While you were sleeping September 21st

Since noon yesterday any trading and short term investment decision, it seems, has been taken with today’s Fed statement in mind. The downgrade of Italy had muted impact on the markets as it was not really a surprise and more important things are waiting to happen.

In this environment the overnight action was following the same pattern. Most equity markets in Asia are unchanged and the same goes for currencies, commodities and fixed income. We are in the waiting mode for “operation twist” from the Fed. On a side note I am amazed how we get attached to these strong titles for policies with zero impact. It was the same for QE1 and QE2.

I do wonder, however, what is the Fed thinking. Similar versions of operation twist were implemented with no result. Why would it be different this time around? How can low long term interest rates, if that is the goal, can help an economy swamped by huge budget deficits, i.e. government demand for liquidity? Even if the costs of long term funding goes down markets know is only temporary and their expectations of higher taxes, inflation and higher interest rates remain unchanged. Therefore no investment should be expected from those policies. The only policies that would work would be those committed to lower budget deficits in the future which yes does mean a clear and transparent program for cutting government expenditures. That is why you need to lower taxes to make it through this period. I will get back to this after the Fed announcement.

Today is a special day again. But in the grand theme of things will not make or brake the global economy. However, with few important pieces of news expected, Greek Government meeting and the Fed, it would be wise that you remain mostly in cash and then decide which side or risk to accept.

Here are some articles about overnight action (can you spot the difference?): Bloomberg, Reuters, Market Watch




3 thoughts on “While you were sleeping September 21st

  1. Remember when I told you that it would be easier and better for them to go beyond 10y maturities, because they have too much debt until 2014 but on the long run they have a lot of space to go?! 🙂 It shouldn’t be a surprise if such an operation twist will be announced, today, or some day in the short run. They can’t find customers for these sort of maturities in the market, at these yields, and they can’t afford increasing interest rates for the economy. And they can’t borrow more for the short run, because they already have too much. So somebody has to take most of these long maturities. That somebody will probably end up being the FED, the only option really left. So, this operation twist helps some borrowers for a while, I don’t say no, but mostly is a question of financing the US debt :). Of course they must say something, anything, because the truth would sound somehow freak for the biggest part of the market, I’m not sure they are ready to just understand :).

    1. Expectations are that they will go on a buying spree for longer and longer maturities. No doubt about that. But… what worries me is the lack of vision. Also, the stories I am hearing about Fed buying a whole host of assets equity included. It is also advocated by market-monetarists. What I cannot figure out is why should that help. Why should people that all of a sudden feel richer because the Fed is buying their equities or lowers temporarily their cost of borrowing? It did not work when the central banks started to support the housing market. As long as the deficit remains there the expectations are unchanged and that is what is driving long term decisions about saving and investment. I agree that monetary policy should remain loose but not monetary policy is the problem. Is fiscal policy and we try to solve that with monetary tools. It will never work. What the world needs now is lower taxes for income and capital and credible plans that show expenditures cuts. One more thing: those that need to fall let hem fall. It is about time we stop saving the incompetent market players. Other will show up I can guarantee it.

  2. Huh? What sort of asset equity?! I think this must be a joke, or the sort of rumor the Mr. Market likes in order to sustain their positions :). This would be something I wouldn’t agree either.

    I do agree with the lack of vision and the fiscal policy, which indeed is very important, I can’t wait to see the form of the entire jobs act which will pass in the end.

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