The Fed is back buying Treasuries. Yesterday's pop in equities was a nice resh reminder of what happens when the Fed pumps liquidity into the system. I added a chart of the 10Y US Treasury future because it is too funny to be ignored: the market rallies ahead of the Fed buying... and then dips, so the Fed not only injects liquidity in the system supporting a doomed market with your tax dollars, but it also splashes primary dealers in the process. The gift will keep on giving. I am working on digging up the hourly price action for the 24H before and after the POMO days of 2009 in order to isolate the patterns for equities and Treasury futures and also try to measure the impact of the maturity being purchased on the curve. More to come on this when I have a chance to finish the study! Remember tomorrow is a POMO day so don't expect Treasuries to lose their bid, and then expect tomorrow to see today's gains washed away as dealers cash in. After all can you blame them: would you sell today if I told you a multi-billion buyer is guaranteed tomorrow? I didn't think so... - Nic Lenoir

• Asia stocks rise for fourth day, bond risk drops on US output; Yen gains.
• China doubles Korean bond holdings as Central Bank switches from US debt.
• Germany's Q2 GDP growth unlikely to continue : ZEW survey.
• US govt will likely continue to play a role in guaranteeing mortgages: Geithner.
• Vietnam devalues currency by 2.1% to boost exports as stocks approach bear market.
• Wholesale costs in the U.S. increased in July - first time in four months.
• Vestas Wind Sys swings to Q2 loss of €119M, as revs fall fell 17%. Cuts 2010 outlook.

Economic Calendar: Data on Crude Inventories to be released today.

The British pound jumped 50 pips earlier after the BOE decided to keep rates unchanged at 0.5% and not increase the level of QE from the current 200 billion pounds. In a situation that mirrors our own, the bank's board saw one member,  Andrew Sentance, voting for a rate hike, with 8 others deciding to keep rates at the current 0.5%. Sentance pushed for an increase in the rate to 0.75 percent on concerns that inflation expectations may become dislodged. And in a somewhat analogous loosening-tightening dynamic to that of the US, even as many had expected the BOE to actually loosen some more by raising the amount of QE, the bank kept QE total at the existing level, without adding on a Lite, 2.0 of some other silly designator. The reason is that unlike in the US with its doctored core CPI metric, the UK is already experiencing inflation over 3%. As BusinessWeek notes: "Annual consumer-price gains exceeded the 3 percent ceiling in July,
requiring King yesterday to send a public letter of explanation to
finance minister George Osborne on how he plans to control the cost of
living. King argued that inflation has been driven higher by “temporary”
factors and reiterated the central bank’s readiness to change policy in
either direction." It appears that for the time being, the US is all alone, and well in the lead, in the currency debasement via more printing race.

The one must watch interview of the week (if not of the year) features Hayman Capital's Kyle Bass. Bass, who correctly called the subprime implosion (and profited handsomely from it) as a iconoclast contrarian to conventional wisdom, tells David Faber that "given my outlook on the world, I don't know how I can be long stocks." Frequent readers of Zero Hedge will notice many comparable themes touched upon in Bass' interview with issues covered on Zero Hedge: the inevitable restructuring of untenable sovereign debt, the nearly $5 trillion in new global debt that needs to be issued just to plug near-term deficits, the joke that was the European stress test and the ongoing insolvency of the European banking system which is times bigger than its US equivalent, the imminent downward revision of Q2 GDP to sub 1%, the Fed's conflicted position as a political authority whose sole purpose now is not to keep inflation and unemployment low, but merely to keep interest rates as low as possible, as even the slightest shift to higher short-end rates will be seen as a black swan, indicative the Fed is losing control over the economy, and ultimately the futility of Keynesian theory band-aiding of a world caught in a toxic debt death spiral. In short, Bass sees no way the world can get out of its current state absent a huge reset. We agree completely, and needless to say, we are confident Bass will be proven 100% correct, to the chagrin of all the permabullish lemmings who day after day refuse to accept the unpleasant reality. The only caveat: when Bass is eventually proven right, all bets on profiting from this realistic worldview will be off, as the existing financial system will no longer exist.

More world governments are "just saying no" to the ponzi. Last week, the Malaysian government of Kelantan "said it was introducing a new monetary system featuring standardised
gold and silver coins based on the traditional dinar and dirham coins
once used by the Ottoman Empire." And as everyone who has taken game theory 101 knows, the first defector wins the most, while the last one is left with nothing. A small province in Malaysia just made the critical first defection. The question now is who will be next... and next...and next.

Spreads tightened across Europe and the US today with indices outperforming intrinsics thanks to rumors of JPY intervention and headlines proclaiming European sovereign fears over, the US recovery still in place, a 'coming' M&A boom, and the start of the Fed POMO encouraging risk-taking. The thinness of markets (given the summer slump and general lack of desire) enabled modest re-risking to move markets rapidly at the index levels across sovereigns, financials, and corporates in the US and Europe. The completion of the Irish and Spanish debt issues today seemed in and of itself enough to get everyone going (despite notably higher yields in the former and suspected 'help' from the ECB in both) and despite a major drop in German confidence, bond spreads and CDS compressed relative to Bunds with a feeling of squeeze to the move in SovX today - 9bps tighter vs 6bps intrinsics and leaving the index notably rich to intrinsics overall.