, er I’m sorry – the “policies” that the Federal Reserves created in the midst of these financial crisis in 2008 is measured trillions of dollars — $4.5 trillion dollars, is meaningful.

It is an entirely new way of basically creating negative interest rate scenarios in our country even if we didn’t actually have “negative interest rates.” It is keeping rates lower because the taxpayers are buying the Treasuries from the Treasury, but the Treasury is funding the government. And all of that stuff gets completely muddled.

But what I am trying to get to is there is $1.7 trillion of mortgage back securities that the Federal Reserve bought in midst of QE programs. They are probably making a lot of money on those right now. They have been able to send a lot of profit, as I said, off the balance sheet investment in Treasuries and mortgage back securities, to the Treasury. So, we know they are making money on it. Which is just lucky.

This morning, I even heard Janet Yellen the Fed Chair say, that they don’t want to make profits. They are supposedly just trying to do “what is good for the broader economy.” Always remember that the Federal Reserve is 100% owned by the largest banks that have bailed out and that it continues to get trillions of dollars of welfare in these emergencies measures and under Dodd-Frank and all that BS regulation that exist and that were written by the banks themselves to begin with. Always remember that. The Fed a tool to keep creating profit for the banks — not for the Treasury. And Janet Yellen said as much today. But that $1.7 trillion, 1,700 million dollars…What is there, a little more than 300 million people in this country….

What is $1.7 trillion divided by 300 million? You could have written a check to every man, women, child and everything in between in this country for $5,600 instead of spending it buying back mortgage back securities that the Federal Reserve bought from the too big to fail banks.

As I have talked about, back in 2009 and 2010 when I was reviewing this stuff on TV every day and railing against these bailouts and these emergency measure welfare programs for these shysters at the banks that were lying about the balance sheets. (By the way, I don’t fault a banker for making money, but when you are in the midst of a crisis and what you said your balance sheet was, was not true and you didn’t actually take care of your shareholders and depositors — that isn’t right. Then the taxpayer had to come bail you out and we actually ended up taking care of you and writing checks for $1.7 trillion dollars to take these at the time worthless assets that you, as an executive, were approving and your bank was putting on balance sheets back in 2008 and 2009. The Federal Reserve took all that stuff (and it was basically worthless) and paid way too much for all of the stuff they put on their balance sheet with that $1.7 billion dollars. And I have big problems with all of that.)

A great irony, proof that God just has a sense of humor, is that He still allowed the Federal Reserve to look like a genius and make tons of money. Billions of dollars of profit because as you guys know, the real estate market did come back. Which by the way, as long time Trading With Cody subscribers know I told everybody to buy real estate in 2010 and 2011, I did so myself in 2012. I bought a bunch of land in New Mexico.

Anyway the Federal Reserve has made a bunch of money “for taxpayers” despite the fact that its basically screwing taxpayers by having taken these worthless mortgage back securities from the banks at 100 cents on the dollar when they probably should have been taking on it at 30 cents on the dollar.

The point of all of that is really the fact that there is more than $4 trillion of balance sheet debt that the Federal Reserve has taken on.

Whether they outright raise rates or not, the Fed is not going to be taking on additional debt, which is what I talked since 2012 as being a form of tightening. And tightening, again, is surprisingly a bullish thing.

Over the last 20 years, stocks go up when the Fed tighten. So, if they were growing their balance sheet and then they stop growing their balance sheet, that is a form of tightening. Now if they reverse and start reducing their balance sheet, which they are going to do — even if they just quit buying more stuff, those Treasuries that come due will fall off the balance sheet, some of those mortgage back securities will pay themselves out early, etc. — it’s a form of tightening. However they unwind the balance sheet, the fact is that they are indeed unwinding it. They are no longer adding to it and sitting tight. They are about to start and/or actively reducing the balance sheet and that is another form of tightening. So, we are living through these seemingly early stages of a tightening phase.

The news headlines today from the Federal Reserve on MarketWatch and CNBC is about Janet Yellen and what she says that “not many more rate heights needed” yada yada. Whatever the case with the rates, we are still in a tightening phase as the Fed’s reduce their balance sheet. We are still in the early stages of this.

The Feds are probably eventually going to really need to scramble to contain the bubbles we’ve been so presciently positioned to profit from since 2010 or so. Maybe the Dow will be at 25,000 and maybe the NASDAQ will be at 8,000 before the Fed actually gets active at raising the rates and not just reducing their balance sheet, budging interest rates from 1/2% to 1% and all this other stuff they are barely doing on the fringes to tighten right now.

Remember that as we get later in the Federal Reserve tightening cycle we will want to get bearish. We won’t want to necessarily sell everything but we will want to do some more hedging, take more profits, reduce some of our positions and the number of our positions, and add some more shorts. You can’t go back and look at any historical chart or any specific time frame over the last 20 years and find the exact same set up as we have today. You are always going to do some independent thinking and know, “Hey, yes, we are 4 or 5 years into the Federal Reserve in a tightening phase already. But this just isn’t an aggressive tightening phase it is still very much a loose monetary policy world.

As the Fed really starts to tighten in years ahead, we’ll want to be ready for it.

Because we are going to have another crisis at some point. We are going to have another crash at some point. Maybe not this year, maybe next, maybe 3-5 years would be a better guess. I just don’t think it is that near yet. We have got to keep our eye on the black swan, as always folks. Open to questions. I have a bunch of email questions, you guys please jump in.

We’ll send out parts 2 and 3 of the Trading With Cody Live Q&A Conference Call transcript tomorrow.