How to Monetize Fed Cuts

Matt, a loyal reader, emails:

If Ben is dropping money from helicopters, how do I get some?

We're not talking about professional money traders here who can simply play in the Fed funds futures market. If you're a retail investor who thinks that the Fed is going to keep on injecting liquidity into the system, how do you get yourself some of that liquidity?

The big answer, I'm afraid, is that you don't want to. Liquidity is debt: a rate cut means that the overnight cost of money is falling. So rate cuts help borrowers and, mutatis mutandis, hurt investors. Retail investors really shouldn't have any debts, beyond maybe a mortgage. So they're not the people who benefit.

On the other hand, if they do have a mortgage, then maybe they can refinance: refi rates are hitting four-year highs right now.

Beyond that, cheap debt is, from an investor's point of view, essentially the same thing as cheap leverage. Are you into the carry trade, borrowing in US dollars to invest in Aussie dollars or British pounds? Then your returns will go up the more that Ben cuts rates. Do you play on margin at all, either in the options market or by shorting stocks? Then your cost of borrowing securities will fall. More responsibly, are you raising money for investment in some kind of a business? Then that, too, should now be cheaper.

Mainly, however, Fed cuts work through the banking channel. If your bank has more liquidity, then ultimately there's probably more for you. Perhaps. But if you're not the kind of person who's looking for money from your bank, then you're probably not the kind of person who can easily load up on the money that Ben is dropping from his helicopter.