Forget Operation Twist: Rosenberg Says Bernanke Will Shock Everyone With What Is About To Come

Tyler Durden's picture

As we have been pointing out since the beginning of the week, the one defining feature of the past 5 days has been a relentless short covering rally. And while the mechanics were obvious, one thing was missing: the reason. Well, courtesy of David Rosenberg's latest, we may now know what it is. Bottom line: for all who think that Bernanke is about to serve just Operation Twist next week... you ain't seen nothing yet. "The consensus view that the Fed is going to stop at 'Operation Twist' may be in for a surprise. It may end up doing much, much more." Rosie continues: "Look, we are talking about the same man who, on October 2, 2003, delivered a speech titled Monetary Policy and the Stock Market: Some Empirical Results. I kid you not. This is someone who clearly sees the stock market as a transmission mechanism from Fed policy to the rest of the economy. In other words, if Bernanke wants to juice the stock market, then he must do something to surprise the market. 'Operation Twist' is already baked in, which means he has to do that and a lot more to generate the positive surprise he clearly desires (this is exactly what he did on August 9th with the mid-2013 on- hold commitment). It seems that Bernanke, if he wants the market to rally, is going to have to come out with a surprise next Wednesday." In other words, stocks are now pricing in not just OT 2, and a reduction in the IOER, but also an LSAP of a few hundred billion. There is, however, naturally a flipside, to Bernanke's priced in announcement: "If he doesn't, then expect a big selloff." In everything, mind you, stocks, bonds, and certainly precious metals. And, of course, vice versa.

Full note from Today's Breakfast with Dave:

The consensus view that the Fed is going to stop at 'Operation Twist' may be in for a surprise. It may end up doing much, much more. And this may be one of the reasons why the stock market is starting to rally (a classic 50%+ retracement, which always occur after the first 20% down-leg in a cyclical bear market would imply a test of 1,250 on the S&P 500 at the very least). Hedge funds do not want to be short ahead of next week's FOMC meeting, and who can blame them?

Here are 10 reasons why:

  1. Just go back to August 9th. The Fed was supposed to make a more emphatic comment in the press statement about "extended period" as it pertained to the length of time the Fed would stay ultra-accommodative on the rates front. Bernanke went much further than anyone thought with his pledge to keep the funds rate at the floor at least to mid-2013.
  2. Ben Bernanke has shown repeatedly that he is willing to take risks and be very aggressive.
  3. Everyone knows that the Dow finished the August 9th session with a huge 430 point gain after the FOMC press statement was fully digested. Not only that, but when Bernanke held his two-day meeting in mid-December of 2008 and unveiled QE1, the Dow soared 360 points. And last November, the day after that two-day meeting when Bernanke made it clear in his Washington Post op-ed article how key it was to ignite the stock market, the Dow jumped 220 points. It may all be just for a near-term trade, but in an industry where every basis point counts, who wants to be short knowing all that?
  4. At that August meeting, we know both from the statement and minutes that additional rounds of unconventional easing were discussed. And Mr. Bernanke made it very clear at Jackson Hole that they would be on the table again at the coming meeting
  5. The Fed would like to be out of the picture during the election campaign (especially if Richard Perry ends up winning the GOP nomination).
  6. The Fed has cut its GDP forecasts at each of the past three meetings.
  7. The stock market is actually little changed from where it was at the last meeting and we know based on that Washington Post op-ed, that it is equity valuation (specifically the Russell 2000) that Ben wants to see rally. Sanctioning lower bond yields is just a means to that end.
  8. There is no fiscal stimulus to bolster the economy, with the odds very high that the Obama jobs plan — some in his own party object to the package as per yesterday's New York Times — will be dead-on-arrival on the House floor. The Fed is the only game in town.
  9. Financial conditions have tightened nearly 100 basis points since the spring and deserve a policy response.
  10. Bernanke announced at Jackson Hole that this coming meeting was going to be a two-day affair, not one day. The last time he did this was back in December 2008 and that was when he invoked QE1. There has to be a reason why it is two days, and it must be because he wants to build the case for three dissenters. The Board is being sequestered for a reason!

Look, we are talking about the same man who, on October 2, 2003, delivered a speech titled Monetary Policy and the Stock Market: Some Empirical Results. I kid you not. This is someone who clearly sees the stock market as a transmission mechanism from Fed policy to the rest of the economy. Here is a key excerpt from that sermon:

Normally, the FOMC, the monetary policymaking arm of the Federal Reserve, announces its interest rate decisions at around 2:15 p.m. following each of its eight regularly scheduled meetings each year. An air of expectation reigns in financial markets in the few minutes before to the announcement. If you happen to have access to a monitor that tracks key market indexes, at 2:15 p.m. on an announcement day you can watch those indexes quiver as if trying to digest the information in the rate decision and the FOMC's accompanying statement of explanation. Then the black line representing each market index moves quickly up or down, and the markets have priced the FOMC action into the aggregate values of U.S. equities, bonds, and other assets.


Even the casual observer can have no doubt, then, that FOMC decisions move asset prices, including equity prices. Estimating the size and duration of these effects, however, is not so straightforward. Because traders in  equity markets, as in most other financial markets, are generally highly informed and sophisticated. any policy decision that is largely anticipated will already be factored into stock prices and will elicit little reaction when  announced. To measure the effects of monetary policy changes on the stock market, then, we need to have a measure of the portion of a given  change in monetary policy that the market had not already anticipated before the FOMC's formal announcement [emphasis added].

In other words, if Bernanke wants to juice the stock market, then he must do something to surprise the market. 'Operation Twist' is already baked in, which means he has to do that and a lot more to generate the positive surprise he clearly desires (this is exactly what he did on August 9th with the mid-2013 on- hold commitment). It seems that Bernanke, if he wants the market to rally, is going to have to come out with a surprise next Wednesday. If he doesn't, then expect a big selloff.

What he is likely to do is another story, but here are some options:

  1. Expand the balance sheet further and simply buy more bonds (at the longer end of the curve).
  2. Eliminate the interest paid to commercial banks on excess reserves (to try to spur lending).
  3. Announce an explicit ceiling on the 10-year note yield (say 1.5%), which the Fed has done in the distant past. Based on Bernanke's prior rhetoric, this would seem to be a preferred strategy (though the Fed relinquishes control of the balance sheet).
  4. Buy foreign securities (bail out Europe and weaken the U.S. dollar — talk about killing two birds with one policy stone).
  5. Announce an explicit higher inflation target or perhaps a lower unemployment rate target (i.e. reinforce the DUAL mandate).
  6. As Mr. Bernanke stated for the record in November 2002, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. It could offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral. For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector.

Note that this is all for a trade. As we saw back on August 9th, we had a huge rally but the market is no higher today than it was then. All we have seen since is a huge amount of volatility.

Source: Gluskin Sheff

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Upswaller's picture

"You're right, Lefty, it's been just a little TOO quiet around here......."

LawsofPhysics's picture

Is it just me, or do all of those choices do nothing for the real economy or unemployment.  Seems like gold should get another shot in the arm then.  Okay, fine with me.

Comay Mierda's picture

of course they wont do anything for the real problems.  they want to CRASH the economy and make us all their serfs.

WonderDawg's picture

So, nothing new, then. Who didn't already know this? Bernanke may or may not do something stupid. Big fucking deal. The article was kind of anti-climactic to the headline.

101 years and counting's picture

sorry, but this makes no sense.  if ben is going to torch the USD and ignite a commodity and equitiy rally, why did they just squeeze out all the shorts?

LawsofPhysics's picture

So only the HFT bots and insiders can profit.  No goyium allow to catch a ride on the next rally.

IQ 145's picture

On the contrary; it's a public market. Bought another S&P500 contract this morning at 1197.25@2.21am HST. So the center of my position is at $1190.225; The bottom was in a while ago; the rally continues. The article above is useless crap. You can participate if you wish. I have no idea why you're worrying about the next rally; this one started a couple of weeks ago. Oh, by the way, there's plenty of liquidity to drive the S&P back to 1255. I dumped the BAC at $7.23; not because there's anything wrong with it as a TRADE; rather than as a philosophical position, or a moral issue, or whatever; but because I prefer to ride the S&P and it's only a small hobby account.

depression's picture

Dow 12,500 here we come !

Ahmeexnal's picture

Whatever gimmick they might come up to prop up the markets you can be sure it will be "transitory".

Someone ought to tell the stupid manipulators that the first rule of Mr. Market is: Don't scratch Mr. Market's balls.

They are about to find out what happens when you do.

JW n FL's picture



Whatever gimmick they might come up to prop up the markets you can be sure it will be "transitory".

New item in your series of interest:

Working Paper No. 11/216: Data-Rich DSGE and Dynamic Factor Models Author/Editor: Kryshko, Maxym Summary: Dynamic factor models and dynamic stochastic general equilibrium (DSGE) models are widely used forempirical research in macroeconomics. The empirical factor literature argues that the co-movement oflarge panels of macroeconomic and financial data can be captured by relatively few commonunobserved factors. Similarly, the dynamics in DSGE models are often governed by a handful of statevariables and exogenous processes such as preference and/or technology shocks. Boivin and Giannoni(2006) combine a DSGE and a factor model into a data-rich DSGE model, in which DSGE states arefactors and factor dynamics are subject to DSGE model implied restrictions. We compare a data-richDSGE model with a standard New Keynesian core to an empirical dynamic factor model by estimatingboth on a rich panel of U.S. macroeconomic and financial data compiled by Stock and Watson (2008).We find that the spaces spanned by the empirical factors and by the data-rich DSGE model states arevery close. This proximity allows us to propagate monetary policy and technology innovations in anotherwise non-structural dynamic factor model to obtain predictions for many more series than just ahandful of traditional macro variables, including measures of real activity, price indices, labor marketindicators, interest rate spreads, money and credit stocks, and exchange rates.

JW n FL's picture

World Economic Forum's 2011 Annual Meeting concludes in China

In the northern Chinese coastal city of Dalian, the World Economic Forum's annual three-day summer conference concluded. As planned, the event attracted well over a thousand political and business leaders and academics, from over 90 countries to attend panel discussions, workshops and brainstorming sessions on how to deal with the biggest challenges facing countries in the developing world.


espirit's picture

Wha? No QE3?  That will be a shocker.

JW n FL's picture



They are already Printing QE.. Look at the M2 Numbers! they aint going downward! LOL!!


 Percent change at seasonally adjusted annual rates     M1                    M2
  3 Months from May  2011 TO Aug. 2011                   36.7                  23.3
  6 Months from Feb. 2011 TO Aug. 2011                   25.3                  14.5
12 Months from Aug. 2010 TO Aug. 2011                   20.7                  10.3

1. M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) traveler's checks of
    nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and
    foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits
    (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union
    share draft accounts, and demand deposits at thrift institutions.  Seasonally adjusted M1 is constructed by summing currency, traveler's checks,
    demand deposits, and OCDs, each seasonally adjusted separately.

2. M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in
    amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in
    retail money market mutual funds, less IRA and Keogh balances at money market mutual funds.  Seasonally adjusted M2 is constructed by summing
    savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to
    seasonally adjusted M1.



H.6 (508)
Table 1                                                                                                     For release at 4:30 p.m. Eastern Time
                                                                                                                                September 15, 2011
Billions of dollars

June 2011  9111.4

July 2011  9313.7

Aug. 2011  9544.9

bid the soldiers shoot's picture

They won't have a parade on the 4th of July before they don't have QE3 ad infinitum.

prains's picture


we talked about this, decimal to the left friend, when doing your calculations decimal to the left.


chindit13's picture

I'm not sure you know the ground rules here in the comment section.  All profits are immoral unless they come from rises in the fiat price of Gold.  There are only a set number of Authorized Investment Goods (ironically, AIG) and to make matters simple, they have been given an easy to remember acronym, GGGG.  Often referred to as the 4G's, these are Gold (required capitalization, same as God), Guns (same), goulash and guillotines.  Goulash can be either canned or freeze dried.  Guillotines is self-explanatory, but if you don't know, let's just say it is not for cutting Spam.

Regarding the AIG's, you are entitled to high five and gloat when the fiat price of Gold rises, as on up days its value is fairly measured in terms of fiat paper.  You are welcome to applaud your own investment prowess and note the percentage ROI, even though it is fiat based.  On down days, otherwise heretofore known as "manipulation", you are expected to call its nominal price "only a paper price", and to remind people that "I just looked and I have as many coins as I had yesterday".  After a sharp selloff, you are expected to claim you'll soon be "backing up the truck" to take advantage of the lower "paper price", even though you may have boasted a day earlier that you were already "all-in" PMs.  Nobody is keeping track, so puffery is perfectly acceptable.

Hope that helps and that henceforth you refrain from "picking up nickels in front of a steamroller", because sooner than most people think this whole thing is coming down.

Finally, you will notice, if you have not already, that it is heretical to make light of certain subjects and that failure to obey that part of site dogma will result in a plethora of down arrows that will follow you wherever and whenever you post on Zerohedge.

samslaught's picture

think about who benefits from controlled inflation and or hyper-inflation and then think about who benefits from deflation.  Then think about what group of people throughout history always get their way.  This time is NEVER different. 

SheepDog-One's picture

Rosie says 'The market here is pricing in OT2, LSAT, plus $300 billion QE'....wait, whats that Rosie? The markets have already priced in FAR more than that since Feb DOW 9,800! ZH articles from back then had the marketeers pricing in $2.5 trillion QE! Thats what all the stories said!

Skid Marks's picture

May I submit ...... that 100% is not priced in and that there is a great deal of "money on the sidelines". How could there not be? Gold popped and dropped. The Swiss are holding the Euro up (probably getting the cash from the Fed) while the "smart money" gets out. Everything is getting "papered over" (pun intended) and BB is going to surprise everyone by not trying to pull a rabbit out of his hat because the work has aleady been done. We just don't know what it is yet or maybe we do but haven't recognized it, given it a label. What can you call the Swiss support of the Euro? QE-E 3.1?

IQ 145's picture

Yeah; I see that as the Liquidity; or promise of liquidity; that allows the psychology to change and the market broke out above 1200. Oh, by the way; it is not a short covering rally; tha's more assinine BS. Accumulation is taking place; People are buying stocks. Your Guru is wrong; I'm sure you'll get over it.

Caviar Emptor's picture

There are few "people" in this market: more than 75% of daily NYSE volume is program trading (HFT bots ping ponging to each other and themselves). Of the remaining 25% half is day trading only. Only 12% gets held longer than intraday. 

And More data: mutual fund equity withdrawals have been going on all year. This summer several major hedge funds blew their cookies. 

Unfortunately the market has lost it's wealth effect for the general economy and the US population not working in trading on Wall Street. 

We're concerned here about the ongoing effect of Fed policy on the state of the US economy and the future well-being of the nation. The policies may benefit the stock market but are having an inverse effect on the health of the country. 

01022010's picture

skid marks...i'll give you an upvote just for the profile pic!

nmewn's picture

Silicone glows under a black light ;-)

JW n FL's picture



the women down voted you for illuminating the facts, LOL!!!

I of course voted up for Boobies of any kind! I am Pro-Boobies!

Even Babies Love Boobies! how can someone NOT! Love BOOBIES!

JW n FL's picture



but there is that Rule..

whoever Buys them! does not get to play with them.. that is for the next giuy after the guy who bought them! LOL!!

IQ 145's picture

Whinning because you don't like the fact that the market is rallying is infantile; "Rosie" is an ass.

prains's picture

IQ 14.5


your decimal is in the wrong spot, starting to repeat myself

bonddude's picture

Sorry Rosie but you've been wrong so long = broken clocks , etc...

maninthbx's picture

[ ] Whining
[x] Whinning


jackinrichmond's picture

it's a bear market rally..  a  a relief rally if you will.      all the fib retracements make sense..


jdelano's picture

Yeah--I thought that's why we've been range bound for so long. Bears say global economy sucks & Europe gonna crash, bulls say who cares mofos, giant QE coming. Personally I think not even bernanke is that short sighted. He does a massive QE with inflation already ticking up like it is and china will retaliate by dumping the dollar. Game over.

Shit Bag's picture

America is fucked up forever unless Ron Paul gets elected.

max2205's picture

It would be cool if Ben came to the mike naked with a monkey and they both masterbated. Then said he quit after he cums on Liesman's face

FEDbuster's picture

Maybe Becky Quick could be his fluffer and Jim Cramer the jizz mopper?  "Touch my monkey".

PMakoi's picture

LOLOLOL!  That is the hardest I've laughed in 3 days!  Thanks.


depression's picture

Ron Paul = Ross Perot 2.0

Bicycle Repairman's picture

Perot sure tanked beautifully didn't he?

bid the soldiers shoot's picture

Dude, he put Clinton in the Oval Office and perforce a cigar in Monica's ash tray.

Pant Suit Skidmark's picture

He drunk a little of the toilet water too.

fxrxexexdxoxmx's picture

More people voted for Bush and Perot than for Clinton. I still remember his lackeys repeating "President Clinton has a mandate from the people" over and over after the he was inaugurated.

Clinton 44,909, 806   Bush 39,404,950 Perot 19,743,821 ( 59,148,771) per wiki or any search of 1992 Presidential election results. Thats 14,238.965 more than Bill.

The only mandate Clintooon every had was keeping one step ahead of his last rape.

BTW if oral sex is not sex, per Clinton and his apologists, they could twist that insanity so as to have had Chelsea blow Bill and it would not have been incest.

What bunch of scum bags.

chindit13's picture

I'm not sure you noticed, but Clinton has been out of office for ten years and eight months.  It was in all the papers.  Also, the rules of the electorate are only slightly complicated, but according to those rules Clinton was entitled to take office when he did.  Whether or not you gave him a mandate is of no import, for you do not carry that authority.  Just for fun I checked the definition of "mandate".  Here it is:  the authority bestowed on a government or other organization by an electoral victory, effectively authorizing it to carry out the policies for which it campaigned.  Getting the highest number of votes and electoral votes constitutes victory.

Pant Suit Skidmark's picture

Sour grapes, exactly. Everybody wants a Lewinsky facial with icing on the dress.

Nice to see what a nice little middle-eastern girl will do for her country.

Miss anthrope's picture

sorry, but ross perot was a third party to split the republican vote and get clinton elected.  that's not why all of the MSM will not even SAY HIS NAME NOW.  if ron paul gets the republican nomination he will be president. 

Bicycle Repairman's picture

Shitbag, I dig your funky groove, man.  Conk-a-chonk-conk-conk-a-chonk!!!

Abitdodgie's picture

You are already thier surfs, you pay taxes dont you.