Given the market's rapid surge to dismissing The Fed's stock-selling recommendations, we are stunned by the silence of "market defenders" as once again the Fed takes to the airwaves to demand investors sell their bonds...
- BULLARD SAYS FED BALANCE SHEET POSES INFLATIONARY RISK; QE 'FORCED SOME INVESTORS INTO MORE RISK TAKING'
- BULLARD SAYS HE WORRIES ABOUT A BOND MARKET BUBBLE BUT STOCKS RETURNED TO MORE TRADITIONAL VALUATION'
Of course we know why they are so desperate for investors to sell their bonds (aside from the economic growth reassuring meme it provides), because they are in full panic mode over the broken repo markets we discussed in detail here [3].
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As if to embarass himself further, Bullard states...
- *BULLARD PREDICTS FED WILL END QE WITHOUT DISRUPTING MARKETS
Which is NOT what happened the last 2 times... no matter how well telegraphed or discounted
[4]
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As we explained previously,
But why do I care about some archaic money-market malarkey? Simple, Without collateral to fund repo, there is no repo; without repo, there is no leveraged positioning in financial markets; without leverage and the constant hypothecation there is nothing to maintain the stock market's exuberance (as we are already seeing in JPY and bonds).
Crucially, it should be inherently obvious to everyone that the moves we see in the stock market is not about mom and pop choosing to invest in the stock market (or not) as the 'cash on the slidelines' fallacy is "completely idiotic' but about the marginal leveraged machine (or human) quickly jumping oin momentum.
The spike in "fails to deliver" highlights a major growing problem in the repo markets that provide that leverage... and thus the glue that holds stock markets together.
Wondering why JPY and bond yields have diverged so notably from stocks in recent days... repo effects (it's just a matter of time before it hits stocks)...
[5]
So that explains why the Fed is so desperate to talk you into selling your bonds - most notably the short-end by demanding you listen to what Yellen said about raising rates.. as that reduces the shortfall of collateral that repo needs and restocks the banks with repo-able funds.
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Is that why a noted dove like Jim Bullard was so visibly hawkish last time? [6]
The irony of course of the Fed explaining how rates will rise faster is that it spooks stock investors who have grown used to exuberant liquidity supply and roitates them to bonds... which merely exacerbates the problem the Fed has
