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European Bank Runs, Not Ben’s Twist, Gives Market The Runs

The European bank panic, not the Fed’s action, is sending a tidal wave of cash into the Treasury market, causing yields to crash. That sends a false signal which motivates (or forces) investors to sell equities and causes them to infer from the FOMC statement that the Fed expects severe economic weakness. The Fed did not intend that message, but their words and actions appear to have backfired in this case. The market is now reading them that way. We have long speculated that the day might come when a Fed action would cause the market to lose confidence, rather than gain it. That day has apparently arrived.

Both the meltup in Treasuries and the meltdown in stocks trigger forced liquidations, thereby causing a self reinforcing frenzy in both markets. The Fed’s operation Twist will do nothing whatsoever to mitigate these trends since the Fed will not be spending one cent to assist the Primary Dealers in absorbing massive amounts of new Treasury supply each month. Nor will it do anything to stem the run on European banks.

That run is causing the appearance of an accelerating bull market in Treasury bonds. But make no mistake. This is a panic, and it is causing massive dislocations in the financial system.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, 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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