The Shameless Audacity of the Elite

It’s been said before, but I think it bears repeating…  that the Federal Reserve is neither Federal… nor does it hold any kind of “reserves” (at least reserves in the traditional sense of the word). 

So why in the world do they call it the “Federal Reserve” Bank?

Because that sounds a helluva lot better than “The Private Banking Cartel Run by a Small Cabal of Billionaire Investment Bankers Looking to Maximize Banking Profits While Pushing Risk Onto Unsuspecting Third Parties.”

It’s also easier to remember. 

But that is essentially what the Fed is. 

Originally designed to keep banks from squeezing reserve requirements too aggressively when it came to making loans, it’s main purpose was to avoid the resultant “cash drains” within the banking system. (Prior to 1913, the year the current Fed was approved, cash drains — cash obligations that had to be paid between banks — was the number one reason for bank failures.) 

And given the Fed’s modest origins in protecting its member banks, it’s evolved to become the only thing it could… a bastion of moral hazard.

Moral Hazard (noun) 

  1. The risk that an individual or organization will behave recklessly or immorally when protected from the consequences.
  2. The prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.

When you’re this far inside, it’s almost tough to see back out where the rest of the world lives. 

Last week, in your October issue of Streetlight Confidential, I wrote about the “foxes guarding the henhouse” and shared the following headline:

He was caught making no small number of trades with 27 transactions valued at over $1 million each.

“Kaplan was trading stocks like Apple, Alibaba, Amazon, Delta Airlines, Google, and Oracle. These are all stocks that he, as a former Goldman Sachs executive, surely knew would react bullishly to the massive quantitative easing the Fed deployed during the depths of the Covid crisis.”

As a result of the embarrassing (really, the only embarrassing thing for these folks is getting caught) disclosure, Kaplan announced that he’ll be stepping down from his position.

But Bob Kaplan wasn’t the only Fed president heading for greener pastures. Also submitting an early resignation was Boston Fed President Eric Rosengren…

His “official” reason for leaving revolved around health problems he’s been battling for some time. It didn’t mention the real estate trusts he was buying and selling in the face of the Fed’s monthly $40 billion mortgage backed security purchases.

“Rosengren’s disclosure listed stakes in four separate real estate investment trusts and disclosed multiple purchases and sales in those and other securities. Those investments raised eyebrows because he has publicly warned about the risks in commercial real estate.”

Amazingly, the list doesn’t stop there…

Vice Chairman of the Fed, Richard Clarida… 

“…moved between $1 million and $5 million out of one mutual fund and into two other funds on Feb. 27, 2020, which was the day before Fed Chairman Jerome Powell issued a statement signaling a potential interest-rate cut due to concerns over the budding pandemic.”

(Just an aside: Do you know what’s been more difficult to uncover? How much money these insiders actually made.)

As a result of all this nonsense…

“The Federal Reserve is launching a review of its internal rules governing the financial activities of its officials in the wake of news last week that the leaders of the Dallas and Boston regional Fed banks actively traded in financial markets.”

Do ya think it’s about time??

If these revelations aren’t making your head explode, you’re not really paying attention.

As I wrote in this month’s article, “everyone has a right to manage their investments as they see fit…” but these men wield far too much power and influence

Actions like these go far beyond simple “insider” trading. A statement from the Fed can affect more than individual stocks — they can move entire markets.

That’s why I believe nothing short of a blind trust requirement should be the rule at the federal level. 

No stocks. 

No ETFs. 

No futures. 

No options. 

No nothing!

(In fact, I’d go even further and mandate them to put all their wealth into a basic savings account and see how they like earning 0.25% annually…)

These are egregious examples of what my partner Tim and I mean when we say Wall Street is stacked against the little guy. And it’s why we work so hard to get our readers the information they’d otherwise never hear.

And until these kinds of restrictions are in place, we’ll have to keep harping that the playing field will never be level.

Some Market Action That Bears Watching…

One of the most likely candidates for the straw that breaks the camel’s back are higher interest rates. 

The Fed has gone way out of its way to try and keep interest rates as low as possible. Now with the talk of a taper, along with the threat of a hike in rates, and the prospect of surging inflation has made higher rates a very real possibility. 

Recently, 10-Year Treasury Note yields took out highs that were holding the market in check for the past couple months. This action has opened the door to another 50 to 150 basis point rally in yields. A move that could shake things up a bit for stocks.

That said, in my last weekly update I warned that the market would continue to chop, potentially correcting 10-15% before resuming its trend higher. 

“Directionless” would be an apt description of the overall action for the past couple weeks.

Here are a couple levels to keep in mind: From the latest highs, a 10% move lower takes the S&P 500 to 4,090 and a 15% correction would take us to 3,863. Hardly earth-shattering moves, but when a market is so used to going higher every day, it could well seem like the end of the world. 

Make the trend your friend!

Bob Byrne
Editor, Streetlight Confidential