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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You say the Fed issues debt and this is our money.
I am trying to understand this particular debt in relation to intragovernmental holdings and debt held by the public, which are the 2 components of the total debt.
Which component does this fit into?
On the Treasury Direct web site, it states""Intragovernmental Holdings include Federal Financing Bank securities."
It also says that "obligatiuons are issued to the public by the Federal Financing Bank to finance its operations."
So, is this debt you are speaking of in the latter category, debt held by the public?
Is this borrowing factored into the total debt held by the public, which should be reflected in last year's $1.4 trillion deficit.
By public, I assume we mean individuals, sovereign wealth funds, entities distinct from the federal government, right?
If this is debt held by the public, why does the interest go to the Treasury instead of to the "public," being a current budget expense?
For my excerpts, go to:
http://www.treasurydirect.gov/govt/resources/faq/faq_publicdebt.htm.
Don Levit
Posted by: Don Levit | 11/12/2010 at 08:26 AM