Reuters

It was one short week ago that both Australia surprised with hotter than expected inflation (and no rate cut), and a Chinese CPI print that was far above expectations. Yet in confirmation of Dylan Grice's point that when it comes to "inflation targeting" central planners are merely the biggest "fools", this morning we woke to find that the PBOC has cut the Required Reserve Ratio (RRR) by another largely theatrical 50 bps. As a reminder, RRR cuts have very little if any impact, compared to the brute force adjustment that is the interest rate itself. As to what may have precipitated this, the answer is obvious - a collapsing housing market (which fell for the fourth month in a row) as the below chart from Michael McDonough shows, and a Shanghai Composite that just refuses to do anything (see China M1 Hits Bottom, Digs). What will this action do? Hardly much if anything, as this is purely a demonstrative attempt to rekindle animal spirits. However as was noted previously, "The last time they stimulated their CPI was close to 2%. It's 4.5% now, and blipping up." As such, expect the latent pockets of inflation where the fast money still has not even withdrawn from to bubble up promptly. That these "pockets" happen to be food and gold is not unexpected. And speaking of the latter, it is about time China got back into the gold trade prim and proper. At least China has stopped beating around the bush and has now joined the rest of the world in creating the world's biggest shadow liquidity tsunami.

It is time for the US administration to remind everyone that while every other piece of bad news may be priced into the markets in perpetuity, there is still geopolitics. Although that may also be priced in. Either way, the WSJ has just reported that "Federal agents on Friday arrested a man who they allege planned carry out a suicide bombing at the U.S. Capitol, part of a sting operation in which undercover agents posing as al Qaeda operatives provided fake explosives. The Federal Bureau of Investigation's Washington field office said the man was arrested "in the vicinity of the U.S. Capitol." It said the suspect never posed a danger to the public." Ah yes, the good old "threats are among us" gambit. And let's just go with the most trivial cliche possible. If nothing else, it sets the stage for next steps. As for what next steps may be, here is a hint, via Reuters: "Two Iranian naval ships have sailed through Egypt's Suez Canal into the Mediterranean, in a move likely to be keenly watched by Israel. "Two Iranian ships crossed through the Suez Canal (on Thursday) following permission from the Egyptian armed forces," a source in the canal authority said Friday. Two Iranian warships sailed along the strategic waterway on February 17 last year, in a move that Israel called a "provocation." Either way, Suez developments may be Israel's issue for the time being. We now apparently have our own suicide bombers to be 'very worried about.'

In a 60-36 vote, Senate just passed the payroll tax extension, previously voted through by Congress. From Reuters: "The U.S. Senate on Friday passed legislation extending a tax cut for 160 million workers and long-term jobless benefits through December, clearing the way for President Barack Obama to sign the measure into law. The Senate approval by a simple majority vote followed the House of Representatives' approval earlier on Friday. The legislation, which also extends current payment rates to doctors through the Medicare health care program for older Americans, will add $100 billion to the U.S. deficit and is aimed at further stimulating the economy." As a reminder, all this means is that a repeat of the debt ceiling fiasco is now virtually assured before the presidential election as discussed here, which explains the GOP's willingness to pass this through as fast as possible with no offsetting spending cuts. As for the benefits of $1000/taxpaying household, the recent rise in gasoline prices has already offset those. One can only hope that crude prices are as susceptible to successful central planning intervention as all other assets, or else many more extensions will be needed before the year is over.

• German president resigns in blow to Merkel (Reuters)
• China central bank in gold-buying push (FT)
• Germany Seeks to Avoid Two-Step Vote on Greek Aid, Lawmakers Say (Bloomberg)
• Eurozone central bankers and the taboo subject of losses (FT)
• Bernanke: Low Rates Good for Banks in Long Run (WSJ)
• Cameron and Sarkozy to test rapport at talks (FT)
• Chinese Enterprises encouraged to invest in US Midwest (China Daily)
• Goldman Sachs Group Inc. and Morgan Stanley have reduced their use of "mark-to-market" accounting (WSJ)
• Regulators to raise trigger for rules on derivatives (FT)

Global demand for gold reached 4,067.1 tonnes last year, the highest tonnage since 1997, due in large part to a nearly 5% increase in investment demand, which hit a record 1,640.7 tonnes. Asian countries like China, India, Vietnam, Thailand and others see bullion as a store of value against the growing inflation and the ongoing debasement of their currencies. The fundamentals for gold in 2012 look good.  Continuing low and often negative real interest rates will continue to support gold’s safe haven status. The Fed’s statement that it will continue to see rates remain very low until 2014 is very bullish for gold. Central banks were net buyers of gold and their demand surged nearly 6 fold (570%) to 439.7 tonnes in 2011 (compared with 77 tonnes in 2010), more metal than at any time since the end of the gold standard in 1971. The World Gold Council noted that, “The buyers are all ... in Latin America, Asia and the Far East and they are basically enjoying strong growth, fiscal surpluses and growing foreign exchange reserves." 

• Europe Demands More Greek Budget Controls in Bid to Forge Rescue (Bloomberg)
• Moody's Warns May Downgrade 17 Global Banks, Securities Firms (Reuters)
• Officials at Fed Split on More Bond Buys (Hilsenrath)
• Greek deal delays pressure periphery (Reuters)
• Talk, but No Action, to Break US Grip on World Bank Job (Reuters)
• Greek Rhetoric Turns Into Battle of Wills (FT)
• Greece Seeks Monday Bailout Deal, EU Questions Remain (Reuters)
• US Lawmakers Announce Payroll Tax-Cut Deal (Reuters)
• China Leader-In-Waiting Xi Woos and Warns US (Reuters)
• China's FDI falls 0.3% in Jan (Reuters)

Must ... Not ... Think ...

Make no mistake, inflation is creeping into the system in a big way. And the Fed will not raise interest rates to fight it until it’s far too late. Debt levels are simply too high for the Federal Government and US corporations, particularly the large banks which the Fed has been doing everything it can to prop up.

What is better than a one-front European war on insolvency? Why two-fronts of course. But not before many "soothing" words are uttered (no really). From Reuters: "Portugal's international lenders arrived in Lisbon on Wednesday to review the country's bailout, with soothing words of support likely to dominate as Europe gropes for success stories to counteract its interminable Greek headache. As the euro zone's second weakest link, Portugal's ability to ride out its debt crisis will be key to Europe's claim that Greece is a unique case. Despite a groundswell of concerns that Portugal - like Greece - may eventually have to restructure its aid programme, the third inspection of Lisbon's economic performance in the context of its ongoing 78-billion-euro rescue should make that contention clear. "The review will be all about peace and harmony," said Filipe Garcia, head of Informacao de Mercados Financeiros consultants. "The important thing for Europe is to isolate Portugal from Greece, to put it out of Greece's way in case of a default or even an exit from the euro." That makes sense - after all even Venizelos just told Greece that the country is not Italy. And if that fails, the Don of bailouts, Dr Strangeschauble will just give the country will blessing to use a few billion in cash. Oh but wait. It can't. Because as as we pointed out in late January, and as the market has so conveniently chosen to forget, Portugal, unlike Greece, has simple, clean and efficient negative pledge language in its non-local law bonds. Which means "no can do" to any additional bailouts under its current capitalization. Which may very well mean that Portugal is stuck with its existing balance sheet unless the country succeeds in doing an exchange offer which takes out all UK- and other strong-protection bonds. All of them. And as Greece has shown, that is just not going to happen.

Last week we discussed the gradual unraveling of a topic we had been following for the past 3 years, namely the brazen and criminal manipulation in the Libor market, which directly and indirectly impacts a stunning $350 trillion worth of securities (and thus, their implied risk, and hence, prices). Today we are delighted to learn that the retribution against these banks who have been artificially representing to the market that they are in better condition than in reality (courtesy of Libor's "strict" self-reporting approach), are beginning to see lawsuits filed against them, with Schwab merely the latest out of the gate. And just as fraudclosure was the litigation topic of 2010 and 2011, sit down and watch as Li(E)borgate explodes into the biggest litigation pain for banks, with litigation expenses that could easily surpass both the robosigning scandal (and its robo-settlement) and the escalating banks Reps and Warranties scandal. Because as recent evidence confirms, there are likely emails proving manipulation exists black on white, as discussed last week. Which means that the case of Schwab, noted last summer by Reuters, is about to become a pandemic.

While much of the focus has been on Paulson & Co., the hedge fund founded by billionaire John Paulson, cutting its stake in the SPDR Gold Trust by 15% in the fourth quarter, possibly of more importance is the fact that PIMCO, the Texas Teacher Retirement System and George Soros all increased their holdings of the biggest exchange-traded product backed by gold. Paulson cut his gold ETF bullion holdings by about 600 million dollars in Q4, a reduction that was likely driven by client redemption needs as he and his fund remain upbeat on gold – primarily due to inflation concerns.  Paulson’s reduction in SPDR was offset by other important buyers such as PIMCO, which oversees $1.36 trillion and is home to the world's biggest bond fund and significant institutional buying from the likes of the Texas Teacher Retirement System and billionaire investor George Soros. ‘Bond King’, Bill Gross recently wrote about gold as a “store of value” and PIMCO’s allocation to GLD may be ongoing as they seek to diversify their portfolios and hedge against inflation. Soros, who once suggested gold was or would be "the ultimate asset bubble," raised his stake in the SPDR Gold Trust (GLD), a gold-backed exchanged-traded fund, to 85,450 shares, up from 48,350 shares in the period. Soros, who had disclosed call and put options on the gold fund in the prior period, reported no such investments in the fourth quarter. Soros’ GLD position is worth a mere $13 million, however it suggests that he is not as bearish on gold as portrayed and that he sees further upside for gold.

Greek "idiotic" 3:30 pm rumor undone-

• GREEK CONSERVATIVE PARTY SAYS POLICY MODIFICATIONS "MIGHT BE REQUIRED" FOR IMPLEMENTATION

But don't expect the market to give up the gains . After all, the market only goes up on rumors, but never down on refutation, or as it is otherwise known, reality.

• Europe ushers in the recession: Euro-Area Economy Contracts for the First Time Since 2009 (Bloomberg)
• Greek conservative takes bailout pledge to the wire (Reuters)
• China Pledges to Invest in Europe Bailouts (Bloomberg) - as noted last night, the half life of this nonsense has come and gone
• Japan's Central Bank Joins Peers in Opening the Taps (WSJ)
• EU Moves on Greek Debt Swap (EU)
• EU Divisions Threaten Aid For Greece (FT)
• Athens Woman facing sacking threatening suicide (Athens News)
  
• King Says Euro Area Poses Biggest Risk to UK’s Slow Recovery (Bloomberg)
• Sarkozy to Seek Second Term, Banking on Debt Crisis to Boost Bid (Bloomberg)

In case one is wondering what lit a fire under the EURUSD and the ES' ass in the past 30 minutes, why it is the trusty old fall back - China, to which all algos respond every single time like stung donkeys as if on command. Because just as the EURUSD was about to retrace the lows as the realization that the EOD rumor was nothing but an infrared herring, something else had to step in an continue to rumor-based levitation. Sure enough, that something was the Chinese central bank.

• CHINA PBOC'S ZHOU SAYS HE'S CONFIDENT EU WILL SOLVE CRISIS: MNI
• CHINA PBOC'S ZHOU SAYS HE SUPPORTS EU, ECB MEASURES: MNI
• PBOC'S ZHOU: CHINA WILL PARTICIPATE IN RESOLVING EU DEBT CRISIS
• CHINA PBOC GOVERNOR ZHOU SAYS HE HAS CONFIDENCE IN EURO: MNI

And that's all it took to life the ES by over 10 points in minutes.

Wondering why the market just viagra'ed up to green on absolutely nothing? Here is the news from Reuters, with key words underlined:

Greek conservative party leader Antonis Samaras is expected to deliver a letter of commitment to the country's international lenders on Wednesday, a government source said on Tuesday.

"Samaras' letter of commitment is expected to be handed in tomorrow morning," the government official told Reuters on condition of anonymity.

A senior official at the conservative New Democracy party confirmed that Samaras intended to sign the letter. There was no official comment from the party.

So... let's get this straight: Samaras, the guy who has promised will he reneg on the European deal as soon as he becomes PM, is "expected" to agree to the deal he voted for on Sunday..."according to a Grek government source." And who will he supposedly delivery this letter to? The cancelled European meeting? Or to Juncker who said Greece needs to comply with the terms of the first bailout, forget the second one. The same Juncker who said he is uncomfortable with Samaras lack of commitment?