Twist and Shout

You know you got me going now
Got me going
Just like I knew you would
Like I knew you would
--The Beatles

The new policy addition articulated in the FOMC statement yesterday is what has become known as Operation Twist. The idea is to 'twist' the yield curve by selling short term treasuries and buying long term ones.

The thesis being offered by the Fed is that Twist will further reduce long term interest rates and perhaps spur borrowing.

With rates already at generational lows, it should be clear to anyone with eyes that interest rates do not constitute a binding constraint on economic activity at present. There is little willingness to take on risk here by both lenders and borrowers. Stated differently, the world is already drowning in debt and doesn't want any more--even at cheaper prices.

What really perplexes me about Twist is that it doesn't just 'twist' the yield curve...it flattens it. A flatter yield curve is unfriendly to any institution engaged in the carry trade. Thus, banks, hedge funds, and other speculative entities seem likely to reduce investment risk in the face of Operations Twist.

Because the Fed 'needs' the participation of leveraged speculators to prop up risky asset prices, how the Fed sees value in Operation Twist is hard for me to figure.

position in SPX