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The Honorable Life of Mr. Wally Ciochetti

My apologies for this unedited Bulletin!

It was another captivating week in global financial markets. Here at home, the Dow, S&P500 and Transports all added about 1%. The Morgan Stanley Cyclical index gained 2.25%, increasing y-t-d gains to 30%. The Utilities and Morgan Stanley Consumer indices were about unchanged this week. The broader market advance continued, with the small cap Russell 2000 (up 35.5% y-t-d) and S&P400 Mid-cap (up 25% y-t-d) indices adding 1%. The Technology sector again outperformed. The NASDAQ100 gained 2%, increasing y-t-d gains to 43%. The Morgan Stanley High tech index jumped 3% (up 57% y-t-d) and the Semiconductors 4% (up 62% y-t-d). The Street.com Internet Index (up 71% y-t-d) and the NASDAQ Telecommunications index (up 56% y-t-d) added 3%. The Biotechs were up about 1% (up 40% y-d-t). The financial stocks were strong as well, with the Broker/Dealers up 3% (up 53% y-t-d) and the Banks up 2% (up 23% y-t-d). With bullion recovering $4.10, the HUI gold index gained 4%.

The yield curve steepened this week. The implied yield on December 2004 3-month Eurodollars dropped 9 basis points to 2.255%. The 2-year Treasury yield was unchanged at 1.63%, while the long-bond yield jumped 8 basis points to 5.18%. The 5-year Treasury yield added 1 basis point to 3.11%, and the 10-year added 5 basis points to 4.25%. Benchmark Fannie Mae mortgage-backed yields dipped 2 basis points. The spread on Fannies 4 3/8% 2013 note narrowed 3 to 41, as Freddie's 4 ½% 2013 note narrowed 3 to 40. On the back of unexpected losses reported this week by two Federal Home Loan Banks, the spread on FHLB debt widened 6 basis points to 39. The 10-year dollar swap spread declined 2 to 39. Corporate debt performed well, with junk spreads narrowing significantly.

Corporate issuance was somewhat slower than average ($12 billion per week) at about $9 billion. Goldman Sachs sold $1.75 billion (up from $1 billion), Wells Fargo $1 billion, Univision $700 million, Placer Dome $300 million, Principal Life $550 million, Eastman Kodak $500 million, Codelco $500 million, Anheuser Busch $400 million, St. George Bank $400 million, VF Corp $300 million, Florida Power & Light $300 million, and GTech Holdings $250 million.

Junk bond fund saw weekly inflows of a modest $68 million (from AMG). Record year-to-date inflows of $22.34 billion compare to the previous record of $17.85 billion set during 1999. Issuance included Mobile Telesystems $400 million, Eastman Kodak $500 million, Universal Hospitality $260 million, and Norcraft $150 million.

Convert issuance included Eastman Kodak $500 million (30 year 3.375% coupon), Quanta Services $225 million, Finisar $130 million, and Idine Rewards $60 million.

October 9 - Bloomberg: "California bonds fell as the state prepares to sell $1.5 billion in bonds and Governor-elect Arnold Schwarzenegger considers whether the state should defend a lawsuit over a $10.7 billion plan to finance this year's deficit. California needs to finance its deficit 'the right way, the legal way,' Schwarzenegger said... Instead of 'brushing the debt under the rug and pretend like we don't have that debt, and we don't have that deficit.' The state's plan to sell $10.7 billion in deficit bonds beginning in February is a linchpin of planned borrowings that helped close a record $38 billion budget gap this year."

Commodities are on the move. The Goldman Sachs Commodity Index (GSCI) surged 6% this week and is up 14% from September lows (to the highest level since March 13). Cattle futures surged to the highest level since 1986. Prospects for the smallest crop since 1996 have led to 25% soybean price gains since the first week of July (5% this week). Prices are near a six-year high. Copper remains near a 32-month high, while the Journal of Commerce Industrial Commodities index trades near a 3-year high. Cotton is at a five-year high. Natural gas prices enjoyed their strongest weekly gain since February, trading to a 3-month high. This is early in the heating season for natural gas to be moving, with natural gas surging 19% this week. Crude oil surpassed $32 a barrel, ending the week at a 2-month high.

October 9 - Dow Jones (Terin Miller): "Concerns that tight supplies of heating oil could lead to price spikes this winter sent oil prices soaring Thursday. Prices started climbing early Thursday after traders reassessed inventory data released the day before and took note of a warning by the federal Energy Information Administration that U.S. stocks of heating oil were 14% below the five-year average last week as winter looms."

September U.S. Producer Prices were up 0.3%, versus estimates of 0.1%. Year-over-year, the PPI index was up 3.5%. It is worth noting that September 2002 y-o-y Producer Prices were down 1.80%, with September 2001 up 1.60%. Between September 2001 and December 2002, the y-o-y PPI increase never rose above 1.60% (and was negative for 12 of 16 months).

Global Reflation Watch:

October 9 - Financial Times: "China's economy may be growing much faster than official economic statistics suggest and is in danger of overheating, according to an emerging consensus among foreign and local economists. The economists say a surge in investment, bank lending, construction and car manufacturing has put the Chinese economy on course to grow at about 11 per cent this year, well above official forecasts of just over 8 per cent... Exports, property and cars accounted for about one third of the economy in terms of their value-added contribution to GDP, said Andy Xie of Morgan Stanley in Hong Kong, and all three were growing by more than 30 per cent. 'One third of the economy is growing by about 30 per cent - that's about 10 per cent already,' he said. Power consumption, one of the most important independent indicators of Chinese GDP growth, was up by 15 per cent so far this year..."

October 8 - Bloomberg: "Indonesia, Thailand and Malaysia had their debt ratings raised to their highest levels since the 1997 Asian financial crisis by Standard & Poor's, which praised leaders in the three countries for improving government finances... Surging exports and consumer spending are helping revive economic growth and tax revenues across Southeast Asia, six years after a plunge in the Thai baht triggered devaluations, defaults and recessions in the region. Thailand predicts economic growth will accelerate to 6.4 percent this year, Malaysia is forecasting 4.5 percent growth and Indonesia a 4 percent expansion. 'Asian governments will be able to get cheaper funds, helping fund economic growth,' said Sean Chang, who helps manage about $11 billion in fixed-income funds at Invesco Asia Ltd... 'Overseas investors will look at these countries with a kinder eye given the upgrade...' The risk premiums demanded by investors to hold bonds of Malaysia, Thailand and Indonesia have fallen. For Malaysia's dollar-denominated 7.5 percent bonds maturing in July 2011, the extra yield it offers over U.S. Treasuries of similar maturity declined by about two-fifths of a percentage point since the middle of August... The yield gap for Indonesia's 7.75 percent dollar-denominated bond maturing in August 2006 has narrowed by about 1 percentage point since May... The yield on Thailand's 7.75 percent dollar-denominated bonds due in 2007 has fallen below the like-maturity U.S. rate from as much as 92 basis points above in April..."

October 10 - Bloomberg: "Norway's Petroleum Fund, whose 775 billion kroner ($110 billion) of assets equals more than half the country's economy, plans to boost investments in emerging markets, where stock indexes are world's best performing this year. The Norwegian fund, which gets revenue from oil sales to finance future retirement benefits, may hire outside fund managers to invest more money in securities ranging from Chilean stocks to Hungarian bonds... Emerging markets are attracting investors with stock prices in Brazil, Argentina, Venezuela and Thailand ranking among the biggest gainers this year and credit-rating companies turning more bullish on prospects for countries such as Russia. During the past week, $339 million went into U.S. mutual funds investing in emerging markets, the most in 1 1/2 years, according to AMG... The Norwegian fund plans to make more stock investments in India, the Philippines, Indonesia, Malaysia, Israel, the Czech Republic, Hungary, Iceland, Cyprus and Chile... In bonds, the fund will focus on the Czech Republic, Hungary, Iceland, South Korea and Cyprus."

October 8 - Bloomberg: "Russia's foreign-currency bond ratings were raised two levels to investment grade by Moody's...five years after the nation defaulted on $40 billion of domestic debt. Moody's increased the ratings for Russia's Eurobonds to Baa3, the lowest investment-grade level, from Ba2, citing the government's progress in reducing debt and spending. It's the first time the country's foreign debt has been rated investment grade by either Moody's or Standard & Poor's... The country's 5 percent dollar bond due 2030, the most traded emerging-market Eurobond, gained 2.65 cents on the dollar to 97.7 cents, pushing the yield down to 6.88 percent... Five-year credit-default swaps for Russia, which pay out in the event of missed debt payments, fell to 175 basis points from 225 basis points yesterday and 425 at the start of the year..."

Bloomberg quoted a Goldman Sachs economist: "It is a big, big turn and is a reflection on the political stability, much better fiscal policy, and a degree of luck with the high oil prices." From Dow Jones, "The country's ratio of government debt to gross domestic product has fallen from nearly 100% to 33% as its economy has strengthened." Well, I would argue that rising oil prices having nothing to do with luck but much to do with energy prices being a prime incipient consequence of global reflation. The ruble this week traded to its highest level against the dollar since December 2001. The IMF today raised it forecast of Russia's 2003 growth rate to 6.25% (estimate was at 4% in April). "The mission found the macroeconomic situation had strengthened considerably."

October 8 - Bloomberg: "India's economy may grow at the fastest pace in seven years in the fiscal year to March 31, 2004, as heavier monsoon rains boost agriculture, Ashok Lahiri, chief economic adviser in India's Ministry of Finance, said. Growth of more than 7 percent is 'eminently possible,' Lahiri told reporters... Asia's third-largest economy last grew more than 7 percent in the year ended March 31, 1997, when it expanded 7.8 percent... Falling interest rates have helped the government cut its average borrowing cost by more than 2 percentage points to less than 7 percent since the April..." This week Indian bond yields declined to a record low 5.03%.

October 8 - Bloomberg: "Indonesia's economy probably expanded 4.1 percent in the three months to Sept. 30, faster than the previous quarter, helped in part by exports, the country's central bank said in a statement. 'The improvement in exports and the positive growth in manufacturing, trading and transportation sectors in the period contributed to the higher' growth, Bank Indonesia said...."

October 9 - Bloomberg: "PT Indonesian Satellite Corp. Indonesia's main overseas phone call operator, increased the amount of rupiah-denominated bonds it's selling by 43 percent to 2.5 trillion rupiah ($300 million) to meet investor demand."

October 8 - Bloomberg: "Turkey's industrial production jumped 10.3 percent in August from the same month last year...as a surge in exports was matched by growing demand at home... Turkey's industrial production has expanded for 18 straight months as the economy recovers after shrinking 9.5 percent in 2001. Exports, which grew 32 percent in the first half, have led the revival. Domestic demand also has begun to accelerate, helped by the central bank, which has cut interest rates five times since April."

October 7 - Bloomberg: "Mexico sold $1 billion of 10-year bonds, tapping into a two-month rally in emerging-market debt to lock in lower borrowing costs. The government sold the bonds to yield 1.79 percentage points above 10-year U.S. Treasuries, or 6.06 percent. That's down from a 6.65 percent yield Mexico paid on 10-year bonds it sold in January." It is worth noting the ease with which Mexico is able to raise money despite the weak peso.

October 10 - Financial Times: "Euro-denominated high-yield bond issuance rose 168 per cent to $7.3bn in the first nine months of 2003, according to Thomson Financial. This exceeded the 121 per cent rise in high-yield dollar bond volumes though at $98.6bn, the dollar market is far larger."

Domestic Credit Inflation Watch:

Market News International quoted Mr. McTeer: "'We've just got to gun the economy' so that demand is 'great enough' to spur job creation."

October 8 - DowJones: "Growth above 4% is needed over the next 18 months to reduce the unemployment rate, Kansas City Federal Reserve Bank President Thomas Hoenig said Tuesday. Speaking in Tulsa... 'While maintaining such a growth rate, say above 4%, over the long run may not be sustainable, it is achievable and desirable over the next year-and-a-half. 'The economy must grow faster than productivity in order to create new jobs, and it must grow faster than potential in order to reduce the unemployment rate. 'In my view, a 1% Federal Funds rate is consistent with these objectives.'"

October 9 - Dow Jones (John McAuley): "U.S. chain-store sales showed another impressive gain in September, increasing by between 5.9% to 6.1% on a year-over-year basis, depending on which estimate is used. The gains shattered the 5.2% increase seen in August, which had been the best performance in over a year. Economists' estimates of the sales gain are in a range because of the different samples of retailers that the September estimate is based on. In general, however, they agreed that chain store sales were strong last month. 'The right word to describe sales in September is 'Wow',' said Mike Niemira, senior economist at the Bank of Tokyo-Mitsubishi... 'There was impressive strength across the board, but apparel stores in particular came back nicely in September.'"

Broad money supply (M3) declined $6.8 billion for the week of Sept. 29. Currency increased $1.6 billion, while Demand and Checkable Deposits declined $5.3 billion. Savings Deposits declined $5.0 billion and Small Denominated Deposits dipped $2.0 billion. Retail Money Fund deposits decreased $3.2 billion. Institutional Money Fund deposits added $3.9 billion, while Large Denominated Deposits declined $1.6 billion. Repurchase Agreements gained $8.3 billion, while Eurodollar deposits declined $3.2 billion. Elsewhere, Commercial Paper outstanding jumped $9.5 billion, with Financial Sector CP borrowings up $10.0 billion. Foreign "Custody" Holdings of U.S. and Agency Debt surged $18.2 billion (up $28.4 billion in two weeks). "Custody" holdings were up $55.2 billion over 9 weeks to $991.8 billion. Foreign dollar reserves are exploding.

Bank asset data are interesting. Total Assets jumped $119.2 billion, fully reversing the three weeks of decline going into quarter-end. For the week ended October 1, Securities increased $49.9 billion, with Other securities up $42.3 billion. Other securities holdings were up $61 billion over four weeks to $753.4 billion. Loans & Leases were up $12.1 billion for the week, although Commercial & Industrial Loans declined $6.2 billion. Security loans jumped $15.6 billion. Other Assets increased $23.5 billion.

October 7 - Bloomberg: "Wall Street firms' profits will total a record $22.5 billion this year... The projected pretax total profits...for New York Stock Exchange-listed brokerages would be three times last year's and more than the $21 billion that banks earned in 2000, the association said. Pretax revenue probably slumped to $154 billion from the $245 billion peak in 2000 and barely rose from $149 billion last year."

October 7 - Bloomberg: "The cost for companies to switch between fixed and floating debt payments traded in its widest range in three years last quarter as investors in the $5 trillion market for mortgage bonds managed their interest-rate risk. The 10-year U.S. swap spread, used as a guideline to price bonds, reached an 18-month high of 72 basis points on Aug. 4, more than double its level at the end of June. It rose 24 basis points in July, and ended the third quarter at 43 basis points. A basis point is 0.01 percentage point. 'It was a panicky price action -- there were positions that needed to be hedged' as soaring Treasury yields, rather than economic news, drove the spread, said Ian Douglas, London-based chief bond strategist at UBS AG... The July surge was the swap spread's biggest monthly increase since Russia defaulted on its debt in August 1998... Measured by underlying assets, the global market for interest-rate swaps was $79 trillion as of Dec. 31, the Bank for International Settlements reported."

October 10 - American Banker: "Medallion Financial Corp., which two years ago vowed never to rely on bank financing again, passed a milestone this week on the road to independence when the Federal Deposit Insurance Corp. granted coverage for a start-up industrial loan bank. The action will enable the New York taxi medallion lender to collect its own low-cost deposits for making loans rather than relying on a bank line of credit for funding... The deposits will come in the form of certificates of deposit brokered by firms such as Merrill Lynch & Co. and A.G. Edwards & Sons, which will act as Medallion's sales force. The company expects to quickly take in about $100 million and increase that by about 15% a year over three years. ...the deposits would dramatically lower Medallion's cost of funds. Today the company pays around 4% for money it lends at 7%... The CDs would reduce its cost of funds to 1.5%."

October 7 - Bloomberg: "The National Association of Realtors (NAR) raised its forecast for 2003 U.S. home sales after mortgage rates retreated from a one-year high. The trade group said 6.94 million new and existing homes will sell this year, a 6.1 percent increase from last year's record 6.54 million. A month ago Washington-based NAR called for 6.79 million sales in 2003... 'The (interest rate) spike was short-lived,' (NAR chief economist) Lereah said. 'Mortgage rates came right back down again, back below 6 percent, and that's driving sales once again.'"

From the Fall 2003 State of California Real Estate Bulletin: "The Licensing Section is responsible for the administration of real estate license examinations as well as the issuance and renewal of salesperson and broker licenses. With the favorable real estate market and historically low interest rates, the Department of Real Estate (DRE) has experienced a substantial increase in examination and license applications and is servicing approximately 7,250 telephone calls every business day... It is somewhat amazing that the number of calls handled by the Licensing and Examination Section increased 57% in a single year and 549% since fiscal year 1998-99. At the end of fiscal year 2002-03, the licensee population totaled 355,912, which included 112,942 brokers and 242,970 salespersons. This is an increase of 10% over the number of licensees at the end of the past fiscal year." The number of examinations administered has doubled in two years to more than 80,000.

October 7, 2003 - Santa Cruz Sentinel (Heather Boerner): Quoting Tom Brezsny of Monterey Bay Properties: "What's clear to me is that we've established the bottom end of the market is at around $500,000 to $550,000 and we've established that first-time home buyers constitute the major demand," he said. "But the question becomes, how can a first-time home buyer afford $500,000 to $550,000? Certainly some of it is interest rates, but the other part is that people no longer have to have 20 percent down. They can do a lot more creative financing."

First-time homebuyers "constituting the major demand" for homes in the $500,000 to $550,000 price range? This is the most alarming evidence yet of a housing Bubble.

October 9 - PRNewswire: "The percentage of households in California able to afford a median-priced home stood at 23 percent in August, a 5 percent decrease compared to the same period a year ago when the Index was at 28 percent, according to a report released today by the California Association of Realtors. The August Housing Affordability Index (HAI) declined by 3 percentage point from July when it stood at 26 points. The minimum household income needed to purchase a median-priced home at $404,870 in California in August was $93,490, based on a typical 30-year, fixed-rate mortgage at 5.66 percent and assuming a 20 percent downpayment. The minimum household income needed to purchase a median-priced home was up from $82,150 in August 2002..."

"Specialty" mortgage lender New Century Financial originated $3.44 billion of mortgages during September, up 180% from September 2002. For the quarter, originations totaled $8.64 billion, up 49% from the previous (record) quarter and up 126% from the comparable 2002 quarter.

The Mortgage Bankers Association application index jumped almost 16% for the week to the highest level since the first week of August. Refi applications were up almost 20%, while remaining down 60% from the year earlier elevated level. Most noteworthy, the Purchase application index jumped 11% for the week to the fifth-highest level on record. Purchase applications were up 25% from one year earlier, with dollar volume up an eye-opening 40%. Purchase applications were up better than 50% from two years earlier.

Freddie Mac posted 30-year fixed mortgage rates jumped 18 basis points to 5.95%. Fifteen-year fixed rates increased 16 basis points to 5.26%. Meanwhile, one-year adjustable mortgage rates declined 3 basis points to 3.69%, the lowest level since early August.

From Freddie Mac's October 7 Economic and Housing Outlook: "All told, the latest economic indicators point toward a vigorous acceleration in economic growth in the second half of 2003 with job gains during the fourth quarter. Inventory restocking and strong gains in computer and software investments will add to continued strength in consumer and government spending to accelerate growth to about 4.6 percent in the second half of this year, and about 4.0 percent in the second half of this year, and about 4.0 percent for 2004... With the data in so far, the economy seems well into a powerful recovery. We forecast GDP to grow at 5.5% for the third quarter, followed by a 3.7% forecasted rate of growth for the fourth quarter... Housing starts are forecasted to rise up to 1.86 million new units during the third quarter... We forecast home sales at 7.4 million units (annualized) in Q4... Originations will hit a record $3.26 trillion in 2003."

I appreciate today's refreshingly cogent editorial comments from the Washington Post's Steven Pearlstein: "I don't agree with those who think these organizations are no longer needed now that Wall Street has figured out ways to 'securitize' all sorts of loans. Fannie, Freddie and the Flubs bring liquidity, innovation, efficiency and price stability to the $7 trillion market in mortgage-backed securities. They also help provide home financing to neighborhoods and low-income families that private markets have ignored. But with assets in excess of $2.2 trillion, there is no need for these institutions to keep adding to their balance sheets to continue serving these policy goals. Although it is political heresy to say so, the government probably has gone overboard in pushing homeownership, through both the mortgage interest deduction and the housing finance companies. Notwithstanding the social benefits of homeownership, such heavy subsidy distorts decisions about where to invest and where to live. It represents a regressive transfer of wealth from renters to homeowners. And by artificially boosting demand, it drives up the price of houses to the point that much of the benefit we think we're getting from lower rates and tax deductions is really a financial mirage. How do I know this? Because whenever anyone proposes to do away with these private enterprises' government goodies, the housing-industrial complex descends on Washington with studies warning that house prices will crash and home building will cease. There are other reasons to put Fan, Fred and the Flubs on the South Beach diet. Continued growth increases the risk of a much broader financial meltdown if one day these institutions make a big mistake in the way they structure their balance sheets or hedge their risks. That's the conclusion of Fed Chairman Alan Greenspan and a string of Treasury officials dating back to the first Bush crowd. The government would probably step in to prevent such a meltdown, but as we discovered during the S&L crisis, the cost to taxpayers would be enormous."

October 9 - American Banker (Rob Blackwell): "The wheels have come off a bill to overhaul regulation of Fannie Mae and Freddie Mac that was speeding to enactment as recently as two weeks ago, and it is unclear if lawmakers will be able to put it back on track this year. House Financial Services Committee Chairman Michael G. Oxley indefinitely postponed a vote on his bill that had been scheduled for Wednesday after the Bush administration withdrew its support..."

Powerful comments Wednesday from Representative Richard Baker: "I'm dismayed by the postponement, but let's be clear that the blame falls squarely on Fannie Mae and Freddie Mac. From the moment the administration presented the committee its proposal, Fannie and Freddie lobbyists have swarmed the Hill and flooded member offices with document after document designed to gut all meaningful reform out of legislative consideration. Apparently, the lessons of Freddie's ongoing troubles haven't sunk in, and Fannie and Freddie have relapsed into their tired old methods of obstructionism. The only difference this time is their mendacity, giving public lip service to supporting the administration while working furiously behind the scenes to attack real reform. It's time we stop the charade and finally let Fannie and Freddie know that Congress created them, and Congress - not Fannie and Freddie - will decide what constitutes their sufficient regulatory oversight and their adequate fulfillment of their housing mission."

And while efforts to more stringently regulate the most abusive Credit inflators have (not surprisingly) been stymied, the dollar's dilemma worsens by the week. Yet the spirit of the marketplace was captured by the New York Times' headline for Jonathan Fuerbringer's Wednesday article, "Dollar Weakens Again (No U.S. Tears Are Shed)". Pimco's Paul McCulley concluded his October piece (posted today) with a famous quote by Richard Nixon's Secretary of the Treasury John Connally: "The dollar is our currency, but your problem." In your faces, you silly U.S. creditors! For the week, the dollar index lost almost 2% to lows last seen during those dark days of October 1998. Dollar weakness is broadening, but our currency did gain a little ground against the Mexican and Uruguay pesos.

But No Tears Were Shed here at home, as the stock market carries forward in what is essentially a melt-up mode. Dr. Bernanke delivered a speech, "Monetary Policy and the Stock Market." "Monetary policy matters for the stock market but, on the other hand, it is not one of the major influences on equity prices." Sure... In his speech you will not find reference to "liquidity," "Credit availability," "leverage," "speculation" or even a mention of the Credit system. And while his research endeavors to understand the link between Fed interest-rate policy moves and changes in the stock market, his methodology necessarily disregards remarks by Fed policymakers that directly impact the marketplace. In Q&A following his speech (and in the midst of rampant speculation) in response to a question about possible over-valuation, Dr. Bernanke commented, "Stocks have risen significantly since March and I think that increase in stocks reflects justifiable optimism about the future of the economy." The Fed is as determined to inflate Bubbles. From Bernanke's speech: "If all goes as planned, the changes in financial asset prices and returns induced by the actions of monetary policymakers lead to the changes in economic behavior that the policy was trying to achieve." This is wretched, activist central banking in its purest form.

For now, the Credit market remains content to play along. There was excitement this week with rumors that foreign central banks were major buyers at Wednesday's 5-year auction. At the same time, the Fed can simply not repeat its message to the market enough times: rates will remain low for some time to come. I am intrigued with the reality that only about five months ago the Fed and markets seemed to be enamored with the prospect of deflation. What, then, could develop over the next year? How quickly things can change in this contemporary financial system and global economy that we have created. The Fed is promising no meaningful rate increases on the horizon, bringing artificial clarity to a most fluid and unclear environment. They've over-promised.

I look at developments this week and see further indication that The Global Reflation Cat is Out of the Bag. Importantly, enhanced global liquidity and Credit availability are self-reinforcing. Moody's Wednesday upgrade of Russian government debt to investment grade is a seminal reflationary event. For the week, Russian benchmark 10-year yields dropped 23 basis points to 5.60%. A veritable emerging markets buyers' panic ensued, with energized players salivating to get in front of the next upgrade. Brazilian government bond yields collapsed almost 60 basis points this week to 9.70%. Indian yields dropped 10 basis points to 5.08%. The Argentine peso gained almost 2.5% this week, the Chilean peso 2.25%, and the Brazilian real 2.0%. The Thai baht, New Zealand dollar, and Australian dollar all gained better than 1%. I would be willing to bet the announcement that Norway's enormous ($110 billion) Petroleum Fund is planning to increase investments in emerging markets is not the last. The global liquidity spigot is wide open and an increasing number of economies are beneficiaries. Things are now developing rapidly.

Here at home, the Fed has the U.S. bond market convinced that Nothing Really Matters. The Fed is on hold and spread profits are there for the taking. Pegged interest rates are written in stone. After all, with Fed funds at 1%, how high can rates go before the next leveraged speculator comes to gather up the easy money? Today's mindset recalls LTCM's dangerous view that their illiquid positions were not a serious concern because losses would always be mitigated by other speculators moving to capitalize on "arbitrage" profits. And similar to LTCM, todays leveraged trades will work splendidly until they blow up spectacularly. It's the nature of the (flawed) strategy.

The flaw in prevailing reasoning is becoming clearer. There is now a significant inflationary bias that permeates the U.S. and global financial system. Moreover, this bias is broadening, deepening and strengthening. There is grossly excessive global liquidity enthralled with a lengthening list of markets and economies. The dollar is not one of them. Some key commodities, however, look vulnerable to shortages and possible panic buying. And considering this financial and economic backstop, U.S. interest rates are way too low and excess liquidity unmanageable. The problem becomes only more acute with the unfolding dollar crisis. The U.S. Credit system needs to dramatically reduce the creation of new dollar claims (dollar inflation/devaluation). It won't.

Back, during those halcyon days of King Dollar, global liquidity and inflation issues were moot. Obliging Bubble dollar liquidity flowed out to the global system and then came prancing right back into the confines of the U.S. Credit system - the greatest free ride we (or anybody) will ever experience. And the Greenspan Fed absolutely wallowed in the fantasy of itself as the brilliant financial Master. That nature of the inflationary beast was docile and agreeable; it didn't miss a cue. But wild animals have been known to turn on their masters and well-intentioned defenders.

We've now entered a new stage of global wildcat finance, and it's going to be something to watch. The transition has begun away from the hegemonic dollar and its deluded master. There are No Tears, yet. But that's only because the Fed and market participants fail to appreciate that a break in dollar confidence in this New Global Wildcat Environment will shatter Pandora's Box. Dollar devaluation will beget only greater Credit excess, further devaluation and irreparable damage to dollar financial assets. The hideous U.S. Bubble economy will be left to its own devices.

October 7 - The Eugene, Oregon Register Guard (Dave Kayfes): "In 25 years as a sportswriter for The Register-Guard, I always wanted to do an up-close-and-personal story on Wallace 'Chick' Ciochetti. I knew of the man's reputation, how respected he was around the world as a track and field coach and official, and how influential he was in developing so many outstanding pole vaulters and throwers, and Dyrol Burleson, who set a national high school record in the mile and went on to become a sub-four-minute miler at the University of Oregon.

I had heard about his stoic nature, how he'd run five miles in the dark of the gym at 5:30 every morning, not turning on the lights to save taxpayers' money; how he managed three U.S. Pan American Games teams and ran the coach training program for the Mexican Olympic team in 1968, yet shunned recognition for any of his achievements. I never got a chance. And I never will again. Chick died Sept. 26 of complications from Alzheimer's disease. He was 82.

On Saturday morning, friends, family and former students filled First Presbyterian Church in Cottage Grove to celebrate his life. There were stories, lots of them, and tears. 'From the time I was 13, Chick was everything to me,' said Bud Taylor. 'He was the coach's coach, the teacher's teacher, the man's man; the best I've ever known.' It was Ciochetti and Ron Pupke who teamed together in the early 1950s to start construction of a community pool in Cottage Grove, from where Taylor developed several individual and team state champions and was honored as national prep swimming coach of the year for the Lions.

Wally Ciochetti was a legend in this quiet town, population 8,500. The guy influenced so many young people, the ripples reach out in ever-growing numbers as his former pupils become teachers and coaches, reaching out to others as he did to them. Perhaps not with the same drill-sergeant demeanor or chiseled body, but maybe with some of the same work ethic and impeccable sense of fairness.

He could bring kids to attention with his booming voice or demand 10 Fours (40 push-ups) for a mental lapse on the field as well as he could soothe them after practice. Bill Thompson, who has taught at the high school since 1977, recalled that Chick always demanded push-ups from kids who would walk on the polished gym floor in something other than sneakers. When he found that one of the boys couldn't afford tennis shoes, he bought a pair for him.

He was a master at avoiding acclaim or publicity. (Track coach Bruce) Vogel recalled Ciochetti burying his face in his hands when former Oregon coach Bill Bowerman recognized him at a clinic for keeping the United States Olympic team together and out of jail in 1968. He made former principal Ed Otten promise he wouldn't tell anyone, even his wife, about his retirement from teaching in 1986 so there wouldn't be a ceremony to honor him. Ciochetti said if Otten told anyone, he would continue working. He protested when school officials named the all-weather track at Lincoln Middle School in his name after he helped raise the money for it and personally helped build it. But he won't be around to suggest other names when they dedicate the new track at the new high school in his honor, probably this spring. 'All that Chick wanted but never could have,' Cottage Grove Police Chief Mike Grover said. 'He laid the groundwork to get it.' And it will bear his name, and the memory of who he was and what he meant to so many."

Growing up in small towns in Oregon I was blessed with the opportunity to learn from and compete for some extraordinary teachers and coaches. I am forever thankful; I think of them often. On those particularly difficult days they still provide me inspiration and always will. These were tough, disciplined, principled, no- nonsense, caring gentlemen. Mr. Ciochetti was a truly wonderful, honorable man. While I had the highest respect and admiration for him, I had no idea at the time how precious were his virtues. Sadly, we see very few of his kind these days, at least not in the "public domain." But surely they're still some out there. In towns across the country like Cottage Grove, they are making a difference in individual lives -- invaluable contributions that embody an Honorable Life.

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