For yet another extraordinary week in global markets, the Dow declined 2.4% (down 3.9% y-t-d) and the S&P500 fell 1.8% (down 5.5%). The Transports were hit for 2.2% (up 13.6%), and the Morgan Stanley Cyclicals dipped 0.9% (down 1.8%). The Utilities sank 2.6% (down 6.4%), and the Morgan Stanley Consumer index declined 2.1% (down 7.0%). The broader market was stronger. The S&P400 Mid-Caps added 0.4% (down 0.5%), while the small cap Russell 2000 slipped only 0.8% (down 6.0%). The NASDAQ100 declined 1.1% (down 6.0%), and the Morgan Stanley High Tech index fell 1.3% (down 6.2%). The Semiconductors dipped 0.3% (down 2.3%), the Street.com Internet Index lost 1.3% (down 4.0%), and the NASDAQ Telecommunications index fell 1.9% (down 2.2%). The Biotechs declined 1.3% (down 4.9%). The wildly volatile financial stocks were sold this week. The Broker/Dealers sank 6.2% (down 17.5%), and the Banks lost 6.0% (down 8.5%). With Bullion rallying $29.20, the HUI Gold index recovered 5.9% (up 3.3%).

One-month Treasury bill rates surged 25 bps this week to 1.59%, and 3-month yields rose 15 bps to 1.68%. At the same time, two-year government yields sank 21 bps 2.24%. Five-year T-note yields fell 22 bps to 2.96%, and ten-year yields declined 9 bps to 3.72%. Long-bond yields fell 5 bps to 4.52%. The 2yr/10yr spread ended the week at 153 bps. The implied yield on 3-month December '08 Eurodollars dropped 14.5 bps to 2.80%. Benchmark Fannie MBS yields declined 5 bps to 5.37%. The spread between benchmark MBS and 10-year Treasuries widened 4 to 160 bps. The spread on Fannie's 5% 2017 note widened 6 to 60 bps, and the spread on Freddie's 5% 2017 note widened 5 to 59 bps. The 10-year dollar swap spread declined one to 60.0. Corporate bond spreads were mostly wider this week. An index of investment grade bond spreads widened 15 to 103 bps, while an index of junk bond spreads narrowed 16 to 624 bps.

According to Bloomberg, this week's $38.2bn corporate debt sales were the third highest on record (four straight weeks of $30bn+ issuance) Investment grade issuance included Glaxosmithkline $9.0bn, Citigroup $3.55bn, Berkshire Hathaway $2.0bn, Merrill Lynch $1.75bn, ConocoPhillips $1.5bn, Transalta $500 million, Travelers $500 million, Duke Realty $325 million, and Alabama Power $300 million.

In what Bloomberg is describing as the "busiest week since November," junk issuers included Newfield Exploration $600 million, Petrohawk Energy $500 million, Atlas Energy $400 million, Ace Hardware $300 million, and Newport TV $200 million.

Convert issuance this week included TTM Technologies $155 million and Synnex $125 million.

International dollar bond issuance included GTL Trade Finance $1.5bn, Nordic Investment Bank $1.0bn, Quebec $1.0bn, Grupo Televisa $500 million, and Independencia International $300 million.

May 7 - Dow Jones (Rogerio Jelmayer and Tom Murphy): "Taking advantage of a recent credit rating upgrade to investment grade, Brazil Wednesday re-opened its Global 2017 bond for $500 million, pricing it at 104.816 to yield 5.299%, the lowest yield ever for a Brazilian overseas sovereign bond. Demand was considerable... The bonds were issued at a spread over comparable U.S. Treasurys of 140 basis points..."

German 10-year bund yields dropped 20 bps to 3.99%, as the DAX equities index slipped 0.6% (down 13.2% y-t-d). Japanese 10-year "JGB" yields fell 9 bps to 1.55%. The Nikkei 225 declined 1.4% (down 10.8% y-t-d and 23.1% y-o-y). Emerging debt markets were mostly quiet, while equities were mixed to down. Brazil's benchmark dollar bond yields added 3 bps to 6.02%. Brazil's Bovespa equities index increased 0.4% (up 9.0% y-t-d). The Mexican Bolsa added 0.4% (up 3.9% y-t-d). Mexico's 10-year $ yields slipped 4 bps to 4.79%. Russia's RTS equities jumped 7.6% (down 0.3% y-t-d). India's Sensex equities index sank 4.9%, boosting y-t-d losses to 17.5%. China's Shanghai Exchange declined 2.2%, raising 2008 losses to 31.3%.

Mortgage rates were little changed again this week. Freddie Mac 30-year fixed mortgage rates dipped one basis point to 6.05% (down 10bps y-o-y). Fifteen-year fixed rates added one basis point to 5.60% (down 27bps y-o-y). One-year adjustable rates were unchanged at 5.29% (down 17bps y-o-y).

Bank Credit rose $9.8bn to $9.426 TN (week of 4/30). Bank Credit has expanded $213bn y-t-d, or 6.7% annualized. Bank Credit posted a 41-week surge of $782bn (11.5% annualized) and a 52-week rise of $942bn, or 11.1%. For the week, Securities Credit dropped $28.8bn. Loans & Leases jumped $38.6bn to $6.927 TN (41-wk gain of $602bn, or 12.1% annualized). C&I loans dipped $0.7bn, with one-year growth of 21.3%. Real Estate loans rose $15.9bn (up 5.1% y-t-d). Consumer loans added $2.9bn, and Securities loans gained $13.9bn. Other loans were up $6.5bn. Examining the liability side, Deposits dropped $43.4bn, while "Net Due to Foreign" increased $35bn.

M2 (narrow) "money" supply declined $39.2bn to $7.654 TN (week of 4/28). Narrow "money" has expanded $191bn y-t-d, or 7.8% annualized, with a y-o-y rise of $455bn, or 6.3%. For the week, Currency was unchanged, while Demand & Checkable Deposits increased $7.8bn. Savings Deposits dropped $40.2bn, and Small Denominated Deposits declined $1.4bn. Retail Money Funds declined $5.4bn.

Total Money Market Fund assets (from Invest Co Inst) surged $54bn last week to $3.472 TN, while posting a y-t-d gain of $359bn, or 33% annualized. Money Fund assets have posted a 41-week rise of $889bn (44% annualized) and a one-year increase of $1.006 TN (41%).

Asset-Backed Securities (ABS) issuance increased to a respectable $7.0bn. Year-to-date total US ABS issuance of $76bn (tallied by JPMorgan's Christopher Flanagan) is running 28% of the comparable level from 2007. Home Equity ABS issuance of $303 million compares with 2007's $151bn. Year-to-date CDO issuance of $12bn compares to the year ago $157bn.

Total Commercial Paper declined $9.7bn to $1.754 TN, the lowest level going back to April 2006. CP has declined $470bn over the past 39 weeks. Asset-backed CP sank $15.9bn (39-wk drop of $462bn) to $734bn. Over the past year, total CP has contracted $328bn, or 15.8%, with ABCP down $376bn, or 33.9%.

Fed Foreign Holdings of Treasury, Agency Debt last week (ended 5/7) increased $16.3bn to a record $2.278 TN. "Custody holdings" were up $223bn y-t-d, or 29.7% annualized, and $349bn year-over-year (18.1%). Federal Reserve Credit expanded $3.2bn to $868bn. Fed Credit has contracted $5.9bn y-t-d, while having increased $14.1bn y-o-y (1.7%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $1.439 TN y-o-y, or 27%, to a record $6.769 TN.

Global Credit Market Dislocation Watch:

May 7 - Financial Times (Paul J Davies): "The growing refrain that 'the worst is over' for the credit crunch is as warm and welcome among banks, investors and policymakers as the arrival of spring sunshine. But in some quarters there is concern that in their relief, many market participants might be ignoring one great dark storm cloud on the horizon - the growing chances of a significant jump in problems with corporate credit. Banks may have taken the majority of writedowns they are likely to take on mortgage, buy-out loan and structured credit exposures... However, the type and volume of funding the financial system can provide to the real economies of the US and Europe undoubtedly remains constrained. Many fear that the real-world version of the credit crunch is yet to begin."

May 9 - Bloomberg (Oliver Biggadike): "Fannie Mae, seeking new capital after reporting three straight quarterly losses, raised $4.5 billion in a sale of common and preferred shares. The government-chartered firm, which owns or guarantees one of every five U.S. home loans, sold $2.25 billion of new common shares and $2.25 billion of convertible preferred stock, according to a statement yesterday. Fannie Mae raised the capital after credit and derivative losses increased fivefold to $8.9 billion in the first three months of the year. The...company said May 6 it planned to raise a total of $6 billion amid a deepening of the worst housing slump since the Great Depression."

May 8 - Bloomberg (Hugh Son): "American International Group Inc., the world's largest insurer by assets, plans to will raise $12.5 billion after posting its second straight record quarterly loss... AIG had a first-quarter net loss of $7.81 billion, or $3.09 a share, compared with earnings of $4.13 billion, or $1.58, a year earlier... Standard and Poor's lowered AIG's credit rating after the insurer reduced the value of contracts it sold to protect fixed-income investors by $9.11 billion and marked down other holdings by $6.09 billion."

May 6 - The Wall Street Journal (Jeffrey McCracken and Tamara Audi): "Casino operator Tropicana Entertainment LLC sought Chapter 11 protection...in the largest corporate filing of the year, a startling reversal of fortune for the new owner of one of the most historic casinos in Las Vegas... The problems at Tropicana, which has 11,000 employees and about $1 billion in annual sales, come as the casino industry as a whole is struggling. They also underscore weak performance in Las Vegas, which has seen major casino projects canceled or delayed and gambling revenue decline as the economy stumbles."

May 6 - Bloomberg (Bill Rochelle and Bob Willis): "U.S. business bankruptcy filings in April increased 49% from a year earlier, the biggest gain so far this year, as the slowing economy prompted more companies to shut down. Business filings rose to 5,173 during the month... Total bankruptcy filings, including those by individuals, were up 31% from a year earlier to 93,096, the group said."

May 5 - Bloomberg (Caroline Salas and Ari Levy): "Residential Capital LLC, the mortgage- finance company owned by GMAC LLC, said it may not be able to meet debt obligations unless it comes up with an additional $600 million by the end of June... To finance the debt restructuring, ResCap is seeking a new $3.5 billion credit line from its parent GMAC... 'There is a significant risk that we will not be able to meet our debt service obligations, be unable to meet certain financial covenants in our credit facilities, and be in a negative liquidity position in June 2008,' ResCap said..."

May 8 - Financial Times (Ralph Atkins, Paul J Davies and Gillian Tett): "A clutch of influential bank investors will congregate this week in Marbella, Spain, to attend a private seminar that is hosted each year by Swiss bank UBS to discuss the health of the leading financial groups. This year's discussions over tapas could be fraught. For these days, a distinct paradox is haunting the way that markets are treating major banks - including UBS itself, as it reels from its recent massive writedowns. On the one hand, some key market indicators suggest that investor panic about the banking system is falling... 'Frankly, the behaviour of the interbank market is something of a mystery,' admits one senior policymaker... 'In understanding why unsecured term cash is so precious and hard to get - despite easing credit tensions of late - we believe that it is crucial to note the current phase of money market tensions is different from the first two phases,' says Christoph Reiger, a money markets analyst at Dresdner Kleinwort... 'In contrast to the bouts of tightness witnessed in September and November, systemic bank credit risk and mistrust have lost in prominence as drivers for money market spreads. Instead, banks' desire to hoard liquidity has gained in prominence ever since the fall of Bear Stearns.'"

May 6 - Financial Times (Michael Mackenzie): "The raw ingredients for inflation can easily be found, from surging oil prices to record costs for buying food. Yet government bond markets, where prices are in large part determined by inflationary expectations, have all but shrugged off those risks, for now. The steady upswing in commodity prices since 2003 has been marked by a surge in oil and food prices to record levels this year. Commodity prices have boomed on a slumping dollar, hurt by the Federal Reserve's aggressive rate cuts and infusion of cash into the financial system. The decline in the world's reserve currency has propelled US import prices sharply higher in the past year, reversing the era of deflation from emerging market economies... Once the credit dust fully settles, inflation could well become a much hotter topic. Chris Watling, chief executive officer at Longview Economics, says: 'Once this immediate credit crisis has passed, bond investors are likely to start to ask why in an environment of long-term global inflationary pressures, are bond yields at record 60-year lows?'"

Global Inflation Turmoil Watch:

May 6 - Financial Times (Roel Landingin): "The Philippines is preparing an ambitious plan to guarantee the supply of cheap, subsidised rice to Manila slum dwellers as the government seeks to restore calm among extremely poor households that are cutting back on food amid soaring prices for rice and other items. Subsidised rice is currently sold in public markets but stocks are being bought up by middle-class buyers... The new scheme aims to establish a network of state rice shops where only poor households will be able to shop... Local officials and social workers are in the midst of a massive effort to identify and sign up more than 500,000 'food-poor' families in the capital."

May 7 - Financial Times (Roula Khalaf): "Saudi Arabia's central bank governor...called on the government to fight inflation by curbing public expenditure, warning that economic policies in the kingdom faced 'a critical situation'. The call by Hamad al-Sayari followed a government announcement that it would invest in agricultural and livestock projects in foreign countries to ensure food security and control commodity prices. Saudi Arabia's oil-fuelled boom is producing massive investment in infrastructure projects but is also leading to growing social pressure as inflation spirals, reaching 9.6% in March year on year. Although lower than in Qatar and the United Arab Emirates, the inflation rate is tormenting a country accustomed to near zero inflation."

May 7 - Financial Times (Catherine Belton): "Russia signed off on a series of steep price rises for domestic gas, power and railway services for the next four years on the eve of Dmitry Medvedev's inauguration as president. Mr Medvedev... will inherit a potentially poisoned chalice of increasing economic and political risks as inflation surges to as much as 14.3%. Thousands of people across Russia took to the streets on May Day in rare demonstrations against rising food prices and living costs, the same day as a pre-election price freeze on basic foodstuffs expired. The Russian government... added to the pressure when it agreed annual increases on state-controlled prices of 25% for household electricity and 28% for the wholesale gas market, rising to 40% in 2011."

May 7 - Financial Times (Quentin Peel): "Emerging markets will face grave problems in controlling inflation and money supply because of the expansionary economic policies of industrialised countries seeking to prevent gridlock in their financial markets, the head of the United Nations Development Programme warned... 'This may cause us a lot of headaches in the next two or three years,' said Kemal Dervis, the UNDP administrator and former economy minister of Turkey... 'We are seeing excessively expansionary economic policies, just as we did when the dot.com bubble burst.'"

May 7 - Financial Times (Javier Blas): "For years, food policy in the Middle East and North Africa was very simple: hydrocarbon exports paid for carbohydrate imports. Rising agricultural commodities prices and a large population increase mean that the traditional policy is now untenable even if crude oil trades at about $120 a barrel, forcing countries in the region, including Saudi Arabia, to reconsider how it feeds its population. 'The region has woken up to the new food market reality,' says Abdolreza Abbassian, an expert at the Food and Agriculture Organisation in Rome. The FAO estimates the region's cereals import bill will hit $22.6bn this year, a 40 per cent increase on 2007. Since 2000, it has jumped almost 170%. The rising bill is the latest signal of the looming food crisis hanging over the Middle East and north Africa, the region of the world most dependent on imports of food staples."

May 6 - The Wall Street Journal (Nina Koeppen): "Central bankers from around the globe voiced concern about the risks that rising food and commodity prices present for the world-wide inflation outlook. 'On a global level, inflationary risks are significant,' ECB President Jean-Claude Trichet told reporters... Global policy makers gather at the BIS -- often called the central bankers' central bank -- every other month. 'There is no time for complacency for central banks in any respect. The present level of inflation must be transitory.'"

May 8 - Bloomberg (Thomas Kutty Abraham): "India, the world's second-largest buyer of vegetable oils, banned futures trading in soybean oil, rubber, chick peas and potatoes as the government seeks to rein in the fastest inflation since 2005. The Forward Markets Commission halted trading for at least four months... Trades will be settled at yesterday's closing price."

May 8 - Bloomberg (Fabienne Lissak and Tara Patel): "French Agriculture Minister Michel Barnier urged limits to speculation in food-related commodities, after prices for wheat, corn and soybeans rose to records... 'We must look at what is happening to prices and who is speculating... We must look carefully at futures markets and take measures to limit this speculation.'"

Currency Watch:

May 8 - Bloomberg (Robert Tuttle and Maher Chmaytelli): "Crude oil may rise to $200 a barrel because of a weakening U.S. dollar, OPEC President Chakib Khelil said... echoing a sentiment aired...by Goldman Sachs Group Inc. Oil at $200 is 'possible if we have a continuing devaluation of the dollar with respect to other currencies,' Khelil, who is also the oil minister of Algeria, said..."

The dollar index declined 0.6%, ending the week at 73.05. For the week on the upside, the Japanese yen gained 1.9%, the Swiss franc 1.1%, the Swedish krona 0.9%, and the Canadian dollar 0.7%. On the downside, the South Korean won declined 3.3%, the New Zealand dollar 2.2%, the South African rand 2.2%, the Brazilian real 1.9%, the British pound 1.0%, the Taiwanese dollar 0.9%, and the Mexican peso 0.9%.

Commodities Watch:

May 9 - Bloomberg (Jeff Wilson): "The U.S. corn harvest will be 7.3% smaller than a year ago after farmers reduced planted acreage because of rising fertilizer costs and more attractive soybean and wheat prices, the government said... 'We are going to have unforgiving tight supplies,' said Jeff Hainline, president of Advance Trading... 'If we have any weather problems this summer, prices will run higher.'"

May 8 - Bloomberg (Jeff Wilson): "Corn rose to a record for the seventh time since the end of March on speculation that planting delays caused by wet weather will reduce yields in the U.S., the world's largest producer and exporter of the crop..."

May 5 - Bloomberg (Saijel Kishan and Gavin Evans): "Chile's worst drought in five decades and power rationing from South Africa to China mean the price of aluminum, gold, copper and platinum will keep climbing as the lights go out in the world's biggest mines. Those governments are being forced to choose whether to reduce power to their 1.4 billion residents or curtail energy supplies to the world's biggest copper, aluminum, platinum and gold factories. The energy used by China's aluminum smelters each week could provide enough power for more than 2 million people for an entire year... 'There will be a sustained level of risk from power shortages in the commodities markets,' said Michael Lewis...global head of commodities research at Deutsche Bank AG. 'We are pricing bigger supply losses as a result.'"

May 5 - Bloomberg (Cherian Thomas and Naga Munchetty): " India may have to suspend trading in more food futures as political pressure grows for action to tame inflation, Finance Minister Palaniappan Chidambaram said. 'If rightly or wrongly people perceive that commodities- futures trading is contributing to a speculation-driven rise in prices, then in a democracy you will have to heed that voice,' Chidambaram said... 'The pressure is to suspend a few more food articles,' he said..."

May 8 - Financial Times (Javier Blas and Chris Flood): "Booming demand for iron ore and grains and delays at key ports drove shipping costs for dry bulk commodities higher... The Baltic Dry Index, the global benchmark for shipping commodities such as iron ore and grains, pushed above the 10,000 points yesterday... The Baltic has reached a five-month high, returning within sight of the record 11,039 reached in November."

Gold rallied 3.4% to $886 and Silver 2.7% to $16.91. May Copper declined 2.7%. June Crude surged $9.78 to a record $126.10. June Gasoline jumped 7.0% to a record high (up 29% y-t-d), and June Natural Gas 7.9% (up 55% y-t-d). July Wheat dipped 0.6%. The CRB index surged 4.7% to a new all-time high (up 19.2% y-t-d). The Goldman Sachs Commodities Index (GSCI) jumped 7.0% (up 28.3% y-t-d and 68.4% y-o-y).

China Watch:

May 6 - Bloomberg (Li Yanping): "China's economic growth will rebound to 10.8% this quarter as local governments and companies rebuild after the worst blizzards in 50 years in January and February, state economists forecast. Faster gains in industrial output and factory spending will boost the expansion from 10.6% in the previous three months... 'The infrastructure reconstruction in the southern provinces hit by the snowstorms will add new investment demand,' economists said."

May 9 - Bloomberg (Nipa Piboontanasawat and Li Yanping): "China's export growth cooled in April and the trade surplus was little changed... Overseas sales rose about 21.8% from a year earlier, after gaining 30.6% in March..."

May 9 - Bloomberg (Nipa Piboontanasawat): "China's producer-price inflation accelerated at the fastest pace in more than three years on rising energy, commodity and labor costs. Factory-gate prices rose 8.1% in April from a year earlier..."

May 7 - Bloomberg (William Bi): "Wholesale prices for corn and unhusked rice in China's northern Heilongjiang, the biggest grain supplier to the rest of the country, have surged on higher domestic and global demand... Procurement prices, or prices paid to farmers, have risen as much as 30% for unhusked rice compared with the beginning of the buying season, while corn gained 11%..."

May 8 - Bloomberg (Xiao Yu): "Aluminum smelters in China, the world's biggest producer of the metal, may add 73% more capacity than forecast... Most of the new plants will start production in the second half, he said."

May 9 - China Knowledge: "Residential land prices in Beijing rose RMB 1,279 ($182.6) per sq m in the first three months of the year, representing a year-on-year increase of 22%, according...the Chinese government..."

Japan Watch:

May 8 - Financial Times (Michiyo Nakamoto): "Japan's consumer finance companies, which have endured one of the rockiest periods in their recent history, are braced for renewed turbulence as three of the top four companies prepare to publish their full-year results... Intensifying pressure on Japanese moneylenders has meant weaker companies have been forced to shrink operations dramatically, while the more fortunate come under the umbrellas of banks, which can provide them with steady funding."

India Watch:

May 6 - Financial Times (Raphael Minder): "India is considering a blanket ban on trading in food futures, highlighting growing concerns in Asia over the role of hedge funds and financial markets in the recent surge in commodities prices. An emergency move by India to shut down its food futures market, proposed yesterday by P Chidam-baram, the finance minister, would reverse measures introduced only five years ago intended to aid the development of India as a financial centre. Speaking on the sidelines of the Asian Development Bank's annual meeting... Mr Chidambaram lambasted the use of crops for biofuel as 'the single -biggest reason why we are facing this [food] crisis'. 'To put it mildly, [converting food crops to biofuels] is foolish; to put it strongly, it is a crime against humanity,' Mr Chidambaram said."

May 9 - Bloomberg (Kartik Goyal): "India's inflation accelerated at the fastest pace in almost 3 1/2 years... Wholesale prices rose 7.61%... from a year earlier..."

Asia Watch:

May 5 - Bloomberg (Shamim Adam): "Surging food prices are hurting 1 billion Asians as the region's poor struggle to cope with rising food and energy costs that are stoking inflation, Asian Development Bank President Haruhiko Kuroda said. 'Soaring food prices are hitting the poor very hard,' Kuroda told delegates attending the ADB's annual meeting... 'Their purchasing power has been eroded, placing them at a greater risk of hunger and malnutrition.' ... 'Reduced supplies, increased demands, record high energy prices, the steep depreciation of the U.S. dollar and trade restrictions imposed by some countries have all combined to cause the price surge in recent months,' Kuroda said."

May 7 - Bloomberg (Berni Moestafa): "Indonesia's domestic vehicle sales rose 46% in April from a year earlier to 51,500, Bisnis Indonesia reported..."

May 6 - Bloomberg (Aloysius Unditu and Arijit Ghosh): " Indonesia's central bank unexpectedly raised its benchmark interest rate for the first time in more than two years to tame inflation. Bank Indonesia increased the rate used as a reference for bill sales to 8.25% from 8%..."

Latin America Watch:

May 9 - Bloomberg (Bill Faries and Eliana Raszewski): "A standoff between Argentine farmers and the government over agricultural exports is threatening growth in South America's second-largest economy as a national strike disrupts shipments for the second time in two months."

Unbalanced Global Economy Watch:

May 7 - Bloomberg (Fergal O'Brien and Ben Sills): "European retail sales dropped 1.6% in March, the most since at least 1995 and twice as much as economists forecast, as soaring fuel and food costs sapped consumer spending."

May 6 - Bloomberg (Svenja O'Donnell): "U.K. services from banks to airlines grew at the weakest pace in five years in April as the seizure of credit markets choked economic growth, a survey showed."

May 9 - Bloomberg (Jennifer Ryan): "U.K. courts issued the most claims and orders for home-loan repossessions in the first quarter since the first half of the 1990s... The number of court orders for repossessions in England and Wales rose 17% from a year earlier to 27,530..."

May 5 - Bloomberg (Chris Reiter): "German car sales rose 20% in April to their highest level in eight years, helped by increased demand for cars with lower carbon dioxide emissions."

May 5 - Bloomberg (Zoltan Simon): "Hungarian producer prices show 'worrying signs' that rising oil and food costs are making other consumer goods more expensive and may prompt another interest rate increase, economists at Intesa Sanpaolo SpA said. The cost of goods leaving factories and mines rose an annual 5.7% in March, compared with 4.9% in February..."

May 5 - Bloomberg (Robin Wigglesworth): "Norway's jobless rate fell to 1.6% in April, matching the lowest in 21 years, as a deepening labor shortage threatens to damp economic growth and drive wages and inflation higher."

May 9 - Bloomberg (Robin Wigglesworth): "Norway's inflation rate rose to 2.4% in April, the highest since July 2002 and adding to pressure on the central bank to raise interest rates even as global economic growth slows."

May 5 - Bloomberg (Maria Levitov): " Russia's inflation rate rose to 14.3%, the highest since April 2003, led by rising food costs. The inflation rate rose from 13.3% in March..."

May 8 - Bloomberg (Abeer Allam and Abdel Latif Wahba): "Egyptian inflation accelerated to 16.4% in April, exceeding the government's target range for a fourth consecutive month and adding pressure on the Central Bank to raise interest rates."

May 5 - Bloomberg (Jacob Greber): "An index measuring Australian inflation rose at a record pace in April as costs for fuel, health services and rents surged, reinforcing economists' expectations that the central bank will keep borrowing costs at a 12-year high. Consumer prices climbed 4.3% from a year earlier... The fastest inflation in almost 17 years..."

May 8 - Bloomberg (Tracy Withers): "New Zealand's employment fell by the most in 19 years in the first quarter... The unemployment rate increased to 3.6% from 3.4%..."

Bursting Bubble Economy Watch:

May 8 - Market News International: "Treasury Secretary Henry Paulson Thursday toured a government printing plant turning out stimulus checks and said nearly $100 billion worth of them will reach households by early July... 'By the end of May, we will have pumped almost $50 billion into the economy and another $50 billion will follow... By early July, about 130 million households will have almost $100 billion of payments in hand.'"

May 5 - Bloomberg (Matthew Benjamin and Rich Miller): "Wal-Mart and OPEC are battling for the tax rebates the U.S. government began handing out last week. The result may be a draw for the economy. While consumers might spend enough of the $117 billion stimulus at retailers to keep the U.S. economy afloat in the months ahead, the boost from their purchases will be diluted by gasoline prices at $3.62 a gallon and rising. The upshot: The U.S. might avoid an outright contraction in the second quarter and still be saddled with sluggish growth typical of Europe, which expanded at a 0.9% annual pace in the six quarters following a 2001 recession."

May 8 - Financial Times (John Gapper): "If anyone doubts the problems of US infrastructure, I suggest he or she take a flight to John F. Kennedy airport (braving the landing delay), ride a taxi on the pot-holed and congested Brooklyn-Queens Expressway and try to make a mobile phone call en route. That should settle it, particularly for those who have experienced smooth flights, train rides and road travel, and speedy communications networks in, say, Beijing, Paris or Abu Dhabi recently. The gulf in public and private infrastructure is, to put it mildly, alarming for US competitiveness. You might have expected that investing in US infrastructure would be a hot political topic this year. Well, no. Hillary Clinton spent the final week of her Indiana campaign standing on the back of a pick-up truck arguing for a temporary suspension of the 'gas tax', the fuel duty that pays for highways... At times I wonder whether the world's biggest economy has the will to solve its challenges or will end up wandering self-indulgently into the minor economic leagues. I expect it will get serious when the crisis is too blatant to ignore, but it has not done so yet."

May 7 - Bloomberg (M.C. Govardhana Rangan and Pooja Thakur): "Merrill Lynch & Co. expects defaults on U.S. consumer loans and credit cards will rise, putting strain on the world's largest economy, Chief Executive Officer John Thain said. 'Continuation of falling home prices, rising food prices, rising energy prices and higher unemployment will result in a pull back on the part of U.S. consumers,' Thain said..."

Central Banker Watch:

May 7 - Bloomberg (Steve Matthews): "Federal Reserve Bank of Kansas City President Thomas Hoenig said 'serious' inflation pressures may compel the central bank to increase interest rates... 'There is a significant risk that higher inflation will become embedded in the economy and require significant monetary policy tightening to reduce it,' Hoenig said... Consumers are gaining an 'inflation psychology to an extent that I have not seen since the 1970s and early 1980s,' he said... 'A sharp slowdown in growth has put the economy at the brink of a recession while, at the same time, rising commodity prices have caused inflation pressures to rise considerably,' Hoenig said..."

May 8 - Bloomberg (Gabi Thesing and Christian Vits): "European Central Bank President Jean-Claude Trichet said inflation will remain 'high' for some time, signaling that the bank is in no rush to lower interest rates as economic growth slows. 'Inflation rates have risen significantly since autumn... As we have said, inflation rates are expected to remain high for a rather protracted period of time before gradually declining again."

May 6 - Bloomberg (Ben Sills and Simone Meier): "European Central Bank council member Miguel Angel Fernandez Ordonez said soaring food prices are a 'major' inflation concern. 'The rise in inflation pressures on food prices derived from the commodity boom is becoming a major concern,' Ordonez, who is also head of the Bank of Spain, said today in Madrid. 'Inflation is identified as the key economic challenge for emerging economies.'"

May 5 - Bloomberg (Joshua Gallu and Christian Vits): "Surging food prices may be one of the most serious challenges policy makers have to cope with, central bankers said as they met for talks today in Basel, Switzerland. 'Food pressure could be one of the most serious problems we have to face now,' Polish central bank Governor Slawomir Skrzypek said... Food-price inflation is 'certainly going to be one of the big issues here,' said Stanley Fischer, Israel's central bank governor."

MBS/ABS/CDO/CP/Money Funds and Derivatives Watch:

May 8 - Bloomberg (Jody Shenn): "Fitch Ratings may downgrade 46% of top-rated classes of collateralized debt obligations composed of company-debt derivatives after changing its rating methods."

Mortgage Finance Bubble Watch:

May 6 - Bloomberg (Vivien Lou Chen): "Countrywide Financial Corp. has suspended the home equity credit lines of almost all its Las Vegas customers, including the $60,000 Christopher Whipple says he needed to expand his cell-phone accessories business. 'I hope this doesn't break me,' the...retailer said... Since January, Countrywide, Bank of America Corp., Washington Mutual Inc. and IndyMac Bancorp Inc. have frozen about 600,000 equity credit lines nationwide, said Michael Kratzer, president of a Bankrate... The lenders are targeting borrowers in cities where property values are falling, including Las Vegas, Chicago and Los Angeles, he said."

Real Estate Bubble Watch:

May 6 - Bloomberg (Sharon L. Lynch): " U.S. home values dropped 7.7% in the first quarter to the lowest in almost three years, according to estimates by Zillow.com... 'While the high rate of negative equity has little consequence to owners staying in their homes, it can be devastating to those who need to sell immediately or refinance,' Zillow Vice President...Stan Humphries said... 'The inability to secure refinancing is ultimately contributing to the growing rates of foreclosure in many parts of the country.'"

GSE Watch:

May 6 - Bloomberg (Jody Shenn): "Fannie Mae, the largest U.S. mortgage- finance company, plans to change its policies and pricing to help the country emerge from a housing slump. The government-chartered company will handle refinancings of non-delinquent mortgages for as much as 120 percent of property values when it owns the existing loans, the...company said... Fannie Mae also said it will buy 'jumbo' mortgages, or those bigger than $417,000, for the same prices as smaller loans. The changes come in response to rising costs for borrowers, making it harder for some consumers to refinance loans or buy homes. Fannie Mae and smaller rival Freddie Mac have been boosting fees to increase revenue and tightening guidelines to limit losses from foreclosures, amid mounting credit costs."

May 7 - Dow Jones (Michael R. Crittenden): "The regulator for Fannie Mae said Tuesday it was lifting a 2006 consent order for the firm and lowering the excess capital the company must retain. The Office of Federal Housing Enterprise Oversight said Fannie Mae would lower its capital surplus requirement to 15% from 20% once the company raises additional capital... 'The lowering of the prudential cushion was appropriate in line with the company's progress and with the need to maintain safe and sound operations,' Ofheo Director James Lockhart said... The agency said it was making the move in part because Fannie Mae successfully completed a number of changes required by Ofheo in the wake of accounting problems at the company. The changes included extensive changes to the firm's accounting and compliance systems."

May 6 - Bloomberg (Jody Shenn): "Fannie Mae, the largest U.S. mortgage- finance company, plans to change its policies and pricing to help the U.S. emerge from a housing slump. The government-chartered company will handle refinancings of non-delinquent mortgages for as much as 120% of property values when it owns the existing loans, the Washington-based company said today in a statement. Fannie Mae also said it will buy 'jumbo' mortgages, or those bigger than $417,000, for the same prices as smaller loans."

California Watch:

May 8 - Financial Times (Matthew Garrahan): "California state legislators are considering radical revenue-raising measures including a new services levy and a temporary tax on high earners to address a budget crisis that has spiralled into a $20bn deficit. Wide ranging spending cuts have been proposed, including controversial cuts to the education budget. But with Governor Arnold Schwarzenegger expected to announce next week that the deficit has grown from $7bn to $20bn, pressure is growing for new taxes. 'I don't think voters are going to be willing to accept draconian cuts," said Ross DeVol, director of regional economics at the Milken Institute... John Laird, a Democratic assembly member, said the state should look at exploring alternative revenue-raising measures. 'A $20bn deficit is 20% of our general fund,' he said. 'A cuts-only strategy is unsustainable and untenable.'"

May 8 - Bloomberg (Michael B. Marois and William Selway): "As Vallejo, California's home prices plunged, the once-humming Navy town on the north edge of the San Francisco Bay seemed like a good place to settle down, said Tim Medrow, a manager at a store that sells floor and bathroom tiles. Then came the city council meeting Tuesday night, when elected leaders voted to turn Vallejo into the largest California city to declare bankruptcy. 'It's crippling the city,' said Medrow, 32. 'It's already feast or famine. And it's only going to get worse now.'"

Speculator Watch:

May 6 - Bloomberg (Lindsay Pollock and Philip Boroff): "Claude Monet's cerulean blue painting of the French countryside bisected by an iron railway bridge sold for a record $41.5 million tonight at a Christie's... The sale suggests that $318 billion of credit losses and writedowns reported by banks linked to U.S. subprime loans haven't derailed the international art market."

Crude Liquidity Watch:

May 6 - Bloomberg (Glen Carey): "Saudi Arabia is forecast to earn 975 billion riyals ($260 billion) in oil revenue this year as record oil prices boost its current account surplus, Arab News reported, citing a report from Jadwa Investment Co."

May 7 - Bloomberg (Matthew Brown): "The dirham's peg to the weakening dollar has contributed to inflation of more than 50% for some basic foods in Dubai during the last year, the Chamber of Commerce said. The cost of flour increased by 58%... Sugar rose by 9.7%... Global wholesale rice prices rose by 97% in the last 12 months..."

May 7 - Bloomberg (Robin Wigglesworth and Nina de Roy): "Norway's $390.3 billion sovereign wealth fund, the world's second largest, lost about 5% of its value in the first quarter because of the global credit squeeze, a Finance Ministry official said. 'This will be a quarter in line with the worst quarters we have had,' Martin Skancke, the Finance Ministry's head of asset management, told Bloomberg..."

May 7 - Bloomberg (Alex Nicholson): " Russia's trade surplus widened in the first three months of the year to $53.6 billion, the Federal Customs Service said today. That compared with a surplus of $33.5 billion in the same period last year..."

A New Inflationary Epoch

Crude oil closed today above $126. The most vitally important commodity in the world has now posted a stunning year-to-date rise of better than 30% and has now doubled in the past year. It is worth noting that during the ten-year period 1996 through 2005 crude averaged about $29 a barrel. It's now at four times this level - and running.

I don't believe it is mere coincidence that crude has posted about a 30% y-t-d price surge at the same time as international reserve positions have expanded at about a 30% annualized rate - to a stunning $6.769 TN. Over the past 4 ½ years, official international reserves have ballooned an unprecedented $3.921 trillion, or 138%. During this period, crude prices surged almost 300%. Chinese reserves ballooned more than four-fold over this period to $1.68 Trillion; India's reserve position tripled to $303bn; and Brazil enjoyed a four-fold increase to $189bn. After beginning 2004 at $73bn, Russian reserves have almost reached the half Trillion mark ($493bn). And in just the past year, OPEC reserves have inflated 42% to $490bn. To be sure, the world is awash like never before in excess "liquidity" for which to bid up prices of critical tradable resources.

Especially since the Fed's Credit System Bailout, anticipating Heightened Global Monetary Disorder has been a key CBB theme. The ongoing relevant question: how much would (in particular) China, India, Russia and Asia be willing to pay to procure adequate supplies of food and energy for their populations and economies? The obvious answer is "we have no way of knowing", but the market is becoming increasingly cognizant of the reality that today's massive international reserve positions provide virtually unlimited purchasing power. The bidding war has begun in earnest, in what increasingly appears A New Inflationary Epoch.

The CRB Commodities index closed today at an all-time high, sporting a y-t-d gain of 19% and one-year rise of 37%. The Goldman Sachs Commodities index, also ending at a record high, has gained 28% so far this year and 68% over the past 12 months. During the past year, soybeans have gained 85%, corn 72%, and wheat 68%. Prices for iron ore, steel and hard commodities have experienced similar price inflation. Gasoline prices are up almost 40%, natural gas about 50%, and heating oil about 90% over the past year.

A second important theme also emanated from the Fed's and Administration's desperate measures to sustain the U.S. Bubble economy: one upshot of this gambit would be stubborn Current Account Deficits and resulting ongoing growth in the increasingly destabilizing Global Pool of Speculative Finance. Not only do China, India, Russia, OPEC and others today enjoy ample reserves to bid up the price of global necessities, the leveraged speculator and sovereign wealth fund communities remain awash in financial resources that embolden huge speculative positions in various energy and commodities markets - essentially "front-running" real economy purchases. It's turning into a battle royal - and a prime dynamic of A New Inflationary Epoch.

Perhaps others recall the commercials that seemed to run nonstop on CNBC during the 1996/97 Asian crisis: Make easy currency trading profits from the collapse in the Thai baht, Indonesian rupiah, the Malaysian ringgit, and the South Korean won. I remember thinking at the time how repulsed Asian policymakers must be at the thought of retail U.S. speculators shorting their currencies, while their citizens and economies suffered through such devastating financial, economic, and social upheaval. Some leaders did spew vitriol and point blame at the hedge fund speculators. Yet the bottom line was that these policymakers and their broken systems were basically powerless to mount any response against speculation or other forces unleashed upon them, not to mention the IMF and other western policy strongmen.

The Asian and emerging economies "block" are anything but powerless today. To be sure, surging food and energy prices these days spur the most serious social unrest since the nineties' "Asian contagion." The head of the Asian Development Bank this week warned that "soaring food prices" were hitting a billion poor Asians "very hard." The so-called "silent famine" became louder this week after a catastrophic cyclone ravaged Myanmar. Rice prices (in Chicago) jumped another 7% this week and have more than doubled over the past year. Throughout Asia, nervous policymakers are wasting little time in reacting to surging prices, hording and supply constraints for rice and other basic foodstuffs. As this crisis unfolds, the various policy responses and courses adopted by countries throughout this region will have a decisive influence on the general global economic and inflationary outlook. One might think in terms of polar-opposite effects to the "disinflationary" forces that arose from this same region during much of the nineties.

Responding to public outrage over the perceived role commodities speculation is having on food prices and heightened general inflationary pressures, the government of Indian Prime Minister Singh has suspended futures trading in soybean and cooking oil, sugar, rubber, and other commodities. India has scrapped import tariffs on many commodities, while banning the export of rice, wheat, edible oils and cement. The government is also pressuring steel and other industries to limit price increases. Politicians in India and throughout Asia will come under only more intense pressure to deal with rapidly mounting inflation pressures. Various forms of intrusive government prices controls are gaining in popularity.

China, Philippines, Thailand, Malaysia and Vietnam have all over the past several weeks moved aggressively to secure additional food supplies. China, in particular, appears to have significantly bolstered its global efforts to procure agricultural and energy resources. It's a fair bet that spiking prices for food, energy and commodities in general will have major trade and geopolitical ramifications - while our policymakers' attention is fixated on problem mortgages.

Wealth redistribution is an inherent facet of Credit and Asset Bubbles. And I would argue that this inequitable wealth-transfer gains momentum progressively throughout the life of an inflationary boom. As such, various degrees of angst, contempt, unrest and "blowback" are inevitable. I've had particular disdain for Alan Greenspan warning us of the risks of trade frictions and "protectionism." These are, after all, the predictable consequences of a bursting U.S. Credit Bubble. It would now appear that spiking prices, hording, and supply shocks (emerging most acutely in the Asian inflationary "tinderbox") throughout the agricultural, energy, and commodities markets have the potential for initiating a period of problematic trade tensions, dislocations and acute geopolitical uncertainty.

And it is not only government policymakers grappling with today's new reality: the extreme uncertainty with regard to pricing and availability of critical resources. Industries throughout the U.S. and global economies now confront a fundamentally altered environment, where the future prices and supply of scores of key inputs can no longer be taken for granted. For many, the whole idea of "just in time" inventory management has become a luxury no longer affordable. Moreover, recent media accounts have illuminated the problems suffered by farmers and grain elevator operators due to recent dislocations in commodities derivative trading. Financial derivatives markets, having functioned well in the commodities arena for the most part for years now, will now play a destabilizing role in a new era of acute supply/demand imbalances and disruptions.

In particular, one can expect today's unfolding dislocations in energy trading to inflict bloody havoc on scores of businesses, industries and derivative players alike. Many (i.e. the airlines) that have previously been somewhat hedged against future energy price gains were more recently left largely unprotected because of the perceived exorbitant cost of hedging programs. And those derivative players on the wrong side of runaway price gains are today scrambling to hedge exposures and mitigate mounting losses. Importantly, whether it is in derivatives or in contracts for the future delivery of actual resources, those in a position to provide supply are today much less willing to lock themselves into future commitments. Psychology has changed and changed profoundly. The entire market landscape has been radically altered for key commodities and resource markets, and the ramifications for general inflationary trends are significant.

I am compelled to again contrast today's inflationary forces to other recent bouts of acute pricing pressures. When emerging Credit Bubble forces fueled the NASDAQ and technology Bubbles, inflationary effects were largely isolated in technology stocks, high-yielding telecom/tech-related junk bonds and leveraged loans, and a booming tech industry. This Bubble incited huge increases in demand for technology products, yet this demand was met by a massive increase in technology production capacity. The incredible growth in semiconductor and technology output was known as a "productivity miracle." It was, however, industry idiosyncratic. The buyers of these relatively inexpensive new products benefited, while fortunes were made (and many then lost) in the Internet and technology stock Bubble.

The next Fed-instigated round of Credit and Asset Bubble Dynamics then invaded mortgage and housing markets. Wall Street simply created Trillions of new higher-yielding securities, while the homebuilding industry constructed millions of new homes. Most American relished the wealth effects from inflating home and stock prices. The economy enjoyed a Credit-induced boom. Corporate cash-flows boomed, while government receipts swelled. Similar to the technology Bubble, few felt or thought they were suffering from the ill-effects of inflation.

I am this evening referring to A New Inflationary Epoch because today's unfolding inflationary dynamics are Different in Kind. For one, prevailing inflationary pressures are global in nature. Wall Street finance is not the source fueling the boom, and it's running outside the Fed's control. American asset inflation and resulting wealth effects are minimal, while price effects for food, energy, and commodities are extreme. In contrast to previous inflationary booms, while some selected groups benefit, the vast majority of people today recognize they are being hurt by rising prices. This pain comes concurrently with atypical housing price declines. Today's price effects pummel already weakened consumer sentiment, as opposed to previous effects that tended (through asset inflation) to bolster confidence. Furthermore, current inflationary forces are destabilizing and even destructive to many businesses, while playing havoc with the fiscal standing of federal, state and municipal governments.

Revolving around booming Wall Street finance, previous inflationary booms naturally fueled surges in securities issuance and speculation. These Bubble Effects worked as powerful magnets in attracting foreign financial institutions, foreign-sourced speculators, and cheap foreign-sourced borrowings (i.e. yen borrowings financing higher-yielding U.S. securities) that all worked in concert to "recycle" our Current Account Deficits ("Bubble dollars") directly back to our securities markets.

In contrast, inflationary forces these days largely bypass U.S. securities to play global energy, commodities, and hard assets. Foreign financial institutions are fleeing the U.S. risk intermediation business, while "Bubble dollars" are chiefly recycled back into Treasury and agency securities (where they now have minimal effect on U.S. home and asset prices). Meanwhile, the massive Global Pool of Speculative Finance is today focused on energy, commodities and the "emerging" economies.

Unlike tech stocks/junk bonds, and U.S. mortgages/houses, it is today extremely difficult to meaningfully increase the supply of energy, agricultural commodities, and many natural resources. Moreover, the longer this boom is sustained the greater the demand for energy and commodities from the likes of China, India, greater Asia and the Middle East. And the higher prices rise, the greater the tendency for hoarding and problematic supply disruptions - only aggravating supply/demand imbalances and emboldening aggressive speculation. Wall Street can't fix this demand imbalance.

Importantly, surging prices for vital necessities such as energy and food by their nature elicit expanded Credit creation - albeit our consumers using Credit cards at the gas pump; our Congress deficit financing economic stimulus packages; our state and federal deficits expanding to pay for generally rising costs; corporate America borrowing to finance surging energy and other expenses; aggressive borrowing by U.S. and global energy/commodities-related industries expanding operations; by the alternative energy Bubble; by speculation-related leveraging; by governments around the globe that will expand deficit spending programs implemented in an effort to placate outraged citizenry; and by OPEC, Brazil, Russia, Australia, Norway and other economies directly prospering from the boom. Or, stated differently, through various mechanisms, processes, dynamics, and rationalizations there will be overriding tendencies to "monetize" today's inflationary effects. And unlike previous inflation manifestations that tended to remain largely contained within asset markets, today's virulent energy and commodities inflation will spawn broad-based secondary price effects. As recent trends corroborate, inflation begets only greater inflation.

The reality that powerful inflationary psychology has taken hold - and that the world's leading central banks show no inclination to confront this worsening problem - motivates tonight's title, "A New Inflationary Epoch."