The Idea Behind POMO's

I don't think the Fed would articulate their monetary policy quite this way, but it seems to me that the theory behind their non-sterilized permanent open market operations (POMOs) is that by juicing asset markets they are promoting greater confidence in the future (via the wealth effect), thereby leading to increased consumption and greater business investment (economic growth).

Twill be interesting to see if any parts of that transmission mechanism misfire.

Big picture update

Things unchanged.

Since the crisis, the authorities have propped the system up through QE and fiscal stimulus. But even that failed to stop asset price deflation. Into the bargain, people are still unemployed resulting in contracted incomes, and scared witless consumers. Worse than that, we have seen no credible attempts to address the real flaws in the system (global structural imbalances, unfunded entitlement liabilities, financial moral hazard).

Recovery will ensue, but it will be a languid, stop-start affair. Even as the recovery takes hold and confidence returns, the economy will be racked by secular headwinds (interest rate unwind, higher taxes, delevering consumer, fiscal belt-tightening). None of which means that equities will necessarily be a bad place to reside (they'll be solid because we're starting from a low base, they just won't be spectacular).

The costs of the artificial pumping will be bourne by current taxpayers and future generations.

Implications: multi-year stagnation.

Defenses Probed

The market probed the 1130 defensive line on the S&P 500, but it was only a reconnoiter.

Expect another test on post-expiration Monday ramp. Could be a great jump-on point for a nice retracement trade.

Holding Pattern

We've been in a fairly volatile holding pattern, waiting for instructions from the tower.

This fog of uncertainty is causing havoc with hairlines and blood pressure.

Which way will we break? When will we break? Will we break at all?

Inquiring minds want to know!

Capitalism and Democracy inherently flawed

The flaws within both capitalism and democracy relate to the breadth of the human self.

Just as it is self interest that serves as the impetus for a positive marketplace, so to it is selfishness that ends up distorting a marketplace.

Just as it is self interest that sets-up a system of governance that benefits the whole of society, so to it is selfishness that leads to a system that gives the majority what they want (rather than what they need).

Motto of the current zeitgeist

"It is, what it is."

Usually performed in a resigned tone.

It is what it is, is employed to answer many a situation where there appears to be little that can be done.

More precisely, it encapsulates the implied nihilism swimming beneath the surface of our modern secular culture.

Tail Wagging the Dog

It used to be that an indexes movements were a function of changes in the underlying stocks.

But the advent of ETFs has changed that dynamic. Now the ETF moves first and it is up to the arbs to equalize constituency components.

I'm not 100% sure what the implications are of this change, but it doesn't sit well with me.