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The Fed’s Inflation Crusade, POMO Making its Presence Felt Across the Markets

Stock-Markets / Financial Markets 2010 Oct 24, 2010 - 06:09 AM GMT

By: Investment_U


Best Financial Markets Analysis ArticleDr. Mark Skousen writes: The Obamas’ pet is a Portuguese water dog named Bo.

But President Obama likes another dog a lot more.

This one is called “POMO” – short for “Permanent Open Market Operations.”

And the reason why POMO is Barack’s best friend is because it could single-handedly propel Wall Street to new highs over the next year and save the President’s reelection campaign.

How can I make such a bold prediction? Simple…

The Fed’s $32 Billion Inflation Crusade

On August 10, the Federal Open Market Committee, an arm of the Federal Reserve Board, announced the creation of POMO. It then directed the New York Fed to start retiring agency mortgage-backed securities and invest the proceeds directly into longer-term Treasuries to the tune of $32 billion.

The goal is simple: To reinflate the economy.

The Fed backed that up last week by announcing its official plan to “return inflation, over time, to levels consistent with its mandate.”

And since the U.S. economy has incurred actual price deflation over the past two years, the Fed is now determined to open the floodgates and provide enough liquidity to get us back to 2% to 3% inflation at a minimum… regardless of the consequences.

POMO Making its Presence Felt Across the Market

Every week, the New York Fed has followed its orders like clockwork – and the results have been spectacular:

•Money Supply: The M2 growth rate has doubled from 3.5% to 7.4%. According to Milton Friedman and other monetarists, an easy-money policy will cause a sharp recovery in the economy in six to nine months (the Friedman Rule).
•Interest Rates: The coupling of low interest rates and low price inflation is a dream combination for the U.S economy and Wall Street – and rates have fallen again.
•The Stock Market: Having bottomed out in August, the U.S. market has rebounded by 12% – one of the fastest recoveries ever and one that anticipates better times ahead.
•The U.S. Dollar: POMO is bearish news for the dollar, which has sold off sharply since August. (But Obama doesn’t care, as long as the decline is orderly.)
•Commodities: Oil, gold and silver have skyrocketed. (Most commodities are quoted in dollars.)

How to Play POMO

Interestingly, Obama’s POMO will continue its trick of buying billions of dollars in Treasuries every week until the elections occur. And while that’s good news for the Democrats and Obama over time, it may be too little, too late for this mid-term election cycle. (Intrade, the political futures market, still has the Republicans regaining the House and maybe even the Senate:

But let there be no doubt that the so-called independence of the Fed has been a myth since the financial crisis of 2008.

By the end of POMO’s buying spree, the Federal Reserve will surpass Japan and perhaps even China as the largest owner of Treasury securities (approaching $900 billion).

And it means investors should continue to buy stocks and commodities.

Good trading – AEIOU,

Source :

by Mark Skousen

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