A few house keeping things, first, im going to oversimplify a lot here to keep this as short as possible, if you have questions, feel free to ask.
Second, so you know im a certified autist I studied Financial Economics; my macro courses were taught by a well-respected economist who was an adviser to the Fed at the time (2014).
In short, the feds job is to manage the money supply & credit while overseeing financial institutions, in times of crisis, the fed enacts appropriate monetary policy to help mitigate economic impacts.
Typically, this comes in the form of repos, QE, adjusting margin/cap reserve requirements, and buying debt assets, such as Mortgage-Backed Securities, in 2008.
By increasing the money supply, the fed runs the risk of inflation if the money they inject is actually circulated (spent) and not just held in a savings account or used to provide liquidity.
The feds current policy is what I would consider as dangerous. They have entered into the debt markets, and unprecedentedly are purchasing fallen angle debt (companies that were solid, but are now junk-rated).
Why does this matter? Well, it affects the feds ability to roll back its injections of capital into the money supply. As we are entering this crisis, if many firms that the fed holds debt from default, the fed just holds that on its balance sheet and cant resell it. The same goes for MBS products. Massive defaults affect the feds ability to sell back these assets into the open markets and remove those monies from the money supply.
Now, what do companies do with capital from debt purchases? Well, they spend it. In this case, mostly on payroll and other operating expenses, putting the money in circulation and not just providing it for liquidity.
If enough of the money the fed injects is actively circulated in the economy, we will see inflation, potentially on a massive scale and at the same time, if many debt assets the fed purchases go belly up and they cant sell them on the open market, it limits their ability to remove the monies from the money supply to fight inflation.
This would hinder the effectiveness of one of the biggest tools in contractionary monetary policy, reducing the money supply. So, the fed, in a case of inflation where they cant effectively reduce the money supply, will have to increase cap reserve requirements on banks, reducing how much the banks are willing to lend out for investment, causing a potentially steep economic downturn.
To add insult to injury, the feds monetary policy is aimed at helping out hedge funds, not you.
Many are speculating that these massive market swings were fueled by funds being overleveraged funds with 10x, 15x even 20x leverage, which was extended by prime brokers since volatility was so low. This is a crazy amount of leverage, typically its 2x or 3x. So, the fed is essentially propping up markets to help hedge funds liquidate positions.
It is likely that once they deleverage, they will go short.
Additionally, many companies used massive leverage to buy back enough shares to artificially increase Earnings Per Share to justify executive compensation, even though revenue was largely unchanged, EPS is higher (smart, can’t blame them, but they shouldn’t be bailed out for it).
The fed is taking a big gamble on long term economic health to prop up markets in the short term, it may work out, and we have no economic impacts. But if it doesn’t, and their models are wrong, the poor stay poor, the rich stay rich, and the middle class is decimated like my puts.
Don’t even get me started on how fucked we will be if the fed enters the equities market. If that happens, we are all fucked. The fed will turn into a hedge fund for the government with unlimited funds and leverage, and will no longer be the fed.
TLDR; if you want to short this shit, buy leap puts on companies that cant essentially get unlimited funds from the government. For the short term, no one knows what direction the market will go since the fed will just keep announcing more capital injections until they are beyond their risk tolerance, which I imagine is soon since the balance sheet is almost 50% of GDP currently.
This is a pure economic perspective, market, and economy aren’t the same, and has nothing to do with JPOW destroying all my puts….Also, long live the mouse.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence.