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Short Term Liquidity Relief Will Turn To Big Pain

We’ve had two working theses over the past few months. One is that the Fed is no longer pumping enough cash into dealer accounts to keep an endless bull trend going. Instead, at best, there’s only enough for rotation between stocks and bonds.

The second thesis was that because dealers are so leveraged, any fall in bond prices, reflected in an increase in bond yields, would mean big trouble for the markets. Based on technical analysis, I guessed that the Maginot Line for the bond market was 0.80 on the 10 year Treasury yield.

It’s early yet but, last week we saw evidence in the stock market that these theories are working in practice. The 10 year yield traded persistently above 0.80, and stocks sold off.

Not only wasn’t there rotation, where selling in one market translates to buying the other, but both markets were weak. The selling was contagious, leading to net portfolio liquidation, losses, and equity destruction. This increases the danger of margin calls, which can become self-feeding.

The big question is just how much pain will the Fed tolerate?

Because more pain is coming. A lot more.

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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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