Archive - Sep 26, 2010

With FRBNY Brian Sack's Permanent Open Market Operations (POMO) now firmly back on the scene, and by all appearances about to grow orders of magnitude larger than the prevailing $10 billion a week levels following implementation of QE2, we have been bombarded by requests to explain the methodology behind what the 10:15 am - 11:00 am liquidity intervention by the Fed means in terms of asset prices. We recently presented Nic Lenoir's observations on how POMO impacts rates on an intraday basis. However, the most comprehensive report on the issue comes courtesy of Bob English as the Precision Report. His analysis titled A Grand Unified Theory on Market Manipulation is a must read for everyone who dares to trade ahead of the Fed on POMO days (which, incidentally, this week will be on Tuesday and Thursday). While the report is as of August 2009, the logic behind it is as relevant and applicable today as it was when first written.

Just as everyone was expecting things between China and Japan to moderate quickly following the fishing trawler incident, things just got heated again. Early Sunday, Japanese PM Naoto Kan violently rejected China's demand that Tokyo apologize and compensate for detaining a Chinese fisherman. The PM has already suffered stinging critique at home for relenting to release the boat captain after Chinese pressure, demonstrating just how tight tensions between the two countries remain to be, especially when it comes to how weak they believe they are perceived by the international community. "Senkaku is a Japanese territory. From that point of view, apology or compensation is unthinkable," Kan told reporters. "I have no intention at all of meeting (the demand). Both sides should first become calm and (then) deepen mutually beneficial strategic ties. What is necessary is for both to calm down and act based on a broad perspective."And while the boating incident occurred near islands in the South China Sea where the waters are believed to be rich in oil and natural gas, the last thing this spat is about is commodity access: it is all about the historical animosity between the two cultures, and with China's economy on the ascent, and owning more American IOUs than Japan, one can see why the Japanese sense of sovereign pride may have been challenged.

Was Japan’s massive $21 billion intervention in the foreign exchange markets the opening shot in a global attempt at quantitative easy in the run up to the November elections? The silver move suggests that the economy may be stronger than the “double dippers” realize. The asset class that has been trouncing all comers since 2000. (GLD), (SLV).