Day of "Operation Twist"

It is 11:30Am on this Wednesday and markets are in "wait and see" mode. Of course, end of FOMC meeting at 2:15 entails the announcement of details of the much anticipated "Operation twist." As I understand it, this is not about new liquidity infusion and instead more of re-arrangement of the Fed balance sheet; they are expected to sell the short-term securities and buy the long-term bonds and in the process flatten the yield curve further.

Different pundits see different things happening. Some ask, "how low the 10yr yield can go?" Obviously, they are questioning the wisdom of Bernanke&co in lowering the yields in anticipation of home buyers coming back into the market, with much lower interest rates! Well, does another 25 to 50 basis point move lower matter to those who are already sinking under debt load? Moreover, in this environment one can hardly muster up his/her animal spirits and get confident about housing prices going higher anytime soon. The world is experiencing that "thousand year flood" and nature will have to take its course. Blaming Obama or for that matter all these policies is not going to do much. Simple truth is, those who were close to the beach when this tsunami struck, will face the consequences. Some policies can help to alleviate the pain for a few, but most will look back at this point in history as a "cathartic" moment. Obviously, weak and the poor suffer the most (you can include the middle class in that category now); rich can see through this phase albeit, they will suffer too.

My source of frustration is: this man-made tsunami had at least few architects behind it--leaders, policy makers, institutions etc.--and my question is, have they been made accountable for their roles while we continue to witness the piling up of human carcass, (metaphorically speaking!)? Our justice system's reach is not that far; so, we just have to wait and see whether nature delivers its Karmic justice and punishes those who built their wealth on the foundation of human misery.

That's why I don't understand all these "twists and turns" by the policy makers. They think it helps; I believe in Bernanke's good intentions. But, humans have done their job; they screwed it up. Now, nature has to cleanse the system. It is similar to what Joseph Schumpeter talked about--"gales of creative destruction." Capitalism, needs to purge itself and go through a transformation. The cronies and the corrupt have too much power for a human system to deliver justice. The justice has to come from nature and those gales of creative destruction will drive the rotten and the incompetent out; just be patient.

Back to the markets; I have no idea how markets will react. So, I have come out of my FX positions. BOE is embarking on its own QE, so GBP may stay weak; Euro still faces PIIGS issues and weak Euro economy, so EUR may continue to languish; commodity weakness affects both AUD and CAD. So, if there is no more QE from the Fed, USD may surprisingly move higher.

So, I may just short EURO if there is a spike above 1.38.