Fed Creating $4 Billion in New Money Each Day, Helping to Rig Stock Market



By Charles Biderman


There’s been a lot of talk about the Federal Reserve rigging the stock market. If you’ve been wondering, as I have, how it is being done, here’s some terrific insight from our own David Santschi. David wrote in this week’s TrimTabs Weekly Liquidity Review, “The Fed is exchanging about $4 billion in newly created money every business day for various types of bonds.  All else being equal, the Fed’s bond buying puts more money in investors’ hands to buy other assets, including stocks.”


I had thought that the major bond dealers sold back to the Treasury the bonds that they bought from the Treasury, making it pretty much of a wash transaction. What I had not realized, until I saw what David wrote, is that major bond traders when they sell Treasuries back to the Fed on the same day then buy other bonds from other bond dealers. And as this buying and selling goes down the chain, Voila. Apparently some of the Fed’s newly created money ends up in the equity market.


Here is what happens, as I see it now. Every day, Federal Reserve traders are buying about $4 billion in long term treasuries and mortgage bonds from major trading houses. How does the Fed pay for those purchases? Simple. The Fed gives the seller a credit on their Federal Reserve statement. Remember , the Fed is a bank that can legally give away money. Meanwhile, the seller of bonds to the Fed can then withdraw some or all of that money, or leave it on deposit with the Fed.


In other words, the Fed doesn’t pay anyone anything. All the Fed does is in essence create new money to give the seller. So let us follow that newly created money. The major dealers who sell the bonds to the Fed can take that money and buy other bonds in the open market. The new seller then gets paid with that newly created money, which in the bank clearing system, acts just the same as money you and I work for.


Therefore, to make this really simple, the Fed creates $4 billion a day and eventually some of that money goes into equities. And that, of course, helps keep stock prices elevated. So it doesn’t matter that we are having major problems with the underlying economy and markets that normally would depress stock prices.


So yes, I have been wrong about the market over the past year or so, expecting gravity to kick in at some point. Back last April and May I predicted the market would crack. Why? Mainly because corporate selling was overwhelming corporate buying.


The market did indeed start to sell off in late April and May. But then all it took was a hint of a new QE last June to rally the market. As the market rallied, public companies reversed engines. They stopped selling shares and resumed buying their shares to shrink their float. I now think that companies are willing to use zero interest cash to buy back shares as long as stock prices keeps going up.


But when stocks look vulnerable corporate selling spikes. So in August, I predicted a September market selloff, which did occur for a while. That is, until the next QE was announced.


Recently I have been relatively neutral on stocks because the markets in January have been flooded with cash from investors reinvesting proceeds from year-end tax avoidance selling and bonus income they took last year instead of 2013. Now when looking at the direction of the markets, I am taking into consideration another source of new money for the markets: The Fed’s creation of $4 billion per day in new money. How much of that does end up in stocks? Even if it is only $1 billion, that still is a lot of daily buying power.


In addition to the Fed providing buying power, some market watchers recently have been writing that the Fed’s money underlies the trillions in derivatives out there. The big banks have hundreds of billions on deposit with the Fed. That’s money created on a computer. Talk about leverage! This is the ultimate leverage. Trillions of dollars in trades on top of hundreds of billions of newly created money.


Why is the Fed doing something that would be a crime if anyone other than the Fed did this? That’s because wealth creation is the only policy action of this government that works. It seems that the Fed is willing to keep stock prices elevated, so the Obama administration can keep spending trillions of dollars that really don’t exist.


How long can this go on? At some point gravity wins out. For now, equity inflows continue. Let’s see what happens when the inflows stop. Will corporate selling surge or not? We will be watching.




19 Responses to Fed Creating $4 Billion in New Money Each Day, Helping to Rig Stock Market

  1. Ed_B on January 30, 2013 at 8:28 pm

    While it is clear that “gravity” is not the strongest force in the investing universe, it does have an attribute that bears consideration: it is relentless. Because of this, it will assert itself at some currently unknown point. When it does, it will pin back the ears of the market riggers and everyone who is holding onto their coat tails.

    Small investors have 3 and only 3 advantages in the market: 1) diversification; 2) dollar cost averaging; and 3) nimbleness. Use all 3 of these in your investing and your odds of success will be improved. Notice that I did not say that they would guarantee success. Life and investing simply do not offer much in the way of guarantees. As a wise old man once told me about such things, “You want a guarantee, Sonny? Buy a toaster!”.

  2. Dan on January 30, 2013 at 10:46 pm

    This seems to be the best reason to buy gold and silver that I’ve seen. The, “Wizard of Oz”, Ben Bernacke, is the new Fanny Mae and the new Alan Greenspan, all in the same person.

    As you say, at some point the laws of gravity and I believe the laws of mathematics will come back to bite the, “Wizard”. The crime is that he will have destroyed the lives of millions of us who are getting ready to retire or have retired and have persistently saved for our retirement, even when it meant denying ourselves a luxury we could easily afford. I can’t see how this can possibly end well. Are we going to face economic annihilation, when Treasury yields jump to 5% and the majority of the US budget has to be spent on interest expense? I can’t see any other outcome.
    I guess we all better learn how to grow a garden, buy a few hens and learn how to barter, because dollars are going to be good only for fuel or insulation. Dollars can be used as the new blown cellulose to insulate our attic spaces – what a great new business venture!

    • mike on February 1, 2013 at 12:39 am

      Dr. Bernanke, to my knowledge, didn’t study quantum physics. Yes, under classical physics you can throw the apple up in the air, then catch it, then throw it up in the air again thus creating bubble after bubble. However, now we are in the world of quantum physics where if the mass is so great, like the budget deficit, then one can get caught in the gravitational field of a black whole which will eventually swallow one up. This is where we are now. IMO.

      • Mike S. on February 1, 2013 at 12:51 am

        I thinking the fed will “orchestrate a 20% equity CORRECTION TO SCARE SOME PEOPLE BACK INTO BONDS.

  3. Chris Hamilton on January 31, 2013 at 12:18 am

    Hey Charles,
    thanks for the video posts…very small percentage of analysts who are willing to look critically at markets and make a determination based on the facts rather than what than their hopes.
    I also note the rise in the long end of the yield curve from low of 10yr@ 1.39’ish to now in excess of 2%. Makes some sense as Fed is doing the bulk of buying of T’s from 3yrs and longer…but very curious why there is no movement in the short end of the curve. Fed is not buying, sold nearly all short duration in Op Twist yet rates on 30 day all the way to 3yr remain at absolute lows. Given that $8T of Treasury debt is 3yrs and under in duration, must be constantly rolled, and further yielding at .50% to .03%…who is buying this (Chinese, Japanese), what other AAA options exist? and is there a serious threat of a interest rate shock in the short end of the curve?

    Thanks for your consideration and also appreciate the peek at the sun and blue sky of the bay in the videos…

  4. Lincoln Hawks on January 31, 2013 at 3:50 pm

    It humors me when I hear that the Fed plans to continue QE until the unemployment rate reaches some fictitious number.
    Then I learn today that the President plans on shutting down the “Jobs Council”, which in my opinion was organized as a re-election ploy.
    Most zombie Americans don’t realize that without QE, we face a severe economic depression. There is no economic growth without it. However, there will come a day when the markets will get crushed to the downside by 20% in less than a week. This will then snowball as several “Madoff-like” Ponzi traders will then be exposed.

  5. David Engel on January 31, 2013 at 6:27 pm

    All well and good but when the music stops, a loss is a loss regardless where the money came from. This is the first time, since the first round of Fed bond buying, that QE is not in tandem with fiscal stimulus, now fiscal contraction.

  6. mike on February 1, 2013 at 12:46 am

    Hi Charles,

    Now that interest rates are rising and, assuming the bond vigilantes are making an appearance, one might assume that there will be a treasury sell-off. Assuming that we are in the “great rotation” from bonds to stocks, then wouldn’t this worry Mr. Bernanke? Would the Fed still want to continue to “buy” or goose the equity indexes if it eventually accelerated a collapse in the treasury market and thus the Fed’s balance sheet and compromise the Fed’s ability to continue to monetize the debt?

  7. Hugh Beaumont on February 2, 2013 at 1:59 am

    Ummm…..I still don’t understand the movements in the Fed-Treasury-Bank transactions that lead to the stock market. I don’t know who the buyers or the sellers are, and when they change from buyer to seller.

  8. Quinn Ronin on February 2, 2013 at 10:20 am

    Charles, thanks for the benefit of your reassessment. I think that there is much value in it, and I’m sure that it’s a major factor in creating the current economic situation.

    I suspect, though, that what will bring the current over-inflated markets down will be the very human tendency to push things to an extreme, deemed necessary to get the desired results of lower unemployment and a strongly growing economy.

    Injecting ever more money into the economy to try to produce that self-sustaining, though artificial, economic expansion seems to have become a global obsession with each Central Banker justifying their actions by pointing out that another one is doing it, and apparently getting away with it.

    And of course sending your currency to as low a level as possible through intervention, or rhetorical threats, to boost exports (at the expense of every other country’s exports, of course.)

    Surely, no thinking person, with any historical perspective, can keep from seeing that this will produce inflation at the very time that you least desire it, or expect it, when everything seems to be under control (almost), and the futures looks very, very bright (if viewed through rose coloured glasses. ;^)

    (Remember the budget surpluses that were forecast to extend far into the foreseeable future during the dot com craze, due purely to retail traders piling into near worthless tech stocks in record numbers? ;^)

    “Irrational exuberance” must always precede a bubble. Otherwise, the participants would have their wits about them, and be more cautious, and caution does not promote bubble blowing. ;^)

    Current inflation would be much higher if government economists hadn’t started massaging the numbers during the last few decades.

    At some point, though, inflation will become so bad that even massaging the numbers won’t be able to hide it, and at that point the FED will have to start raising rates. That will be the signal that the bubble is ripe for bursting.

    Maybe it will deflate all at once, as it did in 2008, or maybe it will deflate more slowly as it did after the tech/dotcom meltdown. I suspect it will be fast, but who knows.

    First, though we must blow it up, and that’s exactly what Benny and FED’s are currently doing, with total support from the upper 15-20%, I might add, 70% of whom appear to approve of the excellent job of reallocating taxpayer’s funds into their bank account that B. and the F. are doing.

    Inflation will bring down this house of cards, I’m guessing, in about the second half of 2015, when Ben’s commitment to keep rates low expires.

    There may be a retracement later this year, but no real lasting downturn right away. Not with free money, low rates and the Bernanke put in place.

    The time to get short is when optimism runs high, all systems are go, the worst appears to be behind us and rates start to rise.

    Then the real money can be made. I’m just trying to stay solvent until then! LOL

  9. Katie on February 5, 2013 at 1:34 am

    Thanks for posting this.

    Mr.Biderman, how long has this $4b a day of bond buying been going on for? since roughly 2009?

    You didn’t mention this, but made it sound like it’s only been going on since QE2 which would place this in 2011/2012.

    Your thoughts?

    Thanks again, I’ve read and watched this post a few times, and forwarded it, it’s extremely important to get the word out so no one’s surprised when the market finally collapses when the Fed can’t keep printing money or rather our creditors refuse to honor the dollar.

    • Ed_B on February 10, 2013 at 6:33 am

      Cutting interest rates to near zero and then holding them there for an excessively long time is not honoring the dollar. Neither is destroying the wealth of older Americans who depend on interest rates for living expenses earned via their CDs, savings accounts, and money market accounts.

      To top this all off, the Fed creates money out of thin air (no real effort = no real value) and then trades that fake money for real property and the sweat of our brows is not honoring the US dollar.

      In 1913 it took only $20.67 to buy an oz. of gold. Today, it takes a little over $1700 to buy an oz. of gold. Many people look at this and say, “Wow! The price of gold is really high now!”. In point of fact, the price of gold is not high. It is that the US dollar has been so cheapened via inflation that it now takes MANY more dollars to buy that same oz. of gold than it did 100 years ago. This is the Fed’s idea of “stable prices”.

      If the US does not honor the dollar, why should anyone else?

  10. Dan on February 6, 2013 at 2:40 pm

    Charles, like you I have been shorting the market and getting beat up, bad.

    I created a chart that included the following sectors:
    Basic Materials

    All are way up since November. These rising sectors indicate the early stages of a bull market. The question is; is this created from real money in growing sectors or is it the fraudulent Fed pumping out hundreds of billions of dollars and does it make any difference in a rising market.

    The one caveat, when the music stops and interest rates rise, I think the market will crash much faster than it went up and a falling dollar that leads to rising interest rates will probably be the cause. I could be wrong, because I’m not an economist, but in sector rotation these sectors are an early sign of a bull market, despite my skepticism.


  11. John C on February 10, 2013 at 8:28 am

    Thanks again Charles. Also note that the fed underestimates the feedback loops as evidenced in the last few weeks where the japanese have said enough is enough. So if the Japanese aggressively do the same thing they might add to the mechanism in the United States. Talk about kicking the can down the road. And then there is Europe. So the Chinese have it right – they worked on Christmas day and on that day they downgraded the United States. If you had a sports background you could see the analogy whereby the officials are paid by the league, unlike the judicial system which is independent. So with the advent of better video capture fans can see when officials make mistakes; this has forced many sports franchises to change their rules. Unfortunately we do not have an ability to hold the fed accountable in the same way except by indirect evidence.

    When one starts a business usually it is because their is some advantage such as cost savings over competition or a cost benefit such as a new product addressing a slightly different market. The average small business better be able to withstand a 20% hit on prices or offer that to get going as building a better mousetrap does not guarantee success. Given the average Chinese price advantage as a factor of 5 to 7; that is 500 to 700%, why would anyone start an exporting business in North America, at least the United States or Canada. So the Chinese politicos stated they want to double personal income in the next 10 years. Well it doesn’t take a Economics degree to see that this will not erode prices, given the historical cost of production, to bring unemployment figures to the target area.. To get to a point of more equitable competition could mean much longer bond buying given the same old same old monetary strategy.

    The fed has even stated how this is not working as well as planned. This is the irony of all ironies. The ponzi scheme is the black hole.

  12. Bill on February 15, 2013 at 3:52 am

    Possible explanation – as the 10 year & longer bond interest rates are starting to move higher as you noted & possibly a super trend at some point, people could just be shortening up on their maturities so as not to get caught holding the bag as interest rates move higher ( which decimates the price of long term bond holdings). Smart people dont want to own long bonds when interest rates move higher (especially if this becomes a super trend). This could explain some of the demand for the short bills/ bonds. People may accept less interest now ( near zero) for the safety it provides.

  13. […] Charles Biderman TrimTabs.com There’s been a lot of talk about the Federal Reserve rigging the stock market. If you’ve been […]

  14. […] http://charlesbiderman.com/2013/01/30/fed-creating-4-billion-in-new-money-each-day-helping-to-rig-stoc… This entry was posted in 7. The Economy and tagged Stock market by admin. Bookmark the permalink. […]

  15. […] contrast, the Federal Reserve of the United States creates money at will, and according to this article, this creation averages out to four billion US dollars a day. This makes Bitcoin downright rare. […]

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Charles BidermanCharles Biderman is the Chairman of TrimTabs Investment Research and Portfolio Manager of the TrimTabs Float Shrink ETF (TTFS)

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