Trichet

That the European ponzi is leaps and bounds ahead of the US is well known: we have frequently succumbed to vertigo trying to chart just how interconnected Europe's financial system is at the current point where €1 in incremental capital is supposed to prop up a multi-trillion pyramid scheme. But the just released news from the Handeslblatt demonstrates that just when we thought we had seen it all, Europe once again manages to surprise us. As is by now well-known, Finland has proven to be quite a stick in the spokes of the joint-European can kicking exercise by, prudently, demanding collateral, or threatening to walk out of the second Greek bailout (that 1 year Greek bonds are trading at 60%+ yields is irrelevant). Well, here's the solution - give them collateral... in the form of insolvent Greek bank shares, which however will be "partially nationalized" as if that will suddenly push their value higher. Supposedly the Finns never clarified that the collateral has to have some liquidation "value."  Oh well, better luck next time.

• IASB criticises Greek debt writedowns (FT)
• ECB to reassess inflation risks (FT)
• Pimco's Gross rues US debt 'mistake' (FT)
• Trichet and Rehn defend Europe’s banks (FT)
• Japan Parliament Confirms Noda as Prime Minister (WSJ)
• Sino-Forest is Second Time Chan Loses Company (Bloomberg)
• US authorities assess hurricane’s aftermath (FT)
• Solar Purge Drives Weakest Into Buyouts (Bloomberg)
• Republicans to Unveil Bill to Force Major Changes at the UN (Bloomberg)

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Follow that bouncing ball across Europe as it eventually hits home right here on Wall Street. Why haven't we heard about this in the media or the sell side reports?

Earlier today we speculated that the latest ECB monetization tally of insolvent PIIGS debt would be between €10 and €15 billion. Well, the final number was below the bottom end of the range or €6.7 billion (with €1.3 billion maturing). This follows €22 billion and €14.3 billion in the past two weeks, bringing the total under the ECB's debt monetization facility to €120.3 billion, a number that Germany must be simply ecstatic about. Keep in mind this is debt that local banks can not pledge to the ECB in return for 100 cents on the euro, and in essence removes liquidity from the system. What was hilarious, however, is the immediate defensive posture by the ECB's Trichet who said on the subject of whether ECB taking on too much risk, that the increase in ECB's balance sheet not as large as Fed or BoE. He also said that "Everybody understands that particularly in the present situation that the ECB would maintain a solid anchoring of inflation expectations,” Trichet told the European Parliament’s economic committee during a special session called to discuss the debt crisis. "All countries would be hampered” if they became unanchored, Trichet added. Bottom line - the most modern spin on an old maxim: "the ECB is not the Fed" - we are not sure if that is a good or a bad thing: frankly it is all central planning. What we are concerned about is that contrary to what self-aggrandizing economist PhD's, somehow the ECB did not refute the fact that there is central bank risk. Yes, even with all that fiat printing capacity.

When the dust settled on gold’s volatile week, despite much “noise” from uninformed commentators, it showed that gold fell 2.96% on the week. This must be put in context. The previous week alone gold had risen 6.2%. Despite the 3% sell off last week gold remains up 11.6% in dollar terms (and by similar amounts in other currencies) so far in August with just three trading days left in the month. Meanwhile, global stock markets are down by similar amounts in August, with the FTSE down 11.7%, the DAX down 21.6%, the S&P down 8.95% and the MSCI World down 10.95%. Thus, gold has again proven its hedging and safe haven status. The data shows that sentiment in the futures market towards both gold and silver remains muted with very little evidence of participants ‘piling in’ on the long side. Indeed, it shows that the sharp margin increases seen in silver and the margin increase seen in gold last week have had the desired effect of cooling sentiment thereby making the fundamentals in both markets sounder. The COT data in conjunction with very robust physical demand globally and especially in China (see news) means that any correction is likely to be shallow and short prior to the primary trend reasserting itself.

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For awhile now, the market has loved to talk about risk-on or risk-off.  Occasionally a few outliers exist, but by and large that pattern of everything risky up or down together has been holding.  It felt like that is potentially starting to fall apart this week. The first thing that caught my eye, was the difference in performance between credit and stocks.  The CDX IG16 index was actually wider on the week.  It closed at 123 the prior week and finished this week at 126.25.   That is not a major move, but is in sharp contrast to the SPX which was up 4.7% on the week.
That relative out performance of stocks left many investors scratching their heads.  For all the talk about "credit" leading stocks, or warning signs in the credit markets, they were all ignored this week, at least in U.S. Stocks. Good luck, and hopefully the simplicity of risk-on or risk-off will return, otherwise I suspect this will get very messy as so many trading strategies have depended on it.

I think if we had the global leader app functioning, we would find that most are on vacation somewhere, making it highly unlikely we get any big intervention over the weekend.  Merkel and Sarkozy just finished a summit.  Obama is definitely on vacation.  I just don't think they feel the level of urgency the market wants them to have.  Trichet has done a lot already, more than any other entity in the past couple of weeks.  What more can he do?  When does he get replaced?  I don't see the ECB announcing anything new.  And what about Ben?  He seems to like Jackson Hole, and he has been far less keen on making weekend announcements anyways.

The ECB just disclosed its much anticipated weekly purchases under the SMP (or direct monetization) program, which at €22 billion came well above expectations of €15 billion, and represents the biggest weekly total in the 66 weeks of purchases under the program, more than the previous record €16.5 billion purchased in the inaugural week of the SMP. Furthermore, as has been disclosed before on Zero Hedge, with a regular (T+3) settlement on SMP purchases, this means that the full weekly total will not be clear until next week's number is announced, and the presented number is only indicative of the pre-settled purchases of Italian and Spanish bonds. As before, what happens under the SMP is irrelevant (although is occurring as predicted by Zero Hedge back in November, when we said the SMP total is about to double as the crisis spreads) since the only thing that matters is when and how big the EFSF will become. Continuing monetizations at this rate under the SMP is political suicide (because make no mistake: the ECB is nothing but a political player now) for JC Trichet and his Italian soon to be replacement. We can't wait to hear Germany's reaction to the fact that cumulative SMP purchases (and thus "Weimar" risk) increased by 30% in one week.

This aggression of a red close in the FTSE MIB will not stand man. Which is why Trichet just went ahead and sent the cavalry to buy another X billion worth of Irish 10 years to send a powerful message that European taxpayer capital will be used to purchase worthless paper that is cash flow bad, until morale improves.

• Rogoff: Fed Will Embark on QE3, Act ‘Decisively’ (Bloomberg)
• China Inflation Quickens to 6.5%, Limits Policy Response to Global Crisis (Bloomberg)
• ECB Puts Pressure on Italy (WSJ)
• Chinese Fault Beijing Over Foreign Reserves (NYT)
• Senate to probe S&P downgrade (FT)
• Cameron Back to U.K. for Emergency Meeting on Riots (Bloomberg)
• Trichet Turns ‘President of Europe’ as Debt Crisis Stuns Political Leaders (Bloomberg)
• Hong Kong Sells Land 33% Below Surveyors’ Estimates Amid Market Turmoil (Bloomberg)

Peter Tchir submits: "I have no idea on the next move.  Headlines will continue to dominate.  If the ECB can't or won't keep Spanish and Italian rates down tomorrow, and the Fed doesn't initiate QE3, it could get really ugly.  Seems weird saying that it could get really ugly after a down 6.66% day in SPX, but it could.  BAC is another wild card.  With market volatility so high, and liquidity minimal, the one thing that makes the most sense is to stay small and nimble."

After all the hollow rhetoric and scapegoating over the past few days about S&Ps "treasonous act" from Friday, we were delighted to finally hear one person say the truth. "I have been criticizing them and Moody's and Fitch for a long time. Moody's and Fitch are on the "S" list. I think S&P finally demonstrated some spin. S&P finally got it right. They spoke to a dysfunctional political system and deficits as far as the eye can see. They are enforcing some discipline. My hat is off to them." The person in question: PIMCO's Bill Gross, who says what everyone is thinking but afraid to say it for fear it would insult our oh so sensitive, and so incompetent, administration. Because if criticizing S&P over being far too late to the subprime party is justified, at least they have the guts (unlike those tapeworms from Moody's) to finally step against the tide of conventional sycophantic wisdom and tell everyone even a modest part of the whole truth. If that is not the first step toward penitence, then nothing is. And yes, America's real credit rating at the current level of deficit accumulation most certainly does not begin with the letter A, or B or even C for that matter. Because what America is doing is heading straight for default, however not by officially filing in the Southern District of New York, but by terminally hobbling its own currency in hopes of stimulating rampant inflation thereby cutting its debt load through devaluation. A sad side effect of that of course is the wipe out of its own middle class as well. But all is fair in love and preserving the wealth of the status quo.