Thursday, June 21, 2012

On Bernanke's Operation Twist and Shout Move

From this morning's EPJ Daily Alert:

I'm officially turning bearish on the U.S stock market and commodities as of this Alert. My one warning is that I may very quickly resort to a bullish stance if I detect any change in Fed policy that might loosen the monetary reigns. 
Yesterday's FOMC statement shows there is no plan by the Fed to, at present, boost monetary reserves. Increasing monetary reserves is the only way the Fed can keep the current manipulated mini-boom going. Operation Twist does not add reserves to the system, it is simply moving assets around the balance sheet. It is taking a carton of out ice cream out of the freezer, not opening the carton and putting the carton back in the freezer in a different location in the freezer. This might be a fun game if you are three years old, it is nuts coming from a Fed chairman.

13 comments:

  1. Isn't this to allow the govt to refi at the new low rates?

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    1. Bingo.

      This is what we can infer from the actions alone. But we have even stronger evidence that this is the case because the Fed went out of its way to say that they are NOT doing this to help the Treasury.

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  2. This is probably why the Philly Fed printed -16.6:

    http://i.imgur.com/XstRv.png

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  3. To Anonymous' point above, is there some place, or group of places, that we can get an idea of the amount of debt the US Gov has to roll over in the immediate to near future? I see everyone talking about these figures for the PIIGS and Europe in general, but I haven't found a consolidated resource as far as US Federal debt is concerned.

    Any help Bob?

    My thought being that, although Bernake is clearly a mad scientist, perhaps he isn't a fool, but just rather a tool...of the power. Let's say they know they have a bunch of debt to roll over, push down rates for the moment, then as we get closer to the election fire up the printing presses again and start the economy fake-booming.

    It would make more sense to me that way.

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    1. Hmmm... It's like timing an evil little engine. (little in the spiritual sense).

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  4. They are gonna cry uncle, call an emergency meeting in July-then print money.

    I'm fine with it all because it's the last chance to buy gold/silver cheap and drives down prices a bit more.

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  5. Who is Bernanke listening to? If he doesn't add reserves, the mini-boom ends and Obama loses. By NOT continuing to pump up the boom, is he backing Romney, starting a bust early so as to have a recovery in the early first term of Romney?

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  6. Pardon me,

    But how can 'Operation Twist' possibly really work?

    Firstly, it seems to me to be inflationary in that the Fed is generating selling pressure on the short end of the T-bill spectrum.

    If this is done in the open market, should I see coupons rising? Shouldn't face drop? If done in enough volume to roll over... to par or below?

    I am not sure I am seeing this. Maybe Euro capital flight is masking it. Or maybe the counterpart

    Shouldn't I see longer T-bills' coupon dropping Shouldn't it be moving above par in face value? (I am seeing this one, I think.)

    The point being that selling any particular par value of short bonds shouldn't net enough to buy the same par-value amount of long bonds.

    I presume Bernanke gets the difference from the old standby...the number keys on his keyboard that type new money into existence.

    Secondly, doesn't an operation like this raise the risk of a run on the bond market if the (presumed) masking effect of the 'safe-haven' psychology goes up in smoke?

    For this to go mostly unnoticed on the short side as it has, it would seem to me that the Fed isn't crowding out pre-existing demand on the short maturities. Rather, it would seem to me that he'd have to be replacing lapses in demand.

    But isn't the size of that theoretical lapse in real demand that he is replacing (and thus not driving coupon up and face down) the measure of the monetary expansion involved?

    Doesn't that, in fact, make this a form of QE3? Just with more smoke and mirrors?

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    1. It really can't, it's a stop gap, a "kick the can down the road" move that won't benefit things in the long or short term. In other words it a net zero sum as I understand it.

      It is a soft QE as some have defined. I would definitely call it "smoke and mirrors". But don't expect anything positive from it.

      Today's stock market and commodities action see it for what it is and are breaking down.

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  7. Bernake is ... perhaps he isn't a fool, but just rather a tool...of the powerful.

    More specifically, Bernanke is a tool for the powers that control the NY Fed- the big Wall Street banks.

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  8. If there's high demand for safe and liquid assets, the market would clear with a lower interest rates. But as interest rates approach zero, the demand for these assets spill over into higher demand for money. Money and t-bill become close substitutes because instead of holding near zero yielding t-bills, you might as well hold money. A higher demand for money of course lowers the demand for goods and services as money hoarding goes up. Operation twist works by decreasing the supply of long term bonds and increasing the supply of t-bills. Because t-bills are closer substitutes for money, operation twists is similar to increasing the money supply.

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  9. Just curious, what happened to ignoring what Bernanke said, and watching what he does?

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    1. Uh, extending operation twist would be paying attention to what he is doing.

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