Wednesday, October 12, 2011

So Far "Operation Twist" Is A Colossal Failure

...except for the Treasury - and for investors clamoring for the short term "safe" paper that the Fed is selling and while the primary dealers (Wall St. banks)  sell back to the Fed the medium/long term paper that primary dealers have to eat in Treasury auctions in order for the Treasury to look like it is having no problem funding the Government's deficits.

Take today, for instance, the Fed auctioned off $8.87 billion in 18 month - 2yr paper that was met with nearly $70 billion in bid interest.  Then the Treasury auctioned off $21 billion 10yr Treasuries in what was one of the poorest quality Treasury auctions in 2 years.  The primary dealers, aka the Fed, had to swallow 58% of the auction.  You see what's going on here?  The Fed is selling short term "safe" paper into huge demand in order to make room on its balance sheet to indirectly monetize Treasury auctions.  This is de facto money printing. 

"OT" is supposed to reduce the yields on the "middle" part of the curve, thereby stimulating business investment and the housing market. In theory. It failed back in the early 1960's when it was tried the first time.  Let's take a look at what the market thinks of "Operation Twist."  When the Fed announced the new monetary operation on Sept 21.  Here's a "then and now" list of what the Treasury yield curve looked like:

                                                            9/21                        Today

                                    5-yr                .85%                         1.18%
                                    7-yr              1.27%                         1.74%
                                 10-yr               1.80%                         2.25%
                                 30-yr               2.85%                         3.25%

Hmmm....either the Fed's policy is a dismally brutal failure or all of a sudden the bond market decided that we might get some inflation.   Since the bond market has egregiously mispriced the true rate of inflation for the better part of the last 10 years, I would say the odds are greatly skewed toward the view that once again the Fed's trying to use monetary gimmicks to tinker with nature is appallingly flawed.

But let's call this "new" policy idea what it is.  Circle back to what we know about the Fed's operation since December 2010, when QE2 was announced.  We know that indirectly, via open market purchase operations, the Fed basically financed 100% of all new Treasury debt issuance.  Hell, Bernanke didn't even wait for the ink to dry on the bond indentures of some of the auctions, as Treasury CUSIPS not even a week old would show up on the Fed's subsequent weekly Treasury purchase operations (POMO).

So this Operation Twist, is really just another disguised form of the Fed shifting paper around on its balance sheet to take advantage of the surreal demand for short term "safe" paper in order to create the funds needed to make sure that the Obama Government can fund its operations.  Nifty footwork if you ask me, but quite obvious to the naked eye if you know where to look for the truth.

Hang onto to your gold and silver, because even if you ended up buying into the market at the recent top in September, I believe that a year from now you may have doubled your money from that point of investment.  It's been that pattern for the last 10 years and the fundamentals and technicals supporting the continuance of that pattern get stronger by the day.


  1. How long can this last?

    'Insane' even by Illinois standards? Union official to get $500,000 in pensions

    'Insane' even by Illinois standards? Union official to get $500,000 in pensions
    Joint investigation by Chicago Tribune and WGN-TV finds at least eight labor leaders stand to get pensions from both the city and union for the same time period

  2. Yet the Dow is up 1100 points since an October 4th low. Splain me that? Of course "The Twist" is all the rage!

    Makes me remember the whimsical poetry that centered on "velocity of money!" Churning seldom creates wealth or anything resembling productivity and due to the mark-ups paid by the Fed for these transactions at the banks... there lots of slosh BUT there is a leak in the bucket.

  3. Aren't you the least bit concerned about draconian policies being implemented to thwart PMs?

    Just one example would be a heavy tax when buying/selling. It's easy to visualize many other heavy-handed methods other than nationalization of PMs.

    I'm curious how you would circumvent these?
    And if you have no plan, then how can you in good conscious recommend allocating more than 50% (or whatever) into PMs.

  4. (Dave)

    No not concerned about policies specifically designed to "thwart" pm's because once you own your gold and silver in physical form your money is "outside" of the system.

    I doubt they'll "tax" gold and silver any differently than any other investment.

    How can you in good conscious keep ANY of your savings or wealth in paper money, especially U.S. dollars when you know that over 5000 years of organized human history that every single paper fiat currency has collapsed? In other words, anyone holding ANY of the fiat currencies right now is pretty much 100% guaranteed that their papaer money will eventually be worth ZERO.

  5. Great post.
    Funny enough, they might actually start to print even more!

  6. In corrupt regimes you never know what the next corrupt policy will be...?

    Florida AG Takes Orders, Money from Fraudclosure Firm

    Of course, we know those denials are nonsense, and these investigators were tossed because they were actually doing their jobs, rather than looking the other way. AG Bondi has been criticized by Florida lawyers for accepting campaign contributions from companies the AG’s office is investigating.

    Conflict of interest, anyone?

    Thus: Congress has been bought and paid for, the Florida AG’s office is also up for sale. Is everyone in public office merely a whore selling their services to the highest bidder? The level of corruption is beyond comprehension — it is unconscionable.

    If I lived in Florida, I would begin a recall immediately to get this pathetic trollop thrown out of office and then I would spend the next 10 years lobbying for her eventual disbarment.

    My disgust is hard to put into words.

  7. Capitalism Without Failure

    Let's recap our recent financial crisis: 1. Rampant fraud, 2. Bailouts of the worst actors in the Ponzi Sector of our economy, 3. Overwhelming debt and liability imposed on taxpayers, 4. Money printing on a scale that will threaten our currency, 5. Promotion of business leaders and policy makers who are seriously compromised, 6. Conglomeration of "Too Big To Fail" banks into a more empowered menace. Problem not solved.

    Dear Occupy Wall Street: Focus on the People

  8. Something I Learned Today

    Last year, Bloomberg spoke to Oppenheimer analyst Chris Kotowski who called the DVA an "abomination." He explains, "Just because Morgan’s credit spreads widened out this quarter doesn’t mean that their ultimate interest and principal payments changed one iota."


    Apparently this rule was passed by FASB in 2007. I wonder who lobbyied for it? More importantly what sort of accounting standard do you have when lobbying is part of it. What a joke.

    ....a U.S. accounting rule known as Statement 159, adopted by the Financial Accounting Standards Board in 2007, which allows banks to book profits when the value of their bonds falls from par.

    JPMorgan Uses Surge In Its Default Risk As A $1.9 Billion "Source" Of Revenue And Net Income

    So what does JPM do? Why it pulls the "Fair Value Option" card, discussed recently in the context of Morgan Stanley when we speculated whether the bank's biggest asset was their debt. Turns out we had the concept right, but the bank wrong, because $0.29 of EPS Net Income, or $1.9 billion pretax, was a "benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads." That's right: the fact that JPM spreads blew out in the quarter, and its default risk soared, for one reason or another actually served to "generate" not only net income but also revenue! And now you see why American banks can never lose - in a good quarter, they release reserves; in a bad quarter they take FVO benefits in the form of Debit Valuation Adjustments, or in this case both! Winner, winner, always a chicken dinner for Jamie Dimon. Expect every other bank to do the same accounting BS this quarter to pad their numbers.

  9. Goals are good....

    Goal Number One - For Anyone Protesting Without Direction (OWS and others)