Wednesday, March 18, 2015

Federal Reserve Statement and subsequent "reactions " unleashes Market " KRAKEN " - March 18 , 2015 .... Currencies , Equities , Bonds , Commodities - all caught up in Algomania !


Before and After

"Flexible" Fed Loses "Patience"; Cuts Growth, Inflation Forecasts (Again)

Eurodollar traders everywhere on suicide watch

Fed Growth Cut Unleashes Panic Buying Of Everything; Dollar Plunges Most Since 2009

Macro funds bye bye

bid ask spread in EURUSD now wider than Ruble pairs in December. Shut it down

Dollar Flash Crashes: Currency Market Pulverized As Dollar Implodes After Close


In short, what Poszar is saying is that in a world in which the traditional broker-dealers and banks have indeed reduced leverage and instead use $2.5 trillion in Fed reserves as fungible collateral against which to buy credit derivatives (for example as in the case of JPM's CIO office and its attempt to corner the IG9 market) the buyside community, which as we have long discussed has largely avoided equities due to fears of a spectacular market implosion (and certainly minimized levered exposure in the space with the exception of several prominent HFT participants) has instead been forced to chase after fixed income products. And chase with leverage that would make one's head spin as can be seen in the outlier chart above.


And while Poszar may be quite correct in stating that most have missed the leverage creep he observes above...
Perhaps the key reasons why economists have missed the creep of leverage into the traditionally long-only world of fixed income mutual funds are the conceptual gaps in the way in which the U.S. Financial Accounts (formerly the Flow of Funds) depict the global financial ecosystem, and by extension, the limited mental map it gives to economists who use it to understand asset prices.
... one entity that does understand all this and grasps the momentuous implications of even the smallest quantum of interest rate increase, is the entity where Poszar previously worked: the US Treasury and the Federal Reserve itself.
And so, the next time someone asks "why is Yellen so terrified of even the smallest possible rate hike", show them this chart above and explain that the Fed vividly remembers what heppened when LTCM blew up. What the Fed doesn't want, is not one but one thousand LTCMs going off at exactly the same time in what is now the world's most levered trade...

Think you understand Treasuries? Think again.