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Bad News Matters When Liquidity Contracts – Professional Edition

The Fed this week discontinued its regular Tuesday rollover of $20 billion of 28 day 1 day forward term repos. They took no action yesterday or today, allowing these repos to expire, thereby draining $20 billion from the system today. That drain is probably part of the reason why the market is as weak as it is today. The media blames today’s bad economic news, but that’s just the excuse. The economic news is bad every day. It only matters when liquidity is contracting.

The Fed is having difficulty with the spreads between GSE paper and Treasuries. They are again on the rise. Piled on top of a big jump in Treasury yields over the past week, this is a double whammy. Furthermore, it comes at a time when the Fed is beginning to make its direct purchases of MBS paper. Here’s another example of a Fed program that does not appear to be having the intended result. By announcing that it would buy, the Fed has apparently attracted more sellers than it bargained for. This is going to be a mess. How will the public, the politicians, and most importantly the market, react when they wake up and realize that not only is the Fed not omnipotent, it’s just throwing s**t on the barn door and hoping that something sticks?

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish, and was lead analyst for Sure Money Investor, of blessed memory. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both sales, analytical, and trading capacities. Prior to starting the Wall Street Examiner I was a commercial real estate appraiser in Florida for 15 years. I was considered an expert in the analysis of failed properties that ended up in the hands of bank REO divisions, the FDIC, and the RTC. Remember those guys? I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. I'm not some Ivory Tower academic, Wall Street guy. My perspective comes from having my boots on the ground and in the trenches, as a real estate broker, mortgage broker, trader, account rep, and analyst. I've watched most of the games these Wall Street wiseguys play from right up close. I know the drill from my 55 years of paying attention. And I'm happy to share that experience with you, right here. 


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