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In a recent op-ed, Daniel Gross writes of the Fed’s “Operation Twist”:

There are a few reasons why we shouldn't have great expectations for this move. First, the Federal Reserve moves with all the surprise and guile of a lumbering elephant. It talks about moving, says what direction it might go in and at what speed, and provides a specific date on which it will act. It does so because it wants to avoid spooking the market. But it also means that the market tends to react well ahead of the actual event. Look at the path of the 10-year bond over the last several weeks. The interest rate on the 10-year bond has fallen from 3.2 percent on July 1 to about 1.9 percent today. The mere anticipation of the Fed's move has caused the market to do much of the Fed's work.

Also, it’s no secret that the prime market-makers have been front-running the Fed, selling before the Fed did what they were going to sell, and buying before they did what they were going to buy, so that the market-makers could mark up the merchandise and then flip it back to the Fed, thus ensuring themselves of some very handsome profits this year.

But small bond-investors could have done the same, and this one, in fact, did so. As I might have mentioned, I’m managing about $800k face of bonds, but $275k face, or a third, were purchases done just this year, and I also sold off about 5% of my weaker holdings, so as to be able to re-position that money more effectively. It didn’t take no smarts to see that what the Fed was going to do. The economy was weak (due to US commitments to unfunded militarisms and other foreign follies), and interest-rates weren’t going to be restored to the 5%-6% where they should be (for wanting to sidestep the restorative correction that should be allowed to happen). Now, as the Fed sells the short-end and buys the middle, prices across the whole yield-curve will rise, and yields will fall, increasing the value of bonds already owned, almost no matter their credit-quality.

Thank you, Ben, for the gift you’ve arranged for us increasingly-enriched ‘investors’ from those beaten-down, barely-surviving ‘savers’. A favor, though. Don’t squeeze them too hard. They are the phytoplankton that supports us all. So throw them a bond, too, by exempting from taxes the gains on the first $25k of CDs and deposit accounts, or about the amount of money each household should be carrying as an emergency fund (but isn’t, because 64% of Americans report they don’t have the ready-cash to meet even a $1,000 emergency). But now that the Fed has made its move, I’m done my buying for the rest of the year, and I can take a much-deserved rest.

“I love it when a plan comes together.”
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