Deconstructing POMO As Fed Becomes The Second Largest Holder Of US Treasurys In The World

Tyler Durden's picture

With today being yet another POMO day, it is only fitting to do the definitive summary of how the Fed's Open Markets Group distorts various asset classes with its liquidity ramps. So all those who doubt thet Fed has an impact on stocks, please look at the chart below. Incidentally, today is the day the Fed will likely overtake Japan as the second largest holder of US Treasurys. Recall that Japanese holdings of US paper were $821 billion as of July. Well, as of September 30, the Fed held $811.7 billion in Treasurys, and in the days following, there were two POMOs: one for $5.2 billion and one for $2.2 billion, bringing its total to $819.1 billion. Which means that if today's POMO operation, which launches imminently, is larger than $2 billion, the Fed will become the second largest holder of US paper in the world. And it won't stop there: China is merely $25 billion away. At a run rate of $10 billion in POMO purchases per week, the Fed will be the largest holder of US Treasuries in the world before the midterm elections.

Back to Pomo, where John Lohman has submitted all the narrative and data one needs to know why it is insanity to oppose Brian Sack.

The truth is stranger than fiction and here are a few numbers to prove it.  I’d like to think this data came from The Onion, but it didn’t (and anyone with access to W’s the Google’ and a calculator can prove it).

Brian the Sack’s website (here) lists POMO operations back to August 25, 2005 (yes, they were conducting POMO under the radar before announcing ‘an extension in maturities targeted’ in a bazooka waving move, a la Paulson style, in March 2009).  In sum, the Sack & Company have POMOed the market on 203 of the 1,334 trading days since (as of October 5, 2010).  As this is well more than the number of observations necessary for statistical significance (approximately 30) in order to draw conclusions about reality from a sample, we can draw some conclusions as to just how much the Fed is artificially chumming price levels in what was once a free market.

Now, I’m sure this is just coincidence.  It just so happens that POMO funds received by primary dealers “appear” to be ramping stocks and causing (dare I say short) selling in gold.  Only The Onion would post something as preposterous.  It’s also interesting to note the doucherious impact the Fed is having on yields.  Ironically, the Sack recently stated in a speech:

Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses.

Perhaps someone should tell Brian, Ben & Co. to mute Krugman and revisit the data (surely they have  the Google and calculators at 33 Liberty).  No, even professional BLS weasels couldn’t make this up (here and here).  Proving, yet once again, that the truth is stranger than fiction, especially in post-crisis capitalism.

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Calls and Putz's picture

There's no link to Brian Sack's website. I'd like to see the listing of all POMO days.

Kreditanstalt's picture

That "tentative outright Treasury operation schedule"  site is all so...PROFESSIONAL looking.   So clinical and reasonable-sounding.  As if it were an auction of art, a list of dividend payments or prices of rare stamps.

I rather like "tentative outright Treasury monetization schedule" because the truth may even set the Fed free...

dcb's picture

other sites will put something like a stick, or a quck link on the front page to information.

I love the content, but some things deserve seperate areas.

lettuce's picture

thanks tyler. great post.

GoatETF's picture

C'mon now Tyler, are you taking lessons from BLS? It has only been 23 times ;)

http://www.google.com/search?q=site%3Azerohedge.com+http%3A%2F%2Fwww.new...

bigdumbnugly's picture

doucherious?

wasn't in my vocabulary...  but is now.

Species8472's picture

right up there with basicalier.

RobotTrader's picture

Treasuries, bitchez!!!

Dollar Bill Hiccup's picture
10 yr 2.39 ylds, nice, Mr. Bill must be laughing so hard he is pissing himself. Oh, and Chairman Mao, no more debt for you! See Martin Wolf today in the FT on currency wars.
Restcase's picture

I don't think they see a downside to being the largest holder of treasuries in the world.

Further, if the link between POMO and stock ramps were proven - to their satisfaction - they would view rising stock prices as a plus.

We're dealing with hardcore idealogues here.

Kreditanstalt's picture

The Treasury doesn't like free money, doesn't like competition but sure likes counterfeiting.

It's kind of like me selling off my Morgan dollar coin collection, bit by bit at $30 a coin, to coin dealers.  Then, using my legal (according to me), though illegal (according to the competition) printing press, I print off another batch of counterfeit Federal Reserve $1.00 notes and go buy my coins back from those same dealers at $32.00 a coin...

So counterfeiting is all relative, isn't it, to WHO IS HOLDING THE GUN...

Restcase's picture

Bought a few Morgans last week for $17 each. I like carrying them in my pocket. Feels like I'm in a spaghetti western.

Goldenballs's picture

Hang em high partner ..........................................

Goldenballs's picture

Hang em high partner .......................................... Soon will be the Wild West ... only it will be Wild West,North,South and East.

Bearster's picture

An interesting data series would be to look at the half-life of price level changes in each market, following POMO.

Any bets the half-life is decreasing?

the not so mighty maximiza's picture

Guaranteed that the law of diminishing returns is in effect for these control freaks

HEHEHE's picture

It's a given. That's the idiocy of the entire move.  Any supposed "benefit" of QE is only maximized when asset prices have collapsed.  Doing it while prices are at a high level minimizes its effectiveness unless the size is so overwhelming as to deluge current asset prices; something on the order of $5T.  To be bullish on stocks at this point is rather silly.  Gold etc is another story; though I think the metals have gotten a bit ahead.

TooBearish's picture

uh..... so POMO works then rite?

Threeggg's picture

As I look at the markets the Dow is the only one green by 8.20 points.

So I would say that it is just delaying the downfall to another day.

This financial Shitstorm is going to be the largest entry in future History books.

Gold is hitting the "proverbial" (something is wrong with the world economy) bell with a "Pile Driver" and the MSM hates everything it stands for. ?

Get ready for a Shitstorm never seen before.

asteroids's picture

POMO works until one day it does not work. That day is coming folks. That is the day the FED loses its mystical powers and the market will finally start correct. I see it coming.

Sancho Ponzi's picture

It leads to misallocation of capital which never works long-term. 

Download this from Cotzias Shipping:

http://cotzias.gr/reports/COTZIAS_ECONOMIC_OUTLOOK_2010_09_SEP.pdf

Navigate to the following charts:

S&P500 vs Baltic Panamax

S&P500 vs Baltic Supramax

S&P500 vs Baltic Handymax

Reality is a bitch.

Sudden Debt's picture

Just buy any stock. It will tripple in 2 years time.

umop episdn's picture

Yep. After you sell the stocks, you will have enough paper to buy a doucherious burger. With flies.

Sudden Debt's picture

here in Europe, they only sell fresh Burgers... :(

Ripped Chunk's picture

Buy em' and freeze em'. You won't be able to finance a happy meal in about a year.

Everyman's picture

So the "greatest of stock pickers" and "investors" since 2005, in reality are either insiders with inside information, or just dumb stupid following the POMO rut in the dirt?  That's what you are telling me?

The more I learn about this so called "industry" or "profession" the more I feel like I need to take a shower.  The whole damned thing is rigged, and for ANYONE, and i mean ANYONE to defend this caldron of crapola the "bastion of caspitalism" makes me wanna puke.  You could call your commode the very same.  This just sucks.

THis is the "free market" we have heard so much about?  WHy bother paying for an SEC, or a UST, or even a FED Reserve.  Screw it, let's just embrace larceny and theft by deception.  Seems all the rage and if the Fed's can do it, I am sure that the cases of insider trading can be overturned.  How can the prosecuting arm be guilty of the very same activities of those that are breaking the laws???

My faith in everything this country stands for is at an all time low.  I thought the last place to find this would be in the "bastion of capitalism", and I was wrong.

hedgeless_horseman's picture
So the "greatest of stock pickers" and "investors" since 2005, in reality are either insiders with inside information,...
by hedgeless_horseman
on Fri, 09/03/2010 - 09:41
#562073

Fundamental analysis?  Earnings?  Technical analysis?  Charts?  We don't have a prayer when Ben has his finger on the button under the table. 

You can take the ghosts of Graham, Dodd, Edwards, and McGee, as well as every CFA on the planet to manage a portfolio.  I'll take one insider at 33 Liberty and my performance will wipe the men's room floor with your's.

asteroids's picture

Capitalism? What a quaint notion!

hedgeless_horseman's picture

Insider trading at The Fed...

http://www.theatlantic.com/business/archive/2010/10/is-it-wrong-to-capitalize-on-nonpublic-fed-information/64043/

If you work at the Fed, own a trading account, and have not personally sucked Bernanke's shlomo in a long and satisfying manner, I would be very worried about becoming a sacrificial lamb in a CNN perp walk.  Act accordingly.

Just kidding!   It shall never be punished for national security reasons.   Just imagine Mary Shapiro and her team of .gov subsidized tranny-porn addicts trying to investigate the pillar of transparency that is The Fed.  lol.

 

-1Delta's picture

Thanks, that is interesting...

FOC 1183's picture

That's an interesting chart (thanks for posting) but I looked at size impact across the full series last night and could not find anything conclusive.

John Lohman

Sancho Ponzi's picture

Don't lose heart, Everyman. The market is still big enough to crush these clowns, just as the market has crushed the NIKKEI. 

As I posted earlier, download this from Cotzias shipping: 

http://cotzias.gr/reports/COTZIAS_ECONOMIC_OUTLOOK_2010_09_SEP.pdf

...and navigate to:

S&P500 vs Panamax

S&P500 vs Supramax

Those charts will tell you everything you need to know. 

captain sunshine's picture

What happened to only using proceeds from mbs to buy treasuries? 10 billion a week is 520 billion a year. They "only" have 1.3 trillion in mbs.

Sudden Debt's picture

DELETE Captain Sunshine's social security number

ENTER

ERASE Captain Sunshine's credit lines

ENTER

DELETE dental records Captain Sunshine

ENTER

 

You see! The government does work!

wiskeyrunner's picture

This is good news, it means the Fed will go ahead with QE2. It's all good. Bad economic data means Fed QE2. Good economic data means the recovery is gaining steam. It's all rigged people, stop fighting the trend.

Spalding_Smailes's picture

Got Gold Miner ?

VGGCF up 17% yesterday, up another 14% today.... $ 0.715

 

Update - up 21% now.

tmosley's picture

Am I reading this right?  Gold, commodities, and oil go DOWN on POMO days, while the USDX goes UP?  What kind of crazy, mixed up world is this?

BobPaulson's picture

Just wait: when the rocket scientists see this histogram their conclusion will be that you just have to make every day a POMO day to get a 50% ramp on the S&P (pinky nail in mouth, white cat on lap). 

Bearster's picture

Which POMO days do you see gold down on your screen?

Diggintunnels's picture

So what, who's going to stop them?  Does Ben answer to anyone except the people who want to inflate away our problems?

Zeddicus's picture

I know this isn't new, but I find it utterly mind-boggling.  How is it even POSSIBLE that our own central bank is "buying" our own debt with "money" created out of thin air?  Whose brilliant idea was it to allow this to ever happen in the first place?  In what universe does this even make sense on any level? 

I'd like to chalk this up to stupidity, but I know the people doing it aren't stupid.  So that leaves only one other possibility: malicious evil.

 

macholatte's picture

 

May the forces of evil become confused on the way to your house.
George Carlin

gmrpeabody's picture

You aren't from around here..., are ya stranger?

RockyRacoon's picture

Did you ever pay off a credit card with a credit card?