Tuesday, November 9, 2010

Resistance Is Futile

Tomorrow the Federal Reserve will announce its forthcoming debt monetization schedule, aka Permanent Open Market Operations (POMO). It is estimated that the amounts will range between $100-$130 Billion a month. You can find the schedule here: http://www.newyorkfed.org/markets/tot_operation_schedule.html

As it has in the past, a lot of this newly created money will find its way into stocks and commodities. The US Dollar, which took quite a beating from the last round of monetization is now near long term support, which will be interesting to see if it holds—at least in terms of the USD index. It may, as countries like Japan also crank up their monetary creation and competitive devaluations get even more serious. But, of course, the real value of all fiat currencies will continue their decline against things of real value and the standard of living for 99% of Americans will continue to go down as well.

POMO: Resistance is futile

This situation may very well turn into the mother of all bubbles—even bigger than what was experienced in the late 1990's. Ben Shalom Bernanke, the FED Chair, and some of his colleagues have pretty much come right out and said that they want higher stock prices. They claim that this will help with the structural problems (such as unemployment) facing the US economy. It will not.  But what it will do is create more financial bubbles and set up the global economy for an even bigger crisis down the road, perhaps in 2012...

In the meantime, stock prices are likely to rise with a very high probability. If the FED is giving money away, you might as well try to get a piece of it. Fundamentally the stock market has no business being where it is today, but it will go much higher. In this context, it may seem like the financial markets have turned into a big casino, and to a good degree they have.
Unfortunately, I do see a lot of similarities in what I experienced during my 8 years working in the casinos of Vegas and what our financial system has become--a casino, with the Federal Reserve as the house...and the house always wins.

I may not like the fact that in the long run the FED and the US Government are making a bad situation worse, but I also know it is foolish to get in their way and become a victim.  So how do you exploit this situation?

It's pretty simple...to profit from price moves you buy corrections against the dominant trends and use low risk vehicles with high potential rewards (for example: option spreads).

It has been two years since I posted on here, but like the gamblers I used to deal to in the casino, I can no longer resist the action--they (the FED) are giving away free money, and I want a piece of it...but many do not have any choice in the matter-- to not play leaves few options (take a look at savings rates).

This is what our financial system has become—a casino...free markets are dead, consumed by a government manipulated casino, and the house is telling you the odds that the stock market will rise are much better than what they otherwise would be.  And sadly, this was Bernanke's plan all along...besides--you don't want to bet against the house, do you?

~ John T. Bardacino, CAIA


  1. wise comments, specks of truth around the web, i have come to believe this is true, dominant trends, pullbacks, and options spreads...

    dominant trends - brain?
    pullback - heart?
    options - courage?

    can we say wizard of oz?

  2. Since I posted this we have indeed rallied, but it looks we may get some profit taking after the holidays. There may still be some juice left for a quick January effect rally as it may not be totally discounted but I think we sell off to the longer term uptrend line on the SPX before we go higher again...

  3. [...] not at all suggesting a crash, because any potential crash would be mitigated by the PPP and more POMO operations. But at a minimum index prices need to come back to a more dominant trend line (support) [...]

  4. Risk is increasing with prices, March may bring a correction with the political battle for raising the debt limit potentially bringing a shutdown of government, as it did back in the 90s….