Federal Reserve Chairman Ben Bernanke was singing from Chubby Checker’s songbook on Wednesday with the announced extension of Operation Twist, a monetary policy maneuver aimed at driving down long-term interest rates that was initiated last September and set to expire this month.
The rock singer, capitalizing on his 1960 hit “The Twist,” reprised the dance song the following year, singing: “Come on let’s twist again, Like we did last summer!…Like we did last year!”
Uncannily, the Fed has directed its bond-buying desk to continue purchases of long-term Treasuries like it did in the summer of 2011 with the aim of keeping a slow-growth economy on its dancing feet amid dreary employment statistics in the U.S. and financial market strains in Europe.
But to David Santschi, executive vice president of the investment research firm TrimTabs, the move was about propping up U.S. securities markets.
“The Fed talks a lot about macroeconomics, but what it watches is stock prices,” Santschi told AdvisorOne. TrimTabs issued a statement to clients Tuesday predicting the Fed’s actions precisely, since stock prices have held up this year, thus obviating the need to take more severe action such as a third round of quantitative easing, Santschi said.
The TrimTabs analyst called the more limited renewal of Operation Twist “throwing a bone to keep Wall Street happy,” saying “markets have become as addicted to monetary stimulus as the economy is to deficit spending of $1.3 trillion a year.”
The Fed’s renewal of Operation Twist lacks the high impact of quantitative easing. In a statement released Wednesday, the Fed said: “The continuation of the maturity extension program will proceed at the current pace and result in the purchase, as well as the sale and redemption, of about $267 billion in Treasury securities by the end of 2012.”
In an afternoon press conference, Bernanke defended the Fed’s policy against criticism that the Fed’s action Wednesday was quite modest in relation to its negative outlook on the economy. “The Fed still does have capacity to strengthen the economy by easing financial conditions,” he said.
But according to Santschi, the Fed is really just engaged in jawboning, or projecting greater strength than it really has.
“When you’re manipulating markets, you want to talk a lot and make people think you’re powerful and do as little as possible. The Fed is more constrained than I think most investors think.”
Santschi says TrimTabs recommends that investors hold cash and Treasury inflation-protected securities (TIPS) rather than conventional Treasuries. Stocks, he said, are fine “as a trade” but not as an investment. “Forward operating earnings are [just] 13 times, but they’re bogus; they don’t have to mark their assets to market.
The TrimTabs analyst does not expect a happy ending to current economic and monetary policies, saying these are “probably the most interesting times since the 1930s. I don’t think most people have any idea how big the problems are.”
Economic policymakers in the U.S. and Europe will “continue with can kicking, bailouts and money printing as long as they can; if they keep doing it, the whole system is going to fail, and you’re going to have a reset,” he said.
That kind of system collapse wouldn’t be the end of the world and won’t likely occur within the year, Santschi said. “But you’re going to have a different monetary system, not this crazy credit system and out-of-control credit creation” where a massive financial system, including trillions of dollars in derivatives risk, is built “on a much smaller economic system.”