Your Money: The 'Twist' was a bust; so now what?

Dear Federal Reserve chairman:

Operation Twist didn't work.

Investors are now seeing through the U.S. central bank's maneuvers to jump-start capital markets and economic growth, trying things that worked in the past, like ultralow interest rates, and massive purchases of long-term Treasury bonds.

"Operation Twist" - the Fed's plan to buy long-dated securities by selling short-dated bonds - has been deemed a failure by the markets.

"Even if it has cut long-term interest rates, there is widespread skepticism that this will be enough to stimulate the economy," wrote Gavan Nolan, Markit's director of credit research, in a note to clients Friday.

Operation Twist won't help savers either, even if short-term Treasury yields increase a little. "The flatter yield curve, or lower long-term yield, will squeeze bank net interest margins, prompting them to cut deposit yields - not increase them, as many assume," says Greg McBride, senior financial analyst at Bankrate.com. The Fed's lower rates are essentially "throwing savers under the bus," McBride said.

So where to hide from all this government intervention?

Safe havens are harder to find these days. In this column, we've devoted much space in the last few months to uncovering defensive plays: Treasurys, the U.S. dollar, gold and silver, high-dividend-yielding stocks such as utilities and drug companies.

And then along comes last week's two-day, 675-point drop in the Dow Jones industrial average.

Art Cashin, a veteran New York Stock Exchange trader, analyzed the current market this way:

Most volatile would likely be the stock market. Next down the volatility scale might be commodities, where conditions tend, overall, to change slowly with the occasional sudden surprise from weather or other natural events. Next would likely be the bond market, and the least-volatile asset should be currencies.

Cashin said last week's turmoil threw out the theoretical textbook. All asset classes saw sudden, sharp moves in excess of normal volatility patterns.

"To an old-timer, that points to one conclusion. Liquidation . . . widespread liquidation across asset classes," Cashin said. "Currencies, bonds, commodities, and stocks all moved swiftly and sharply in a direction that screamed: 'Seek safety! Raise cash! Get liquid!' "

Usually, that means it is time to buy the things that you like - except now you're buying them on sale.

John Taylor, founder of an $8.5 billion currency fund, is a major bull on the U.S. dollar. So why should the U.S. dollar appreciate in such a horrid environment? As the world's reserve currency, Taylor says, the dollar has become a reverse indicator of the globe's economic health. "Whenever things are good in the world [the dollar] goes down," Taylor said, since there is ample liquidity. But when the rest of the globe is doing poorly, there is no liquidity, and therefore the U.S. dollar is worth more.

"So when the world goes into recession, the dollar goes up," Taylor explained. "When the world is doing great, the dollar goes down. That is the most important thing to know about foreign exchange nowadays - it is kind of backwards."

Taylor is bullish on the dollar, and he thinks the euro will collapse from about $1.35 vs. the dollar, where it is now, to par (or equal) in the next 18 months.