Russ Certo: "Twister"

From Gleacher's Russ Certo


I don’t know where to begin and have quite deliberately been aspiring to not bombard distribution list “noise” of the latest iteration in Greece, Munich, or Washington.  There are so many touch points to discuss that I’ll merely just attempt to address MAJOR themes as I see them.  Micro easy to fill in from here.

Zero jobs and a tar and feather emotion filled CNBC search and destroy mission on who to blame.  FHA suing 12 banks in front of a Presidential speech on job creation.  One judge in Europe can decide Germany’s support for EFSF.  European bourses down near 4% and European peripheral PIIGS spreads 15 bps to 25 bps wider.  And the ZERO jobs report.  What will the Fed or the Administrations response to optics of zero job growth?  Spare you 25 line item reports of global market developments. 

What are the implications of a zero jobs report?  I think it is fair to deduce that some percentage of the investment community will (or has) extrapolated that zero job growth and less than lubricated credit conditions and risk market framework, statistically increase the chances of Fed operation twist.  This concept was born out of Sack at the Fed and has been reinforced in popular press.  Less is more and more is less.  Less jobs mean more Fed help.

What is twist?  We know it is a prospective transformation of Fed balance sheet whereby selling shorter maturity debt to purchase and impact longer term debt.  But is twist QE3?  Who cares?  One thing is for sure that policymakers increasingly don’t want to be pinned or associated with incremental EXPLICIT policy.

Why would you want to semantically define a series of quantitative numbers of failed policies?  QE3, QE99 bottles of beer on the wall.  Does that fan 98 bottles of ineffective policy?  By virtue of having another number does that mean the underestimation framework of a previous number?

In some way the FED washed its hands during Jackson Hole speech when it LINKED monetary policy to fiscal policy or fiscal policy limitations.  Read the speech AGAIN as it is one of the most deliberate speeches I have EVER read from a Fed Chairman and not as surmised by the popular press.  Be a responsible citizen and read it yourself AGAIN.  The word “fiscal” is used 15 more times than “monetary” so what is a Chairman to do?

New bond purchases won’t be fashionable or received well.  Rates and repo are near zero and constrained by lower boundaries.  Fed’s balance sheet is at previous unacceptable levels.  There is less of a penchant for push on string monetary AND fiscal policies.  So, twists, printings and usage of FX swap lines, tweaking on interest on reserves seem to be the order of the day. 

Maybe unprecedented COORDINATION of monetary policy with fiscal policy would be stimulative.  Maybe the Fed lends credence to housing reform mandates that are traditionally under the guise of Congress or quasi-government guaranteed sponsored entities.  Maybe, the Fed twists and co-horts in effort to lend balance sheet to housing affordability goals.  Unconventional. 

In fact, QE3 SHOULD take the form of the Fed having a 3 day offsite teach in with other branches of Government.  COMMUNICATION with stakeholders in government like Congress, Treasury, Comptroller of Currency, FDIC, HUD, leaders of banks, mortgage companies and business interests.  What the market is looking for is COMMUNICATION between stewards.  This alone should encourage resolve, incentives, confidence, less uncertainly, productivity, uniformity and an EASING of collective psyche. 

Forget twists, and other policy minutia which REWARD poor decision making, leadership, and the current lack of communication and, hence, capital flight and investment valuation decisions globally in efforts to seemingly futilely preserve capital.   Hello gold and Swiss Franc!!!!!

The removal of daily debilitating geo-political uncertainty and miss-allocation or inefficient allocation of resources and intellectual capital could be a quantitative easing in and of itself.  Let’s hold that off-site with a few economics books, public speaking books, philosophy books and a calculator. 

In practical terms, the market has quantified the increased probability of a “twist” as it may be the most feasible, acceptable, political outcome of a zero jobs report and just maybe the linkage of prospective housing affordability goals optimized by pegged mortgage rates outcome of twists. 

The market, or better the 2yr/30yr, spread is already doing the work.  Since this time YESTERDAY morning, this spread has flattened by a whopping 25 basis points.  The market anticipates the Fed conclusion to the print, compresses and reaches for yield, and yearns for the efficient preservation of itself from the inefficient previous policy made bottlenecked constructs.

Zero point Zero.



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