FAST FIVE: Neel Kashkari Appeals To "QE Conspiracists": Show Me How The Fed Is Moving Stock Prices… So Here It Is
To save both Neel and readers the pain of reading the full report (although we certainly feel that Mr Kashkari should finally understand how the plumbing of the US financial system works, especially since this year he is a voting FOMC member and his dovish votes will only make the world's asset bubble even bigger), we present the following except from the media briefing that was associated with the BIS report, in which Claudio Borio, head of the monetary and economic department at the BIS, laid out everything one needs to know: high demand for secured (repo) funding from non-bank financial institutions, such as hedge funds heavily engaged in leveraging up relative value trades This explains the demand side behind the September repo crisis, one which the Fed, Kashkari and virtually everyone else ignores, and instead focuses on the supply, or lack thereof, of liquidity, i.e.: .
And here, once again for the benefit of Kashkari, this is how the BIS explains how the financial system came close to the verge of collapse on September 16, poetically enough the 11 year anniversary of Lehman's bankruptcy: Shifts in repo borrowing and lending by non-bank participants may have also played a role in the repo rate spike.
The resulting remarkable rise in FICC-cleared repos indirectly connected these players.
The Federal Reserve further announced on 11 October the purchase of Treasury bills at an initial pace of $60 billion per month to offset the increase in non-reserve liabilities (eg the TGA).
Or stated simply, the longer the Fed avoids pulling the repo liquidity band-aid, the bigger the market fall when (if) it finally does.