Martenson Insider - Fed POMO activity and the Stock Market

Today, again, we receive news that Fed is continuing to pour more and more POMO money into the banking system, this time with a 'mere' ~$2 billion addition.

August 7 - New York Fed purchases $1.937 billion in agency coupons

As long-time readers here know, I have been tracking the Permanent Open Market Operations (or "POMO") activity of the Fed for a long time.

As I wrote in The Five Horsemen  ( May 31 2009, enrollment required $):

The beginning of the end for nearly every debt-ridden country has always been the attempt to pay for past expenditures with newly-minted money. It always starts innocently enough and seems like the right thing to do, but soon the programs grow and grow, and eventually the currency of the country is destroyed.

Now the Fed is openly and actively buying dodgy debt from the government as well as from the private sector. I covered on this in May (2009) in an "In Session" posting, where I charted the amount of US Treasury debt that was being purchased by the Federal Reserve on a daily basis. 

This chart reflects only the Treasury purchases. When we add in agency debt, mortgage-backed securities, and various other corporate debt programs, we find that the Federal Reserve is printing up roughly $15 to $30 billion dollars a day just to keep things limping along.

As for the opening quote by Mises, which I think most accurately reflects how things will turn out, I think it is safe to say this: Any country that is printing up to $30 billion a day just to keep things moving along is not voluntarily abandoning credit expansion.  

This means that we are risking a final catastrophe of the currency system involved. Unfortunately, the currency in question also happens to be the world's reserve currency, so this has enormous, far-reaching implications. 

Today I want to update that chart above and provide a little more context by placing it beneath a scaled chart of the Dow Jones index (time periods match exactly so the charts align). Again, what you are looking at is a chart of POMO activity (Treasury + Agency) that is being expressed as "billions of dollars per day." No effort has been made to account for weekends or holidays; this is simply taking each POMO and dividing it by the number of days that pass until the next one.

What we might wonder here are three things:

1. How would the stock markets have behaved without the massive daily additions of billions of dollars?
2. When the stock market turned around in advance of the initiation of the POMO purchases which major bank holding companies, such as GS, were effectively front-running this flood of money?
3. If the stock market is up 40%+ and green shoots are everywhere, why is the Fed continuing to pour gasoline on the fire ($16 billion this week so far)?

Part of the answer may lie in a nice piece of work posted at ZeroHedge which notes that on POMO days that stock markets exhibited some statistically unlikely upward thrusts in the final few minutes of each associated trading day.

Under this scenario POMO money is being shuffled out of the endless thin-air vaults of the Fed and into the banking system where it needs to find something to do.  One of those things, it seems, is to goose the stock market, especially late in the day. 

The goal, we surmise, is simply to get the stock market to move upwards. This is not an unthinkable idea to me because, frankly, it is exactly the prescription I would write for an economy as dependent on rising asset prices as is the United States'.  If a rising stock market helps to get people out buying and spending again then it is a worthy goal in many a policy-makers mind, I am sure.

The only question here is "what does this mean to me?" We'll be exploring that in some detail later on…