Visualizing A POMO Market: How The Fed Added 400 Points To The S&P

Tyler Durden's picture

Lately, it appears, it has gotten trendy to bash the New York Fed's Permanent Open Market Operations (POMO), especially by various self-appointed godfathers of the blogosphere. The logic goes, or so we interpret the thinking, that any given POMO is nothing but yet another component of the various signals that enter into the "perfectly efficient market" and the Fed's intervention is something that is perfectly acceptable, should be a tradeable event, and is nothing of real significance (and, of course, the original narrative would come wrapped in 10 paragraphs or so of fluff). Whatever. Below, in collaboration with John Lohman, we show what the market would look like without POMO, versus a market that is predicated exclusively on FRBNY interventions. The bottom line: starting with the first POMO in 2005, when the S&P was at 1,200 and continuing through today, the broader market index would have been at just over 800 if performance from POMO days was excluded. Alternatively, purely POMO days would have had the effect of doubling the stock market in the past 5 years. We hope readers can decide on their own whether Fed intervention in this case implies causation.

Bottom line: who needs Citadel when you have POMO?

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Bearster's picture

Thanks for posting this graph!

Rainman's picture

....yes, kudos to TD !!

pamriallc's picture

nice.... but POMO or no-POMO we have some measure of recovery--- and as such the fact that POMO seems to be correlated with market upside---- we also might note that "the year" ending in "08" is responsibel for market downside.  the correlations are as interesting to me as the rainfall in Switzerland and its *PERFECT* correlation to S&P-500 performance.  POMO does keep rates locked down, and in the abselce of this, we might see lower markets, but in reality, with T-30 @ 7.5% and short rates @ 4% (1993-1995) we had an S&P hobbling along @ 15X earnings post-recession and S&L Crisis.  today we have S&P 13X earnings (50% from overseas) and only 4% T-30 rates.

by those measures, we should likely see the S&P 500 add another 15 points.

consider the wisdom.


shawn a. mesaros    pamria, llc

chopper read's picture

Dear "relentless self-promoter",   

Look yourself in the mirror while you have one last shred of decency.  Ask yourself to do the right thing.  tell your clients to sell all stocks and bonds, fire you immediately, and buy gold.  

If you wish to keep your job, then perhaps you can recommend managing a small portfolio of long food and energy futures on their behalf (to compliment their precious metals) for a very small fee.   

consider the wisdom.  

AccreditedEYE's picture

tell your clients to sell all stocks and bonds, fire you immediately, and buy gold.  


Crisismode's picture

You are, without a doubt, one of the most complete and utter morons to post on the ZH site in the history of its existence.

End of report.



Bill Lumbergh's picture

Talk to me when the dividend yield of the S&P and the P/E are on par with one another as has happened at all bear market bottoms.  The 2009 bottom produced a dividend yield of only 4% which I can assure you was far less than the P/E at that time.  For the past 20 years everyone has only cared about capital appreciation which is kind of like playing a game of hot potato.

chopper read's picture


for the past 30 years interest rates have declined from 20% to (less than) 0%.  The days of "all boats rise in a rising tide" capital appreciation are over. 

commence knife fight. 

Bigger Dickus's picture

Forward this link to your Portuguese friends

doolittlegeorge's picture

say "Brazilian friends" and your words would have more impact.  Portugese friends?

Spalding_Smailes's picture
Canary in the coal mine ??? Singapore economy just hit a brick wall - worst quarterly drop since 1975!

News just out today from the MAS shows the economy hit a brick wall, contracting an unprecedented 19.8 % quarter on quarter.

According to DBS Bank, this is a record sequential contraction and one that is worse than the supposedly
“free-fall” in GDP experienced in the recent US financial crisis, the slump during the bust as well as the doldrum during the Asia financial crisis.

Indeed, noted DBS, growth wouldn’t have fallen by more dramatic fashion than this
considering that we had a record expansion not too long ago in the first quarter.
Sharp pullbacks in production from the volatile pharmaceutical segment have
brought down overall industrial production in recent months. "And the
exceptionally high comparison base in 1H10 further amplifies the drop. That is, it’s
drug effects plus technical payback!"

"But isolating these volatilities, Singapore’s underlying growth momentum is
slowing and much in line with the normalization process in Asia with the V-shaped
recovery turning into a square root shape. And more than ever before, the
prospect of the Singapore economy is more closely tied to Asia than anywhere in
the world. Hence, this normalization process that is currently underway in Asia will
soon be manifested in Singapore’s economic growth numbers, except with some
doses of volatilities coming from the pharmaceutical industry from time to time.
Our full year GDP growth remains at 15%," noted DBS

The Monetary Authority of Singapore (MAS) surprised the market yet again after
the “double-barrel” move in April. This time, the MAS has steepened the slope of
the Sing NEER policy band as well as widened the width of the band. While it could
reflect the general optimism in terms of growth outlook by the authority, it is also a
pre-emptive move to address inflationary concern ahead. Indeed, the focus is on
inflation in the coming months as external inflationary pressure is expected to pick
up on higher commodity prices. Moreover, with the prospect of another
quantitative easing move by the US Fed, inflows will be strong and upward
pressure on the SGD will be even greater. The widening of the band will in some
ways cater to an anticipated greater volatility in the FX market going forward, noted DBS.

bigdumbnugly's picture

they should administer this POMO in the form of a little blue pill.

bada boom's picture

Yeah, but should we call Dr Bernanke if the erection lasts more than four months?

Cognitive Dissonance's picture

they should administer this POMO in the form of a little blue pill.

Suppository you mean. Because despite what your told, you ain't pitching. Rather you and I are catching, like it or not.

I suppose you could swallow it, but I want faster relief when the Fed is dry humping me.

bigdumbnugly's picture

lolol, cd!  that anal ring thing IS sticking with you isn't it?

though your point is sad but true.

Cognitive Dissonance's picture

I was traumatized, no thanks to you. :>)

prophet's picture

Would anyone ever reasonably expect a canary to survive in a coal mine?

Diogenes's picture

In the old days coal miners took canaries to work with them. Canaries are more sensitive to poison gas than coal miners. When the canary fell off its perch it was the time to get the hell out.

So yes, they were supposed to survive unless there was poison gas in the air, then they were supposed to die first and save the miners' lives.

themosmitsos's picture

Tyler, !ehbelow400! *cough*cough* .... Excuse me

Tyler Durden's picture

Close enough for government-sponsored lbo work

Iam Rich's picture

Is this representative of the open and close price on POMO days? or the few hours that POMO is going on?

In several instances certainly over the last month or so, there have been several red POMO days that do not reflect the fact that the market was down >1% in the morning after some bad news but finished off down/up only a few 1/10th's.

It might be telling to see the effect from the morning low to  the close.

TheMonetaryRed's picture

My reaction to POMO is still "so what"? Well, almost. 

It's MEANT to be a stimulus and it stimulates. 

You can disagree with the intent to stimulate, but the results of the stimulus are pretty clear. I don't believe that the financial markets are necessarily the right place to get the best multiplier (I'm not a supply-sider), but if the thesis is that the Fed's converting bonds into cash moves cash to other alternatives, then per this chart, clearly the thesis works.

TheMonetaryRed's picture

Well, yeah, but we're scarcely talking about a hypervalued market here. 

So eventually they stop quantitative easing and the market dives. So you wait and go short. 

Again, it's just kind of a "so what" to me. I mean it's an important liquidity factor, but there doesn't seem to be any take-away beyond that. 

Again, I agree that POMO stimulates. I'm not a supply-sider so I don't think you get the best multiple with that kind of stimulation, but it's a theory. 

doolittlegeorge's picture

"we don't know" that's the problem.  the theory that "the Fed is bailing out Wall Street" has "more than a little merit."  But what is the point? again..."it is to bail out government."  if you're "looking for a ruling class" behind it all you're not going to find it.  they're called "departments" and they care not one wit about your words, your ethnicity, your name, where you come from, what you stand for (and believe me you're in big trouble if you do that) and least of all "you personally."  in other words "forget mere fiat money" this is "fiat interest rates."  there are however "contradictions" and "dialectics" as Hegel so deeply spoke of "back in the day." 

TheMonetaryRed's picture

Well, I'm sympathetic to the view that there are, perhaps, dialectical-level forces here - in a metaphorical sense. 

But the idea that government's bailing out Wall Street is government bailing out government is more than a little bizarre. I mean, if you want to contend that Wall Street is the government (de facto) then I'm sympathetic to that, but then you'd have to explain the fairly significant amount of friction and lack of coordination between those two entities. 

Besides, it all seems a little mechanistic. 

Implicit simplicit's picture

There is not much of a relative money multiplier in GDP numbers, thus this  pumping is buying time for hopeful improvement in the economy. Its a leap call on hope that will show rapid time decay if GDP numbers continue to falter.

fotokemist's picture

Have you considered the effects of widespread bond defaults on local and state government retirement pension funds?  Government insured retirement funds?  I remember reading that BP's little problem in the GOM put 12% of UK retirement pension's cash flow at risk.  Hard to find a gubment official motivated purely by the common good. 

Rainman's picture

The bankers tried to stimulate RCA and the entire market in 1930, albeit by more crude paper order means. The gamblers jumped right on it. Bucket shops . Unhappily, the force of gravity easily took it down.

This is kind of like trying to decide whether to date the girl with big fake boobs or the girl with the real big deal. Both can stimulate, I guess. 

chopper read's picture

the results of the stimulus are pretty clear.  clearly the thesis works.

cocaine stimulates us.  lets have it every morning to start the day.  "the results of the stimulus are pretty clear.  clearly the thesis works."

MGA_1's picture

I don't remember my econ books talking about an economy requiring govt money printing for a healthy economy, but perhaps they should..

papaswamp's picture

41.8 million americans on SNAP disagree with you.

InconvenientCounterParty's picture

So how's the POMO paradigm doing priced in gold?

For the last couple of months, (maybe longer?) gold outpaces the S&P when the meltups happen. Hedge funds? Soverign frontrunning? FX impact?

molecool's picture

I commented below: the 'non-POMO' line looks almost exactly like a gold adjusted SPX line.

TheMonetaryRed's picture

Clearly POMO is stimulating everything at the same time - hence the fantastic degree of correlation (or inverse correlation) in almost all the markets. 

But you can't say gold is being stimulated by POMO (and HFT) on this blog, because you'd be making an argument that gold is just another relative market, not a reference market.

It's pretty clear to me that gold is moving with the bond market with the prices in both markets being pushed up by stimulus.  



fotokemist's picture

You might want to look at a $USB:$GOLD daily chart for the past three months.

Oracle of Kypseli's picture

Pity the meek and poor in spirit investing in 401k mutual funds and ETF's, for they shall inherit nothing.

However, I suspect that a lot of you ZH readers, supposedly better informed on markets, are still playing the crooked market.

doolittlegeorge's picture

exactly.  "it is hard work driving the market higher" but towards what end?  now if the ZH plan is to "break the back of everything" believe me everyone in America understands:  work and more importantly innovation are not being rewarded "in the economy" relative to "real money" tho certainly for a select few "in the monetary marketplace."  being "unfair to the entire state of Illinois" however does strike me as "not good for the country."  But, hey..."we had to destroy the town to save it" has a long history to it, too.  In short "when dealing with DC...they're going to do what they're going to do."  It's what Al Gore's lawyer told him when he lost "Bush v Gore."  He said "there is no higher authority."  On the ironic side it appears the Fed can  "bail out those who refuse to pay their taxes as well."

Pillage's picture

In the fine print does it say the bank cannot use the POMO money to go short?


bugs_'s picture

Everybody knows
A little place like nopomo
Now if you wanna go
And get away from it all
Go down to nopomo

We'll get there fast
And then we'll take it slow
That's where we wanna go
Way down to nopomo

The Alarmist's picture

Ungrateful bastard ... you're supposed to thank Uncle Ben and the Sons of 33 Liberty for helping us all feel so much richer.

RobotTrader's picture

There is always intervention in the markets.

Because there are always the very wealthy opportunists who engage in the sport of shanking the young hedge funds, money managers, and traders.

They play around with these guys like a cat and mouse game.

Just using a small piece of their liquidity to bat around some unsuspecting players trying to get rich quick.

Today's POMO's are nothing compared to the Rockefellers, Morgans, Livermore, etc. who singlehandedly could move the market by teaming up with 4 or 5 of their buddies and engage in bear raids, u-turn reversals, power spikes, or whatever was necessary to throw the young guys off guard.

Silverhog's picture

Sorry, Gold is just an investment fad. Soon to the be exposed scam based off endless cheap promo's and moon shot expectations sold to the stupidest of people like me. I'm so glad I'm stupid.     

molecool's picture

Funny - the 'non-POMO' line looks almost exactly like a gold adjusted SPX line.

uno's picture

Ritholtz was being a little bitch when he had this this past weekend 

POMO: An acronym used by rookie traders in failed attempts to explain the “mysterious” impact of massive liquidity on equities


He completely misses exposing Wall Street, tries to milk the Foreclosure mess after Zerohedge (Mako)  and Market Ticker have been all over it for years.  Well done, maybe he can give us a heads up on the Y2K problem coming up!