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Tricky Tuesday – Fed Funds Fake EOQ

6-30-2014 6-10-45 PM Fixed RateThank you Fed may we have another?

And, by another, I mean another $340Bn that the Fed paid out to their Bankster buddies in "Reverse Repo" purchases at the end of the month.  That's right, the Fed essentially bought THE ENTIRE STOCK MARKET (in terms of transaction value) from the banks over the last few days of June and THAT injection of cash is how they kept the rally going into the end of the quarter.  

As you can see from the NY Fed's own chart (via Dave Fry and Zero Hedge), this kind of charity buying isn't unusual for the Fed – more like Standard Operating Procedure to inflate equity prices into the end of each quarter.  Does it work?  Sure, look at the results:

As you can see – as the market gets more and more expensive, it takes more and more money to push it higher.  Also note the Fed tweaked (hopefully not twerked – there's an image of Yellen I don't want burned in my mind!) their timing to move it close and closer to the very last day, to maximize their bang for the buck.  

SPX WEEKLYUNFORTUNATELY, as you can see from the S&P chart above, these effects are short-term and demand a correction in the not too distant future. 

What's very interesting is that our stimulus theory is still holding up.  We developed this back in 2012, through observation of the effect of Central Banksters market meddling on Global Equities and it turns out that $10Bn per quarter buys 1 S&P point.  Look how perfectly that aligns on the chart!  

Bill Dudley, New York Fed president, warned last month that if use of the repo facility were to grow too quickly it might “result in a large amount of disintermediation out of banks through money market funds and other financial intermediaries into the facility. This could encourage further enlargement of the shadow banking system.”

Hey, a little enlargement of the Shadow Banking system never hurt anyone, did it China?  China, in fact, also pitched in with more stimulus of their own by changing the calculations they use to determine loan to deposit ratios for their banks.  As of today, Chinese Banks can include negotiable CDs they sold to companies or individuals as assets and they can EXCLUDE loans made to small businesess and municipalities that are backed by bonds (even though a record number of those bonds are defaulting).  

This is another ‘targeted stimulus’ policy conducted by the Chinese authorities to help the economy regain momentum,” Zhou Hao, a Shanghai-based economist at Australia & New Zealand Banking Group Ltd., wrote in an e-mail yesterday. “The new loans extended by the Chinese commercial banks in the next few months will be significantly bigger compared with the same period of last year.”  

FXI WEEKLYZhou estimates total lending in China will exceed 10Tn Yuan ($1.6Tn) in 2014, 12% more than last year’s 8.9Tn Yuan.  Bank of America estimated that about 1Tn Yuan of existing loans may be excluded when calculating the ratios following this week’s change.  

If the downward pressure on the economy intensifies in the second half of the year, the government may take other easing measures,” said Guotai Junan’s Cao. “Maybe another round of targeted cuts in reserve requirement ratios.”

Great – MORE FREE MONEY!!!  So, we can't really be bearish – even though China's economy is being propped up by constantly lowering bank requirements to paper over all the loans that are turning sour.  Their ingenious solution – make more loans!  Draghi has gone for the bazooka in Europe, Kuroda is simply a madman in Japan, Carney is GS's bag boy in the UK and Yellen makes Bernanke look like a hawk – how can you possibly fight this madness?  

Tread the road cross the abyss

Take a look down at the madness

When the flames have their season

Will you hold to your reason

Loaded down with your talents

Can you still keep your balance

Can you live on a knife-edge?

Let's enjoy it while it lasts!  



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