Rosenberg Presents The Three Ways Bernanke Disappointed The Market, And Why It Is Dumping

Tyler Durden's picture

With everyone chiming in with their take on Operation Twist, here is one of the few actually worthy ones on the matter.

From David Rosenberg

First, the Fed once again downgraded its outlook on the economy, citing "significant downside risks" (the word "significant" was not there on August 9th) and added "strains in global financial markets" as one of the reasons for the more downbeat assessment.

If there hadn't been so many trial balloons being floated in recent weeks over the prospect of an Operation Twist ("OT") style of policy easing, perhaps the stock market would have rallied as it did in rather dramatic fashion six weeks ago. At that time, the Fed did surprise the market by not merely signalling to investors that the central bank would remain accommodative beyond just what may be considered to be an "extended period", but by actually stating that rates would be kept near 0% through mid-2013 at the very least. That was something that both bonds and stocks were not anticipating — a specific date well into the future.

This time around, there was very little that was not anticipated, particularly from a stock market perspective. Considering that Mr. Bernanke made this a two-day meeting instead of the one-day confab which was originally planned (the last time he did that was in December 2008 when QE1 was pledged), there were high hopes that the Fed was going to go further than just embarking on OT yesterday.

But the reason why equities may have sold off hard in the aftermath of the press release could boil down to these three other factors:

  1. By radically flattening the yield curve in this Operation Twist program (where the Fed sells short-dated securities and buys maturities between six and 30 years), net interest margins in the banking sector will likely be negatively affected.
  2. The dramatic decline in the 30-year bond yield is going to aggravate already-massively actuarially underfunded positions in pension funds
  3. The Fed says it is going to extend this Operation Twist program through to June 2012. This is a subtle hint to the markets that barring something really big occurring, there is no QE3 coming — not over the near term, in any event, and certainly not at the next meeting on November 1-2. So a stock market that has continuously been fuelled on hopes doesn't have any in this regard for at least the next month and a half.

    There is now likely to be very little talk about another round of Fed stimulus, and as such, one less crutch for the bulls to lean on. If the Fed, for instance, had said that the OT would have a December 2011 expiry date, the markets would be salivating over what would come next. But June 2012 is a good nine months away (it was deliberately drawn out). It would seem strange at this point, barring a cataclysmic event, to have the Fed embark on a new QE strategy at a time when OT is still in play, not that it can't happen. What is key is that the Fed did find a way to say to the market that this is it for a while, perhaps until we are well into 2012.

As for the fixed-income market, the big news was the size of the OT program ($400 billion versus market expectations of $300 billion), but the bigger news was that the switch was not merely going to be in the 7-to-10 year part of the Treasury curve — in a real 'twist', it will also include the long bond, as mentioned above. What the economic benefit of this will be is really anyone's guess, but it is making long duration bond bulls ecstatic. The yield on the 30- year Treasury bond has fallen all the way down to 3%, but it is the only maturity that has yet to make it all the way down to a new cycle low; there is still nearly 50 basis points to go before the December 18, 2008 interim trough of 2.53% is tested (back then, the recession was largely behind us, not ahead of us). While the "bond" may look overbought right now on a technical basis, there has never been a time when yields bottomed before the recession even began.

Besides, a normal curve from overnight to the long bond is around 200 basis points, so to see an eventual retest or piercing of that 2.53% close of 33 months ago is not out of the question. We should add right here and right now that 30-year German bund yields are now at their all-time low of 2.46% and they don't carry nearly as well as Treasuries. The yield on 30-year JGBs are now at 1.9% and in Switzerland the long bond yield is now 1.2%, added evidence that a further dramatic rally in the long-term Treasury is far from a radical viewpoint.

The mortgage market also got a bit of help today — though likely not much — from the Fed's move to reinvest the principal payments from its maturing agency debt and agency MBS securities into agency MBS (instead of Treasuries as it had been doing).

All in, quite a tepid response to an economic outlook that now has "significant downside risks" when benchmarked against what was priced into the stock market. But there still were three dissenters and the tone of the press statement suggests that the meeting was a lively affair and not short on compromises (the FOMC minutes will be released on October 12th). If there is a surprise, it is the inclusion of the long bond in the program. At the margin, this was a backhanded signal that, sorry, this was not Step One with Step Two coming any time soon as it pertains to further monetary policy intervention in the marketplace. And when you look at the chronology of events — taking rates to effectively 0% in December 2008; embarking on QE1 in March 2009; moving to QE2 in November 2010; and now this Operation Twist resurrection, it is abundantly clear that the Fed has moved from cannons to shotguns to water pistols.

Source: Gluskin Sheff

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Hedgetard55's picture

Rosie has great 20-20 hindsight. Sheep Dog 1 called this, yet he is not making Rosie's money. An insane world.

Black Forest's picture

Prepare for buying stocks: defense, tobacco, booze, and pharmaceuticals who repair the outcome of defense, tobacco, booze.

And physical PMs of course.

ratso's picture

There should be at leat a footnote in this discussion that Operation Twist will also reduce net interest costs and therefore slow the rate of growth of the budget deficit.

Pladizow's picture

The crack-head wanted its fix, Bernanke is shy a few rocks and so the crack-head went into withdrawls and got violently upset.

Later in the day the crack-head heard a rumor that Europe may have some good shit, stopped tweeking and calmed down a little - hoping tomorrow it may get its fix.

But if that crack-head doesnt get high shortly - watch the fuck out!

Cheesy Bastard's picture

Soon, the crack won't do it anymore, as crack cannot make a corpse feel better.  Time to top off the preps, methinks...

AbelCatalyst's picture

I thought the real story was the three no-votes on the FED - the fact that there was opposition to what was considered a "mild" easing says something about what is going on behind closed doors.  Would there be more opposition to a larger print?  Maybe the Bernak is feeling like he is going it alone and is being set up as the patsie?  The Repubs send a letter, Perry calling him out, Obama not saying a word in support, a few people in his own ranks voting against him...  Smells like a scapegoat in the making!!   

CrashisOptimistic's picture

Somewhat good call, but I want to look deeper.

Specifically, there were 3 dissents at the last meeting, too, and my money is on the following:

They were a different 3 dissenters this time.

ihedgemyhedges's picture

"Would there be more opposition to a larger print?"  Yes, the same 3 would've said "PLEASE Ben, don't" instead of just "Ben, don't."  And that would've been it...............................

Clinteastwood's picture

 the Fed did surprise the market by not merely signalling to investors that the central bank would remain accommodative beyond just what may be considered to be an "extended period", but by actually stating that rates would be kept near 0% through mid-2013 at the very least. That was something that  

 both bonds and stocks were not anticipating — a specific date well into the future.

This time around, there was very little that was not anticipated,

Blah, blah, blah

Rosie's prediction of what the Bernank was gonna do was 100% incorrect.  Now he's back with another explanation.  Why does anyone give any credence to these predictors of the future?  

You oughtta be ashamed to write another word......keep quiet for a little while at least.....PLEASE, ROSIE?

Buck Johnson's picture

Essentially yes, thats what happened.

Anonymouse's picture

True, that is surely part of the rationale. 

OTOH, it will make the shock all the greater when interest rates ultimately go up. 

As much as I hate brinksmanship, DC needs something to kick them in the butt to get spending under control.

Suppressing interest rates just helps them continute to kick the can down the road.

Meanwhile, the underlying problems, instead of being addressed, get worse and worse.

bulldung's picture

I am among the financially unlearned and do not understand how going from the lower short end rates to higher rates decreases net costs to the US Treas.US gov needs more money and with twist there is no net money gain as it is a rollover that actually costs taxpayer more interest$. What am I missing?Will the new money go for the new, improved lower rate long bond?

CClarity's picture

Rosie is a really good economisct - so much better than almost all the rest that are cited.  He doesn't trade markets and the super short term, but he has been very good at outlining his expetations over time.  Long term or at least middle term investors do well to follow his views.  For short term flippers he's not your guy.

He has been very good on balance sheet recession, interest rates, and the implications - especially macro.  And to boot, he is a very funny, not self-impressed guy, generous guy.  Had the pleasure of a dinner with him and multiple conversations at a conference back in the Spring.  

Alea Iactaest's picture

Rosie is one I bother to follow. That said, I think he could extend his prediction about the status of further Fed easing. Probably nothing in Novemeber, which means probably nothing for a year or so. Not likely for the Fed to risk its *independence* by monkeying around too much in an election year.


Does this mean further easing is off the table? I don't think so at all. The door is still open for some kind of mortgage relief program -- the Romans gave out loaves of bread and this will be the U.S. equivalent. Also, there's no prohibition on the IMF greasing the skids. Will give the Fed plenty of political cover about easing and still accomplish the same result. May even be better, as the bulk of the IMFs 500+Bn liquidity program is funded with FRNs courtesy of the U.S. taxpayer.


Oh yeah. You don't want your tax dollars used to bail out Greece or any of the other Euros? Too bad.

Oh regional Indian's picture

Props to SD1. But the deeper truth si that the FED never needed to "announce" QE 3, because nothing has ever stopped. If there is ever an investigation, 5 years on, after a good FOIA request, the truth of Swap Lines and SPV's and dark pool will come tumblong out.

Or it could happen by November 9as per Clif High). Who knows.

BUt the truth is that it is stranger than fiction and an iceberg shows a small percentage of it's true size.


Troy Davis was a Ritual Sacrifice

mcguire's picture

re: troy davis was a ritual sacrifice... 

sept 21 listed on occult calanders as 'illuminati human sacrifice night'.. its called "Mabon" 

if you close your eyes to the occult, you will never know what is really going on..

and, if you follow this kind of stuff.. what is happening through the 27th of September..

well, it will be nothing but shitstorms through rosh hashana.. cardinal crosses, obama in denver, it is a tin foil hat masterpiece.

Oh regional Indian's picture

Indeed McGuire. And so it was done, eh?

Thanks for the Link.


tekhneek's picture

Oh yeah. We go way back. Back like $20 silver and $1300 gold.

High Plains Drifter's picture

yep 20 20 hindsight. no doubt........

Billy Bob's picture


I am not certain what you are talking abouut......."Rosie has great 20-20 hindsight" 

Maybe I missed something, but it seems to me than Rosie has in fact been one of the most consistent Bond Bulls on the Street.

Ormaybe you intend another meaning.





AustriAnnie's picture

True.  Was there not a Rosie post here on ZH prior to Bernanke speech predicting it would disappoint because the mkt had already priced in OT, and would expect a doozy of a plan to actually consider it good news?  

TruthInSunshine's picture

More clown Cramer and less Rosie for the big fade (indexes need to be at the 70% off rack before the quality merchandise can be picked over).

101 years and counting's picture

imo, point #3 is the biggie.  no money printing for at least 8 months (unless it is absolutely need at S&P 600).

Belarus's picture

Yeah....I got this too. So until then, expect the marekt to test 2009 March bottom lows at the very least. It's the only way the treasury gets funded over this time frame. 



unununium's picture

+2.53 This is really important to remember

erik's picture

Suck it in Buffett... BAC is fighting to hold 6.00 with everything its got right now

tekhneek's picture

$5 and some change by the bell tomorrow.

My puts are finally in the green again.

erik's picture

And it held, wow.  Not one sub-6.00 print today.  There were some heavy bids when it printed 6.00 several times. 

Robslob's picture

This is the same Rosie that said just a few days ago we were going to get Twist + QE3 large?

Rosie Palm more like...

Arkadaba's picture

Actually, he didn't say that. He just laid out a few different scenarios and what he expected the fallout to be from each of them .

tekhneek's picture

You mean "Palmela Handerson"

OrdellRobbie's picture

Gold and Silver are down despite the worsening EU crisis, dollar now a safe haven.

SilverRhino's picture
Silver Bid: 35.82 Ask: 35.92 Change:  -4.57

Man today sucks a$$ ... but, physical can ride it out.


mayhem_korner's picture

Back up the truck, Rhino.  Ag will recover plenty in time for Halloween.

SilverRhino's picture

Backed it up Monday for proofs ... I'm still green and not THAT worried.  We will never see $30 silver again.   I know that much.  


sun tzu's picture

Don't say never. We may get a deflationary collapse before HeliBen starts QE3. 

tekhneek's picture

You're in good support around these parts. I backed up the truck about an hour ago and loaded up 50% of my cash. Going to dump the other 50% tomorrow if it dips more.


tekhneek's picture

Hell, what am I saying? I'll be dumping the other 50% of my cash tomorrow anyway.

Who the hell would hold paper right now? But... I could be wrong.

theotheri's picture

Gold is toast, Silver's worth about $8, how's that for reality PM monkeys?


Rosie- hahahahahahaha, lmfao!  This whale man has been consistently wrong about absolutely everything.  Why does he get so much damn attention?!

tsx500's picture

safe haven, right !   lol.    i'd rather invest all my $$ into a daycare center run by Casey Anthony , than put it in the USD .  

TruthInSunshine's picture

Where's Barton Biggs?

I'd love to see an interview with that clueless, old bastard today, as he mutters something incomprehensible about price/savings ratios or meat/potato ratios, before nodding off to sleep mid-interview, just for the insanity of it all.

wisefool's picture

He was on bloomberg 20 minutes ago over the phone. he says he is 20% long and wishes he was -20%.

Says "officials" are at fault. Asia would be fine but thier cirrencies have slapped.

Really dynamic and negative. I'll try to find the clip.

TruthInSunshine's picture

Ahhhh, I see, the old "official's should plan the economy and markets for better returns" philosophy....

wisefool's picture

yup. "Officials" Officials are people like US sentators. Here a transcript of the recent debt ceiling debate. McCain (R) and Kerry (D) blaming it all on the tea partiers.

  • John: They are are bunch of jerks.
  • John: We were just as bad.
  • John: we were probably worse.
  • John: yeah but they need to knock it off and listen to us.
  • John: yeah they are standing on principles.
  • John: dumb principles, and when we tell them to shut up, they react by saying "fine we want to get the same stuff from the honey wagon as you guys have done for yourselves and your sponsors over the years."
  • John: Assholes!
  • John: Agreed.
  • John: Its the officals who are at fault!
UGrev's picture

Is this the start of the "gentle" crash landing moment?