Odd Citizen

Odd Citizen
An Odd Citizen’s Search For Vanishing Freedoms

FED POMO for Stock Market Manipulation

November 8th, 2010

I have a hard time bending my mind around things like interest rates, FED open-market operations, bond yields and international exchange rates, but today I found some articles that discuss these things in terms of stock prices, something I’m quite comfortable discussing.

A chain of articles, starting with
This Is What Happens When The Market Gets Addicted To Federal Reserve Smack by Charles Hugh Smith, Of Two Minds, then linked to ZeroHedge and then the original article:
A Grand Unified Theory of Market Manipulation (The Precision Report, August 2009) … adds illustrated speculation, though not yet proof that the Federal Government has been manipulating stock prices upward, at least since March of 2009, a theme I’ve discussed here since early 2009 and as recently as October 21 here. Maybe the market manipulation we’ve been observing is in plain sight in the form of POMO (Permanent Open Market Operations) of the Federal Reserve of New York.

The Precision Report says:

There is much speculation and anecdotal information regarding the rally that began March 6 2009, which have suggested the gains are the result of massive manipulation on the part of the Federal Reserve (FR) and the large institutions that dominate Treasury securities dealing, program trading and the derivatives markets. Traders have reported that traditional indicators and metrics used for market analysis stopped working for periods of time or altogether, and that correlations among markets have been erratic and quick to change. Record program trading by Goldman Sachs as reported by the NYSE, heightened focus on high frequency trading (HFT), outsized profits by the large and well-connected banks, along with unprecedented intervention by the FR in the markets only fuel the manipulation speculation.

The article reports the direct stock market intervention of the FDNY The author then goes on to observe there is a direct motivational link between the Fed’s need to sell government bonds and the price of equities. As the equities market rises, drawing investment into stocks, the bond market’s investment appeal fades so interest rates have to rise in order to attract bond buyers.

The theory for which we have the greatest supporting evidence of manipulation surrounds the fact that the Federal Reserve Bank of New York (FRNY) began conducting permanent open market operations (POMO) on March 25, 2009 and has conducted 42 to date. Thanks to Thanassis Stathopoulos and Billy O’Nair for alerting us to the POMO Effect discovery and the development of associated trading edges. These auctions are conducted from about 10:30 am to 11:00 am on pre-announced days. In such auctions, the FRNY permanently purchases Treasury securities from selected dealers, with the total purchase amount for a day ranging from about $1.5 B to $7.5 B. These days are highly correlated with strong paint-the-tape closes, with the theory being that the large institutions that receive the capital injections are able to leverage this money by 100 to 500 times and then use it to ramp equities.

The Federal Reserve, under Ben Bernanke has a lot of contrary pressures put upon it by politics and Wall Street. The political pressure is toward lower interest rates to favor consumers and business borrowers at the expense of interest earners such as pension funds and social security recipients.

But Bernanke must also face the reality that if interest rates go too low then nobody will want to buy government bonds. With a 14 Trillion dollar debt to finance and refinance, the inability to roll this debt over is a frightening prospect indeed. The other end of that rattlesnake is that raising interest rates by buying U.S. Treasuries, as Bernanke announced he’d do, starting now, risks stoking a hyper-inflation, making the U.S. Dollar worthless and thus stimulating an international panic to dump U.S. dollars and bonds denominated therein.

The Precision article further points out that:

Killing the stock market to lower long term yields.
If Bernanke’s biggest threat is high long term yields, the easiest way to prevent or postpone a yield ramp is to kill the stock market and create a flight to safety situation that lowers long term yields.

we revised our theory and became open to the possibility that there would not be an intentional market crash, but that Bernanke and the FRNY would engage in a dance that would see equities rise, then correct
just as Treasuries were in danger of picking up downward momentum (and yields upwards momentum), then correct again just when it appeared that equities were in danger of crashing. In retrospect, this was the more logical choice because the FRNY, with the large member banks on its board, would not have permitted another major equities downturn if it could help it. Nor would the administration have permitted this, as it needs as much political capital possible to achieve its massive reform agenda (including healthcare). Such political capital would evaporate in an instant with another major hit to 401(K)’s. Not to say that Bernanke prefers a falling stock market (which would hurt his chances of re-nomination), but it is the lesser of two evils. For those who wonder why Bernanke, an expert in depressions, is operating from the Japanese playbook that resulted in their lost decade, we submit that it is intentional and preferred to financial apocalypse.
(emphasis added)

Remember, this was written in August, 2009. Now Bernanke has been reconfirmed for another term, the mid-term election is over, and interest rates continue to be near zero. So we may be near the precipice of hyper-inflation and/or a stock market crash due to the Feds need to drive capital from equities into “safer” bonds.

The most ugly part of this is that power to trigger or prevent these events lies with a single, unelected and quite unaccountable individual, Ben Bernanke. In this realm he has God-like powers, but his godliness is more like the ancient Greek variety. The ancient Greeks perceived their gods as fallible and capricious. Their gods were also capable of over-estimating their own capabilities.

So stand back. We’ll just have to wait and see what happens next.

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