mirrae

I don't care what anyone says, the Federal Reserve and the US Treasury are pretty smart cookies. It took me a while to put the puzzle pieces together but after coming across a recent article, my mind started to race.

Lets step back a bit and fill in some back story. A lot of rumblings were going on about the Federal Reserve was potentially going to start buying (injecting liquidity) into any corner of the credit market, from corporate bonds to mortgages to US Treasuries to small business asset backed securities. You name it, if credit flows in that direction, the FED will be there!

On April 9th 2020 the FED announced “new lending plans and said it will provide $2.3 trillion in support for economy!” * The FED quickly established new lending facilities to support the economy. Wow, QE infinity is what everyone was spouting, but I have a different theory based on more recent information that was released by the FED. It was noted that today at the end of June 2020, “the FED have spent just $143 billion, or 6.2% of their projected total firepower.” **

Did the FED just use a Jedi mind trick on investors?

Well, in short – YES.

Lets talk about human nature and “credible threats”.

Since the March/April 2020 FED announcement, to lend credibility to the announcement, the FED set up lending facilities and the US Treasury backed the plan. However, the FED only participated a fraction of what they set aside as firepower. Here is the Jedi mind trick, the FED knew that when investors saw this they would try to make some profit off it. Get in before the FED starts buying because when they do the Bond prices will skyrocket. Well true to human nature, investors tried to front-run the FED when they said hey we're gonna step into the corporate debt market, but it backfired, all the investors trying to get in before the frenzy bought up all their corporate debt and the Federal Reserve barely even had to participate at all. A few billion dollars ... whatever.

That's what is called a credible threat, the fact that the FED has $2.3 Trillion set aside for investment is a credible threat that shorting the market would be a bad idea. In fact, the mind tricks tell you to buy! It's genius if you ask me. And the “credible threat” is still there with 94% of the original $2.3 Trillion waiting to be used if necessary.

So the FED didn't spend the money, check-mate economy. Want to play again? :–)

Sources:

*-https://www.marketwatch.com/story/fed-announces-new-lending-plans-it-says-will-provide-23-trillion-in-support-for-economy-2020-04-09

**-https://seekingalpha.com/article/4355580-borrowers-in-money

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