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Monday, September 20, 2010

Why do markets rise in a recession?



This headline from ZeroHedge.com is a good example why markets rise in a recession even when all other economic data would justify a market drop:

"Fed Injects Record $5 Billion Into Stock Market With Today's POMO"

POMO = permanent open market operations.  Basically the Fed goes and permanently purchases securities (some form of bond) from 'primary dealers' (banks & other 'to big to fail') in exchange for cash.

 Example:
JP Morgan ---->  US Treasury bond ----->  Fed
JP Morgan <----  Cash <-----------   Fed


 The goal is twofold:

1) This is another bailout to help the financials who are carrying untold hundreds of billions, if not trillions in toxic debts on their books and would be unable to give the money to the banks through more overt channels,

2)  To artificially inflate the stock market with free money so the S&P and Dow will also be inflated, giving the perception that the economy is in 'recovery' and it is OK for suckers.. I mean everyday Americans to invest in the market again.

In simple terms, it is outright market manipulation, except the culprit isn't an inside trader or a corporation.. its our government.

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