The U.S. Fed: twisting and turning

Dollars and Sense

Whatever it is, the U.S. Federal Reserve is trying it. It is not new.  It has been tried before — in 1961 to be precise — and guess what, it was largely considered to be a failure then.

The idea of “Operation Twist” is to try to bring down longer term interest rates in an effort to stimulate the economy. Without getting into excessive detail, it works like this: the US Federal Reserve sells short-term treasuries and uses the proceeds to purchase longer term treasuries. Presumably this would serve to bid up longer term treasuries thus pushing down their associated interest rates.

Immediately after Operation Twist was announced, the stock market fell with the Dow Jones Industrial Average closing the day down 283 points. Already the financial pundits were referring to Operation Twist (#2, I guess) as a failure.

Why would they reach such a conclusion after only a few hours — most likely before even a single longer term treasury associated with the strategy had even been purchased? It’s obvious — because the stock market went down.

Since when was the goal of fed policy to prop up the stock market? Actually, for quite a while now, though that’s a whole different story.

In my opinion it is just plain bizarre, on a number of fronts: that the Federal Reserve would use a strategy that hasn’t been used in 50 years, and was a failure when it was used; that they would use a strategy that could potentially cause further damage to an already fragile banking system by flattening the yield curve; and that we have gotten to a point where Wall Street assesses the success of economic policies on the basis of the one-day performance of the stock market.

I don’t get it, and I’m sure a lot of you don’t either.

But here is what I do understand. The economy is weak, and will likely remain weak for some time. And here is my advice: even if by nature you are an optimist, you would be well-advised to temper that optimism with a healthy dose of realism — at least as far as your investments are concerned. You should remain diversified. Make sure you have a healthy exposure to fixed income, own some gold, and be selective in terms of the stocks that you do own (if you choose to own stocks). Some exposure to hedge funds (assuming you are an accredited investor) may also be worth considering.

If on the other hand, you are a pessimist by nature, here is some more advice. Don’t be too pessimistic. The world is not about to end. There are still lots of successful companies out there (i.e. Apple Computers) that are and will continue making money and are still very good investments.

For more on how to invest in such a crazy world, join us on September 28th at the Parksville Community and Conference Centre and learn what is working for us.

Please call 250-594-1100 to register for this event.

 

 

 

 

The views expressed in this article are those of the author, and are not necessarily those of Raymond James Ltd.

 

 

Just Posted

Pam Bottomley (executive director), right and Sandy Hurley (president) of the Parksville Downtown Business Association visit the PQB News/VI Free Daily studio. (Peter McCully photo)
PQBeat: Downtown Parksville gears up for post-pandemic bounce back

Podcast: Hurley, Bottomley chat about what’s ahead for the PDBA

(Black Press file photo)
RCMP: Air ambulance called to Whiskey Creek after crash involving 2 motorbikes

Both riders taken to hospital with serious injuries

(File photo)
Crime report: Crooks busy pilfering bikes throughout Parksville Qualicum Beach area

Thefts among 295 complaints Oceanside RCMP deal with in one-week period

The Arrowsmith Search and Rescue logo on the back of a service vehicle. (Mandy Moraes photo)
Parksville and Qualicum Beach provide letters of support for Arrowsmith Search and Rescue

ASAR asks for increase in funding, one-time capital grant and for RDN to buy out current facility

The proposed running track upgrade at Ballenas Secondary is now on course. (PQB News file photo)
RDN: Parksville track upgrade project gains some traction

Staff recommends board approve $204,000 funding

People watch a car burn during a riot following game 7 of the NHL Stanley Cup final in downtown Vancouver, B.C., in this June 15, 2011 photo. THE CANADIAN PRESS/Geoff Howe
10 years ago: Where were you during the 2011 Vancouver Stanley Cup Riots?

Smashed-in storefronts, looting, garbage can fires and overturned cars some of the damage remembered today

Vancouver courthouse. (Photo: Tom Zytaruk)
Man loses bid to appeal conviction for 1999 rape at Abbotsford music festival

James Redden, 53, formerly of Nanaimo, was found guilty in 2019 following six-day trial

A health-care worker holds up a sign signalling she needs more COVID-19 vaccines at the ‘hockey hub’ mass vaccination facility at the CAA Centre during the COVID-19 pandemic in Brampton, Ont., on Friday, June 4, 2021. This NHL-sized hockey rink is one of CanadaÕs largest vaccination centres. THE CANADIAN PRESS/Nathan Denette
‘Vaxxed to the max’: Feds launch Ask an Expert campaign to encourage COVID shots

Survey shows that confidence in vaccines has risen this spring

Port Alberni court house (Alberni Valley News)
Inquest set into 2016 death of B.C. teen after a day spent in police custody

18-year-old Jocelyn George died of heart failure in hospital after spending time in jail cell

Children’s shoes and flowers are shown after being placed outside the Ontario legislature in Toronto on Monday, May 31, 2021. THE CANADIAN PRESS/Frank Gunn
Ontario commits $10 million to investigate burial sites at residential schools

Truth and Reconciliation Commission identified 12 locations of unmarked burial sites in Ontario

Singer-songwriter Jann Arden is pictured with a draft horse. (Canadian Horse Defence Coalition)
Jann Arden backs petition to stop ‘appalling’ live horse export, slaughter

June 14 is the International Day to End Live Export of Animals

Two hundred and fifteen lights are placed on the lawn outside the Residential School in Kamloops, B.C., Saturday, June, 13, 2021. The remains of 215 children were discovered buried near the former Kamloops Indian Residential School earlier this month. THE CANADIAN PRESS/Jonathan Hayward
Days after Kamloops remains discovery, Tk’emlups families gather to unite, move ahead

‘We have to work together because this is going to be setting a precedent for the rest of the country’

In this Saturday, May 29, 2021, file photo, people crowd the Santa Monica Pier in Santa Monica, Calif. California, the first state in America to put in place a coronavirus lockdown, is now turning a page on the pandemic. Most of California’s coronavirus restrictions will disappear Tuesday, June 15, 2021. (AP Photo/Damian Dovarganes, File)
With COVID tamed, it’s a ‘grand reopening’ in California

No more state rules on social distancing, no more limits on capacity, no more mandatory masks

Montreal Canadiens goaltender Carey Price (31) is scored on by Vegas Golden Knights defenseman Alec Martinez, not pictured, during the second period in Game 1 of an NHL hockey Stanley Cup semifinal playoff series Monday, June 14, 2021, in Las Vegas. (AP Photo/John Locher)
Habs fall 4-1 to Vegas Golden Knights in Game 1 of NHL semifinal series

Match was Montreal’s first game outside of Canada in 2021

Most Read