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The Fed’s Got POMO Fever!
The Fed’s Got POMO Fever!
Ben’s got POMO Fever, Tim’s got POMO Fever
They’ve got POMO fever, what a scam
Ben’s gone buying crazy, Tim’s budget plan is hazy
Debasing Dollars baby, that’s the plan!
Actually, what this whole thing reminds me of it more of a scene from Jungle Fever where Samuel Jackson (Timmy), who is a proud crackhead needing a fix, corners his successful brother (Ben) in a park and says:
Tim (dancing): I’m a little light. Could you let me hold some change?
Ben: No. No, Timmy. That dancing shit ain’t gonna work. I ain’t giving you a red cent.
Tim: What? Come on, you can do me this one solid. Would you rather I go out and rob some elderly person? (raid the lock-box)
Ben: Steal?
Tim: Either way, I’m gonna get high. I hate to resort to knocking elderly people in the head for their money. But I’ll do it. I’ll do it. You know I’ll do it. I like getting high. ‘Cause I’m a… crackhead – I like to get high!
And of course Ben chooses the lesser of two evils and gives his brother enough money to get another fix but he knows he’ll be back tomorrow to do his little dance again. That’s exactly what’s going on in America these days as the Fed issues debt at a rate (as of October) of $140Bn PER MONTH and Ben does his best to match it by buying up notes and other toxic assets at a rate of $110Bn PER MONTH.
We’ve discussed POMO a great deal on the site so I won’t get into it here. Suffice to say it’s very much like when Wesley Snipes hands Sam Jackson money except, in this case Bernanke (Snipes) doesn’t have any money either – he’s just writing checks and backing them with the crack that his brother Timmy (Jackson) buys. Unfortunately, just like the Treasury debt, Sam Jackson consumes the crack and there’s not really an asset there at all – just another day and the need for another handout that will never be repaid.
Very much unlike Wesley Snipes (who, ironically, was convicted for tax evasion), Bernanke does not cut his brother Timmy off. In fact, yesterday, Brother Ben rolled out the new POMO schedule and, rather than $2.5Bn twice a week that has been handed out for the last 90 days, the new schedule takes the game to a whole new level as the Fed is now offering as much as $9Bn per session and the schedule for those sessions is (and I kid you not):
- November 12,15,16,17,18,19,22,23,29,29 (again!),30
- December 1,2,3,6,7,8 and 9.
That’s right kids. Pretty much EVERY SINGLE DAY the market is open and twice on the 29th, the Fed will hand out Billions to "fix" the economy. Keep in mind they have no intention of stopping on the 9th, that’s just the end of month one! I know that we have all gotten comfortably numb with regards to large numbers but let’s consider for a moment how much money EACH $8Bn is as this is OUR money the Fed is spending:
- It’s enough to pay 5.33M $1,500 Mortgage Payments – enough to pay off every home in America each month!
- It’s enough to buy out 40,000 $200,000 Mortgages EACH DAY.
- It’s enough to pay a full year’s $50,000 Salary for 160,000 workers – EACH DAY. In a single month, the Fed could put 4.8M people back to work rather than flushing it back through the banks and Treasury in the hopes that a few jobs will trickle down to the people.
- It’s more than the ENTIRE Federal Education Budget for 2010 EACH MONTH!
- It’s the ENTIRE EPA budget for the year EACH WEEK. Also EACH WEEK, it’s the ENTIRE budged for the Department of Labor or the Department of Commerce for the year. If you want to create jobs – perhaps we could send a few dollar their way instead?
- Every 2 Weeks it’s the ENTIRE budget of the DOE, HUD or Homeland Security.
- EVERY WEEK it’s also the ENTIRE budget of the Department of the Interior, NASA, the NSA or the SBA (oh yes, we really care about small business, don’t we?).
Does that seem just a little bit insane to you? Hopefully, I have gotten the point across that $8,000,000,000 per day is A LOT OF MONEY. Our friends at Goldman Sachs, who belly up to the POMO window on a daily basis, sent a note out to clients in late October saying (Zero Hedge):
On the interplay between the FED and STOCKS: Since Sept 1 – when QE was becoming a mainstream focus – if you only owned S&P on days when the Fed conducted Open Market Operations (in US Treasuries), your cumulative return is over 11%. in addition, 6 of the 7 times when S&P rallied 1% or more, OMO was conducted that day. this compares to a YTD return of 5.8%. the point: you would have outperformed the market 2x by being long on just the 16 days when – this is the important part – you knew in advance that OMO was to be conducted. The market’s performance on the 19 non-OMO days: +70bps.
In other words: "Buy on POMO days, you dummies!" But what happens when EVERY DAY is a POMO day? Will the markets get sick of it, like a kid who ate too much Halloween candy or, like Sam Jackson’s crack-head, will they just get higher and higher every day? For now, we can expect the markets to get REALLY HIGH. Like any crack addict, the fixes will only work for so long and then we will need bigger doses. The Fed has so far been accommodating, stepping up POMO by a factor of 5, which will be a real test of our "Dead Parrot Economy" theory as Bernanke seeks to apply that million-volt shock.
Unfortunately, the actual global FUNDAMENTALS I’ve been yammering on about for the last couple of weeks indicate that $1,000Bn of indirect stimulus is nowhere near enough to really fix our problems and the real flaw in this plan is that the rest of the World may not be willing to sit back and relax while we inflate our way out of trouble. As I said, Ben is writing checks with money he doesn’t really have and that’s fine as long as he’s handing them out to crack-heads like Timmy and the Banksters, who are Jonesing for their next fix so badly they can’t tell good money from bad anyway. But, the minute they try to spend it on hookers and blow – they may find there are not to many foreign dealers who are willing to accept their funny money.
In fact, just yesterday we had a TERRIBLE 30-year note auction on just $16Bn worth of notes. Already Ben is pretty much the only buyer of Tim’s trash paper and, as that bid to cover ratio drops below 2:1, you’ll see rates begin to tick up dramatically, despite the Fed’s best efforts to contain them and that will put pressure on houses, corporate debt, government debt, municipal debt etc and suddenly we’re Greece. So let’s not get too happy about POMO, it’s nothing but a band-aide for an amputation and, despite our leaders’ strong protests – this is NOT "just a flesh wound."
While we are still angling for cash into the holidays, we are far more bearish than bullish due to the underlying fundamentals (and if you think 10% stops will save you, check out CSCO’s near-20% drop overnight) but we are protecting our bearish bets with upside plays like yesterday’s very well-timed DIA $113 calls from our Member Chat at 10:21 at $1. Those jumped back to $1.45 by the afternoon (up 45%) but our goal was just to take 20% and run as the idea was to AVOID cashing our our short plays on the morning dip as we felt the move up was BS.
This is a great way to ride out a choppy move down – using defensive long plays to lock in profits at certain key bounce points (the Dow was at our 11,250 target zone and, not surprisingly, it retraced 50% of it’s drop for the week on the POMO announcement). Of course, think how pathetic that is – just retracing 50% of the week’s drop after Brother Ben pre-announces an endless supply of fixes over the next 30 days? That kind of sucks!
Something is very rotten in Denmark – and by Denmark I mean America and by rotten I mean the economy and by something I mean I’m not sure that $110Bn a month is enough to stop the bleeding. It’s a very tough market to bet against because, as I’ve been pointing out lately, there are now 6 suckers born every minute and that’s 8,640 new Cramericans every day who are willing to swallow this market fantasy and lay their life savings on the line in what are probably the most uncertain market conditions we’ve had since the fall of 2008 when EVERYONE was betting we’d go up and, instead, we went horribly, relentlessly down, down, down.
We can bet on inflation with our gold plays with potentials for 923%, 309%, 3,900%, 567%, 276% and 46% (for you boring stock people) trade ideas so it’s not like we have to commit a lot of money to make sure we don’t miss an inflationary rally but we’ve already inflated the indexes 20% since last quarter and it seems to me that all the Fed is doing now is paying off their Bankster buddies by cashing out all those shares their TradeBots bought on the way up so this is no time to go long in the market as long as we haven’t hit our breakout levels (and volume would be nice too!).
So let’s be very careful out there, please!
- Phil
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If the POMO money is coming into stocks, as the correlation shows, why is the volume not greater?
The only prescription for POMO Fever is more money.
How the Government Spends and Borrows As Much As It Does Without Causing Hyperinflation
Most people are accustomed to viewing savings from their own individual point of view. It can be difficult to think of savings on the national level. Putting part of one’s salary into a savings account means only that an individual has not spent all of his income. The effect of not spending as such is to reduce the demand for consumption below what would have been if the income which is saved had been spent. The act of saving will reduce effective demand for current production without necessarily bringing about any compensating increase in the demand for investment. In fact, a decrease in effective demand most likely reduces employment and income. Attempts to increase individual savings may actually cause a decrease in national income, a reduction in investment, and a decrease in total national savings. One person’s savings can become another’s pay cut. Savings equals investment. If investment doesn’t change, one person’s savings will necessarily be matched by another’s’ dissavings. Every credit has an offsetting debit. As one firm’s expenses are another person’s income, spending equal to a firm’s expenses is necessary to purchase it’s output. A shortfall of consumption results in an increase of unsold inventories. When business inventories accumulate because of poor sales: 1) businesses may lower their production and employment and 2) business may invest in less new capital. Businesses often invest in order to increase their productive capacity and meet greater demand for their goods. Chronically low demand for consumer goods and services may depress investment and leaves businesses with over capacity and reduce investment expenditures. Low spending can put the economy in the doldrums: low sales, low income, low investment, and low savings. When demand is strong and sales are high businesses normally respond by increasing output. They may also invest in additional capital equipment. Investment in new capacity is automatically an increase in savings. Savings rises because workers are paid to produce capital goods they cannot buy and consume. The only other choice left is for individuals to “invest” in capital goods, either directly or through an intermediary. An increase in investment for whatever reason is an increase in savings; a decrease in individual spending, however, does not cause an increase in overall investment. Savings equals investment, but the act of investment must occur to have real savings. The relationship between individual spending decisions and national income is illustrated by assuming the flow of money is through the banking system. The money businesses pay their workers may either be used to buy their output or deposited in a bank. If the money is deposited in a bank, the bank has two basic lending options. The money can be loaned to: 1)someone else who wishes to purchase the output (including the government), or 2) to businesses who paid the individuals in the first place for the purpose of financing the unsold output. If the general demand for goods declines the demand for loans to finance inventories rises. If, on the other hand, individuals spent money at a high rate the demand for purchase loans would rise, inventories would decline and the level of loans to finance business inventories would fall. The structural situation in the U. S. is one in which individuals are given powerful incentives not to spend. This has allowed the government, in a sense, to spend people’s money for them. The reason that government deficit spending has not resulted in more inflation is that it has offset a structurally reduced rate of private spending. A large portion of personal income consists of IRA contributions, Keoghs, life insurance reserves, pension fund income, and other money that compounds continuously and is not spent. Similarly, a significant portion of business income is also low velocity; it accumulates in corporate savings accounts of various types. Dollars earned by foreign central banks are also not likely to be spent.
The root of this paradox is the mistaken notion that savings is needed to provide money for investment. This is not true. In the banking system, loans, including those for business investments, create equal deposits, obviating the need for savings as a source of money. Investment creates its own money.
Once we recognize that savings does not cause investment it follows that the solution to high unemployment and low capacity utilization is not necessarily to encourage more savings. In fact, taxed advantaged savings has probably caused the private sector to desire to be a NET saver. This condition requires the public sector to run a deficit, or face deflation.
http://moslereconomics.com/mandatory-readings/soft-currency-economics/
Lady H. thanks for your last thought..prayer is needed in USSA, things are not looking very bright at the moment.
no...treasury serves as fiscal funding agent...for govt overspendings. Remove the PD's from the process. Think: Treasury sells 600 bio of bonds, Fed buys them with 'printed' money (its an electronic credit really)...monetised the deficit. QE2 differs from QE1 in this respect. The latter was straight ''money to the boys" (MBSs in exchange...WTF!). QE2 is govt deficit monetisation...it's different. Bottom line: 600bio of dollars that weren't there, suddenly are. GDP not up though, therefore prices must go up to accommodate increased money supply (INFLATION). Not sure that velocity is going to kick in though and still think credit implosion will factor significantly. Thus, maybe deflation (if implosion is greater than bubble Ben's money creation)...jury is out. The stock market goosing is a bit of a red herring if one is considering the monetary/fiscal gig. the PD's are definitely switching balance sheet assets here into stocks...because Banker Ben (anagram of B Bernanke interestingly...or not) hangs his one-dimensional macro hat on the hook of a rising market's 'wealth effect'.
Disclaimer: I am from New Zealand...know more about sheep farming than economics!
PS: God bless the true America...a once great country riddled with evil cancer
why was mish's blog removed? anyone? censorship?
QE2 is a monetisation of the fiscal deficit. Treasury will issue 600bio of bonds (in fiscal year), the PD's (primary dealers)will purchase them and sell them to the Fed (the PD's role then is merely a wash). the Fed credits the PD's with 600bio of electronic cash...voila! The Fed has bought the fiscal deficit with "printed money". But this is over a year. Treasury does not want all that cash on day one...only on specified auction dates. POMO's merely 'prime' the PD market for those dates. As for goosing the market, well that interim liquidity goes where banana ben tells it it to go (once he has approval to instruct Lloyd and Jamie from Big Daddy Rothschild)...and that destination is stocks!. They might attempt a gold/silver long squeeze though...cant have the proletariat jumping their train, now can they.
The subject of debt monetization frequently enters discussions of monetary policy. Debt monetization is usually referred to as a process whereby the Fed buys government bonds directly from the Treasury. In other words, the federal government borrows money from the Central Bank rather than the public. Debt monetization is the process usually implied when a government is said to be printing money. Debt monetization, all else equal, is said to increase the money supply and can lead to severe inflation. However, fear of debt monetization is unfounded, since the Federal Reserve does not even have the option to monetize any of the outstanding federal debt or newly issued federal debt. As long as the Fed has a mandate to maintain a target fed funds rate, the size of its purchases and sales of government debt are not discretionary. Once the Federal Reserve Board of Governors sets a fed funds rate, the Fed’s portfolio of government securities changes only because of the transactions that are required to support the funds rate. The Fed’s lack of control over the quantity of reserves underscores the impossibility of debt monetization. The Fed is unable to monetize the federal debt by purchasing government securities at will because to do so would cause the funds rate to fall to zero. If the Fed purchased securities directly from the Treasury and the Treasury then spent the money, it’s expenditures would be excess reserves in the banking system. The Fed would be forced to sell an equal amount of securities to support the fed funds target rate. The Fed would act only as an intermediary. The Fed would be buying securities from the Treasury and selling them to the public. No monetization would occur. To monetize means to convert to money. Gold used to be monetized when the government issued new gold certificates to purchase gold. In a broad sense, federal debt is money, and deficit spending is the process of monetizing whatever the government purchases. Monetizing does occur when the Fed buys foreign currency. Purchasing foreign currency converts, or monetizes, that currency to dollars. The Fed then offers U.S. Government securities for sale to offer the new dollars just added to the banking system a place to earn interest. This often misunderstood process is referred to as sterilization.
if PD's give 600 bio to Treasury, it means that FED's reserve cash is being exchanged with Treasuries bonds. I dont know how, but i have feeling Treasury than buys shares dont they?
Oh fuck..
Yes I understand but when the FED invents money and gives it to the primary dealers the government is not involved, or is it? For the taxpayer to be on the hook for this QE money then surely US treasury bonds would have to be produced in tandem with the 600 billion in QE money from the FED. It was my understanding that FED spending was seperate from government spending, hence the issuance of treasuries to fund government spending. So in summary does the QE money involve the production of yet more treasuries in order to finance QE?
The Fed invents money by buying bonds from banks with accounts at the Federal Reserve, which include the Treasury's primary dealers. The primary dealers buy bonds at the treasury auction, hold them for a few days, then sell them to the Fed for new money. They know ahead of time which issues the Fed will buy. In this way, the clever guys behind the curtain try to hide the fact that we are printing money to buy our own debt. It would be cheaper if the Fed just bought the treasuries directly, this way we also hand a no-risk profit to the banks. The little shell game is not hiding anything anymore since even Fed governor's are describing it as "monetizing the debt" as noted here on ZH:
http://www.zerohedge.com/article/dallas-fed-admits-next-eight-months-nat...
Your earlier questions, is QE2 part of POMO? Yes, QE2 is additional money creation carried out through POMO (buying treasury bonds on scheduled days). Is it just treasuries? According to Jim Rickards the answer is no. The announced QE2 is 600B in treasuries, but there are MBS the Fed is holding which should be reaching maturity. Rather than "retiring" that money they created when buying the MBS's, they will use it to purchase more MBS's.
http://kingworldnews.com/kingworldnews/Broadcast/Entries/2010/11/9_Jim_R...
That's not surprising really - who else would buy MBS in face of the fraud? If the Fed doesn't buy them what happens to the banks getting putbacks?
Good question but don't let it distract you too much.. I may be on your plane tom.
My guess would be yes.
To say that the government is not involved in the purchases would be the same as saying all fiat money issued by the Fed (Federal Reserve Notes) bears no burden on the government since they're not government issued. Then why do we pay taxes to the government if we're paid in Federal Reserve Notes and not government issued silver certificates?
Good question...hope someone has an answer.
I think this explains it PERFECTLY:
http://jsmineset.com/2010/11/11/a-deeper-look-into-why-qe-is-bad/
Is this POMO money, the same as the QE2 money? Are the FED only buying treasuries with this money or are they into more MBS? So let me get this straight the banks then put the QE2 money into the stock market? In this instance do they earn more than if they just kept hold of the treasuries? Where does the FED get the money to pay for QE2, anyone know?
I do, I do!
You, me and everyone else who pays taxes. For every dollar used is a dollar which must be collected through taxation.
Azwethinkweiz,
More accurately stated, through deficit spending. The government does not need to pay for the POMO $ with tax dollars, but by law, they need to issue treasuries for any spending above overalll tax receipts. The issue is: when does deficit spending actually cause inflation. With all of the deleveraging that is currently occuring around the world, Bernanke is not actually spending as much through POMO as the system is removing through debt destruction (defaulted debt). The biggest problem we are witnessing from Bernanke's spening, is the inflating of a new bubble in emerging markets, which will bite back sooner or later.
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Nothing personal. I'm just saying.
How do you think they fund this operation?
I lived through the late 1970's early 80's and we are nowhere near inflation; wage demand generated inflation. All we now have is speculation with borrowed money; your money. Bernanke will keep pumping $$ into the world until a bubble is created. That is, he will pump until the power of greed supersedes caution for tomorrow.
The alarm for caution for tomorrow should have been sounded yesterday. We are nowhere close to inflation of the 1970's but I think one day we could all awake to the 1970's (I hate using this term but it works) on steroids. Agree? Disagree? A lot of smart people I know are saying that the economy is starting to boom and inflation will be under control but I don't see the innovation that came from the 1980's (video games, personal computers) saving us today.
its in the bag!
It's in the Brain Sack! (see my avatar) The HOT money feel so goooooood inside my Brain Sack!
But seriously folks....although I love the article, which challenges several of my assumptions (thank you ilene), I remain of the belief that the December-mid January POMO will be 2 to 3 times this round. Yes that's right, 220-330 billion. Why? Because they want this shit out the door before the new congress gets seated. This may be the last chance Bearhankie gets to devalue the dollar. It's 4th and goal and they are going for the touchdown baby!!! If they miss, expect a new quarterback but with the same game plan in the same game.
bigger bags
of donkey chow..