Twisting The Bond Market, Stock Market And Public Market Opinion

David Frost // Blog


September 29  

More and more people, both within and outside of traditional financial circles are beginning to catch on to the obvious shenanigans and charades taking place.  Here In the United States and across the pond in Europe, they are constantly trying to lead us to the promise land and make believe there are solutions to the no growth, too much debt and not enough money scenario we find ourselves in.  The term “kick the can down the road” has been exhausted – We are NOW officially down the road.

Most recently, our own Federal Reserve has announced their latest (and maybe last) Three Card Monte money trick, what they call “The Twist.”

The Fed’s new efforts, “Operation Twist,” may lead to slightly higher short term rates, in exchange for trying once again for the third time to lower the longer dated interest rates.  The central bank’s plan involves selling short dated Treasury Bonds during the next nine months, a move designed to push short-term debt prices lower and force yields, which move inversely to prices, higher.

We’re really not sure what the main objective is with this program.  If longer term rates are already at historic lows, and unfortunately didn’t have the impact on economic stimulation once promised, then why try it again?  There are really only two reasons that come to mind.  First, to have the appearance the Federal Reserve has any power left to artificially and temporarily boost the economy.  (Notwithstanding, the only people left who may believe they have any impact at all are of course, the people who work at the Fed)  The second possibility is to help out their banking brethren who are saddled with oodles of money in money market funds where the fee has dwindled to nothing because rates have remained so low, that by boosting the short term rate, maybe the money market rates will come up enough for them to reinstate their fee, adding to their bottom lines.  Investors shouldn’t mistake these higher short term rates for consumer assistance.  We will most likely never see an increase in our money market returns as a result of this latest Fed program.  It’s really in spirit alone.

The underlying theme seems to be primarily public relations rather the real solutions.  Not for the lack of trying, but the only solution to our problems are less spending, less credit, less debt and less government regulations.  When and if any combination of the aforementioned, we can begin to discuss the healing process.

The politicians continue to cry out for “job creation.”  It’s nice on paper and in the halls of congress, but the only sustainable, long term job an elected official can create is of course, a government job.  Many of these politicians are smart enough the realize this to be true, but most don’t have the conviction to state the obvious truth in exchange for the part line.  Therefore, they continue to try and lead the American Public down the yellow brick road to nowhere, rather than coming clean with the issues, stating the coming pain, and preparing us for the inevitable liquidation of debt, insolvent banks and other institutions.  These are the only long term fixes on the road back to prosperity.  Until that point, more of the same rhetoric.

Plosser trashes Operation Twist

RADNOR, Pa. – The Federal Reserve’s move last week to further lower borrowing costs was risky and won’t significantly speed up a “painfully protracted” recovery, one of the officials who dissented against the decision said on Thursday.

Philadelphia Federal Reserve Bank President Charles Plosser said he was skeptical the central bank’s so-called “Operation Twist” will prompt businesses to hire or consumers to spend given a backdrop of continued structural adjustments in the economy and fiscal uncertainty.

“We should not take certain actions simply because we can,” Mr. Plosser, one of the central bank’s most vocal inflation hawks told a forum of business leaders in Radnor, Pennsylvania. “The ills we currently face are not readily resolved through ever more accommodative monetary policy.”

Read the remainder of the above quoted article

Now that we are seeing increasing dissension among current and former Federal Reserve participants and presidents, the game should get more interesting while Mr. Bernanke pushes more of the responsibility to Congress, who can’t get out of their own way.

About the Author

Trading and investing in markets is second nature to some, but a mystery to others. The goal is to provide a forum where everyday people aspiring to be part time or full time traders will learn how view markets differently and profit beyond their wildest dreams.

David Frost