What the heck happened yesterday afternoon? That massive sell off ruined my pattern theory about the market, ya know, down one day, up the next. I guess the opportunists couldn’t resist taking profit on yesterday’s rise, and, oh yeh, today is the Fed’s big day …
The anticipation has been building for over a month as economists and quant-jocks the world over wait to hear from the Federal Reserve. Now, finally the day has come! The awkwardly-worded press release comes out this afternoon, folks, and not since the debut of the last Harry Potter film have dorks, geeks and muggles been so excited.
I know it displays my lack of pop-currency, but what is a “muggle?” In any case, the market seems excited as well, but given yesterday’s sell off, it also seems uncertain as to which way the Fed will go. Now, given the expectation, the fun theme above seems quite appropriate indeed. After all, naming a major monetary policy shift after a 1960s pop star (Chubby Checkers) is appropriate to the seriousness of the situation, no? No matter, the market seems to be expecting a yea or nay this afternoon on what could be a monetary policy last utilized in 1961.
Operation Twist is the process of the Fed buying up long-dated Treasuries in an effort to flatten the yield curve. By doing so, the Fed drives down the desirability of “safe” investments, making riskier options like investing in a business instead of government debt more attractive.
Excuse me, I know I missed the boat on muggles, and forgive me for asking, but isn’t Operation Twist quantitative easing with a cute name, and isn’t the goal the same, to drive up prices of riskier assets, such as oil and every other commodity on the planet? Oh, I see, the real goal is to drive real interest rates down even further, not to produce inflationary pressure on the economy. Hey, wait a minute! What if Operation Chubby Checkers does increase inflationary pressure on the economy? What if oil prices shoot through the roof again? Hmmm … I wonder how everyday muggles will feel about gas prices rising again after falling now for some two months?
Oh, and one more question … If investors begin to pull out of long-dated treasuries, doesn’t that mean the Fed will have to make up the difference above and beyond what it plans to buy (if it does plan to buy). If not, then what is the point – yields will rise as investors leave the treasuries market, yes? If so, hello pre-June Fed status, a balance sheet that is growing not getting smaller. That situation points to inflationary pressure on the economy as well. I know, I know, when the Fed did the first and second round of quantitative easing, the know-it-alls said it would lead to hyper-inflation in 2011, but it really didn’t. True, energy and food prices jumped dramatically, but as we all know, those pressures are not the inflation of worry – rapid rises in wages is the real concern. Thank goodness, there’s no need to worry about that …
The top 10% of U.S. workers currently receive about half of the nation’s total income, with half of that going to the top 1%. The last time this country saw a wage gap so extreme was just before the 1929 stock-market crash and the Great Depression.
Trade in the day – Invest in your life …
