The Federal Reserve is said to be ready to announce the implementation of “Operation Twist” some time on Wednesday.
Fueling speculation that something big was brewing, former Federal Reserve Chairman Greenspan was seen entering the building, albeit with Elvis. AS it turns out, he was there for a haircut and sometimes a haircut is just a haircut.
Ultimately, by exchanging its short term portfolio of holdings for longer range debt instruments “Operation Twist” is hoped to bend the yield curve.
Although I’ve seen the visuals many times over the years and can probably understand the concept behind “inverted yield curves”, it’s like “contango”. I know what it means, or at least am capable, but due to my disinterest in the topic, I choose to not clutter my mind with the meanings of those terms and phrases. I can’t begin to tell you how many times I’ve actually looked up the definition of “contango”, yet it still has never taken root. It’s almost as if the my future memory bank is more highly respected than its current state would give it the right to be.
Contango. The word itself brings giggles to mind. I just can’t remember why.
In an earlier blog, I admitted that “I don’t understand currencies“. I can just as easily say the same thing about debt instruments and bonds. I’ve never really tried to understand this very important aspect of investing. Sometimes its hard to know whether my disinterest in bonds and currencies comes from lack of intellect or just true lack of interest, as I perceive them as intangible and somewhat boring. I don’t worship at the feet of the PIMCO altar and I don’t find stamp collecting all that exciting.
I know that they are anything but, yet I can’t find anything persuassive about them to garner even faint interest. But there is probably hope, because last night I watched the premier episode of the new “Two and a Half Men”, never having been interested in the original version.
This “Operation Twister” though, has caught my interest.
During Jim Cramer’s interview of Treasury Secretary Tim Giethner last week, Cramer asked why such a strategy wasn’t being pursued. taking advanytage of historically low interest rates. At that point, the clever name hadn’t been publicly applied. It was just another conceptual approach to managing debt and markets and really meant nothing to me.
Cramer then seemed genuinely surprised and for a brief second seemed to be speechless as Geithner indicated that such a strategy might actually find its way into the arsenal.
You neither see that, nor the resultant silence from Cramer on very many occasions. It’s true when they say that silence speaks volumes.
The concept does seem to make sense, as long as there are buyers for the long term notes, but yet, it’s an untested strategy, at a time when the Federal Reserve seems to be running out of things in its quiver.
The problem with most ideas, whether they are economic issues or otherwise, is the occurence of unexpected consequences.
No one really knows what will happen if the yield curve is drastically altered. Certainly, no one buying a 30 or 40 year note has any clue as to what the rate environment will be at that time, much less next year. Hell, you don’t even know who the lead in Two and a Half Men is going to be.
I know that I wouldn’t be investing in a 30 year note during a period of all-time low interest rates.
Now flip the scene, and make believe that it’s 1979 and interest rates are 17%, then I might have a different opinion on locking into those kind of rates.
My attraction to Operation Twister may be solely related to its namesake, the game “Twister”, which made its debut during my childhood.
Talk about unintended consequences.
I think my first sexual encounter may have been on a spin of blue, but it’s difficult to say who exactly the reciprocal party was.
Although “Don’t Ask, Don’t Tell” has officially gone into the sunset, I might be inclined to invoke it for that long ago game of Twister.
Since I don’t really understand the world of interest rates, I have no idea what the unexpected consequences might be, but drawing from the game, collapse is the end game.
Collapse is exactly what seemed to happen today and turned a 150 point gain into one 140 points less.
Instead of selling lots of call contracts as I had envisioned, I only sold a few and added to my shares of the ProShares UltraShort Silver ETF and Riverbed Technology.
From my perspective, there never was a 150 point gain, as I had one of the worst days ever, compared to the indices. It didn’t help that I was now more heavily reliant on the likes of Freeport McMoran and Mosaic than ever before.
The source of the collapse was said to be “The Troika” and its inability to come to some agreement that would have released the $8 billion traunche that Greece needed to help it further into the hole as it prepares for its inevitable default.
You know, the one that everyone seems to be happily ignoring because that can is maybe as far as 3 months down the road.
The so called “Troika” consists of the IMF, the EU and the European Central Bank. They hold the cards, but apparently can’t decide whether to deal in a clockwise or countere-clockwise direction.
As Operation Twister comes into play, some Troika members may regret treating Treasury Secretary Geithner so shabbily during his vist to their recent meeting in Poland. They could have listened to his wise and sagely advice and could have switched over to a spinner and let the cards fall where they may, as they could then watch the arrow determine Greek’s destiny.
Ultimately, it doesn’t matter whether you spin the wheel clockwise or counter-clockwise, so certain areas of dissent are immediately resolved.
The groundrules could be very simple and definitions readily agreed to.
Blue for no more government hiring
Red for increased retirement age and so on. They may even want to throw in that taxes should not just be levied, but they should be collected, as well.
But no matter what, every game of Twister does end the same. I don’t remember whether there was a “winning” scenario. Surely Twister was first popular long before Charlie Sheen, but even then the concept of “winning” must have existed.
Instead, every game ended with the inevitable collapse accompanied with lots of laughs and the feigning of embarrassment by some.
Some actually reached their peak maturity level in the pile.
In this case, I don’t think there’ll be any laughing. I doubt that there’ll be any embarrassment either, as certain egos, particularly those associated with politically appointed positions, don’t allow public displays of embarrassment.
They do allow for finger pointing, though.
No matter what, those fingers will probably point in our direction, as undoubtedly our banking crisis just greased the pole for southern Europe and Iceland, Ireland and others, as well.
Ultimately, only a winner take all game of Twister will be able to sort it out at the highest levels.
A repeat of the Berlusconi – Hillary Clinton match would be interesting. It’s just so unfortunate that Dominique Strauss-Kahn can no longer suit up (or down) in preparation for game match. You could probably get enough people to pay good money to see him in a good healthy game of full contact Twister to make a dent in the EU economic mess.
Happy to help.