Thursday, September 8, 2011

Thur Post #1: Let's Twist Again

If you have never heard of the term 'Operation Twist', you may wish to familiarize yourself with it.

You're going to hear more about it in the coming days.  As the Wall Street Journal notes, the Federal Reserve is getting ready to act as Fed Chairman Bernanke prepares to make a speech later today.

The blog, The Golden Truth, did an excellent summary on what 'Operation Twist' is all about.

Essentially it's one of the Fed's 'tools' that it use to try and stimulate the economy by making a concerted attempt to lower medium/long term interest rates and stimulate housing and business borrowing.

The 'Operation Twist' idea originates back to the Kennedy Administration and its desire to get interest rates lower in order to lower the balance of payments deficit at that time.

Observers expect that the Federal Reserve will be announcing this later this month.

The way it works is the Fed will attempt to 'flatten' the Treasury yield curve by going out and buying up Treasury bonds in the middle and long part of the Treasury curve (5-30 years, mostly in the 7-10 range where mortgage rates are based).

In a 'twist' on the methodology used by the earlier Fed, which sold short term Treasuries and bought long term Treasuries, many believe that the Fed this time around will try to pull down interest rates and flatten the curve solely by buying the longer paper.

This is because it already has in place a zero-interest short term rate policy thru 2013, and thus many don't expect the Fed to be unloading short term paper.

You will hear some fancy lingo like 'increase the duration' of the Fed's Treasury portfolio, which simply means the Fed is letting the shorter term holdings mature and it's rolling that money into intermediate/long Treasuries.

So "Operation twist" will be an attempt by the Fed to lower medium/long term interest rates by pegging the short term rate to zero and then going out and buying longer-date Treasuries.

It's meant to be an extension of Quantitative Easing 2 and supposedly can be implemented without the Fed having to expand its balance sheet (printing money).

It's called a "twist" because the yield curve is normally upward sloping - i.e. the longer the maturity of Treasury bond, the higher the yield. But the idea is that the Fed can "twist" the yield curve into a "flatter" shape.

Look for the Federal Reserve to do more than this too.  At its next meeting Sept 21-22 many speculate that they will also announce some sort of new QE.

With all that has been going on with the European banks, they are almost sure to inject massive liquidity into the collapsing banking system. Look for the Fed to buy more crap assets from banks.  The Fed will also need to expand its balance sheet to pay for Obama's new spending program he is sure to announce tonight.

With the return of the Kennedy era 'Twist' operation, it's time to mimic Chubby Checker and Twist Again!

Gold and mining stocks are going to be volatile BUT they are going to go a lot higher within the next month or two.

You can count on it.
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  1. tax holiday

    Lobbyists also argued that moving on the tax holiday could help achieve a long-held goal of the White House as well as many in Congress: corporate tax reform. They say it fits into moving the United States towards a “territorial” tax system where only profits made in the country would be taxed.

    “Repatriation is a bridge to tax reform. It’s a further concession that the tax system that we have is outmoded and out of date,” Kies said.

    ah, the system is truly corrupt if this actually is implemented. What a joke.

  2. More market manipulation leading to more misallocations of capital. Real interest rates are already below zero when adjusted for inflation. This low interest rate policy is a massive attack on savers, which totally short circuits the way to a productive economy ie. savings-investment-production. In addition, retired people are getting screwed as they are unable to attain interest income sufficient to live and are forced to chase more risky higher yields. These central financial planners are complete incompetents and should be locked up before they totally destroy the economy and the value of all currencies. Their actions are insane!