For the week, the S&P500 declined 2.2% (down 7.9% y-t-d) and the Dow fell 2.5% (down 8%). The Morgan Stanley Cyclicals fell 6.1% (down 10.5%), and the Morgan Stanley Consumer index declined 1.7% (down 5.3%). The Utilities slipped 0.6% (down 1.7%), and the Transports sank 6.1% (down 16.2%). The S&P400 Mid-Caps fell 3.1% (down 6.9%), and the Russell 2000 small caps declined 5.0% (down 11%). The Nasdaq100 declined 1.9% (down 3%) and the Morgan Stanley High Tech index 1.8% (down 1.3%). The Semiconductors fell 2.9% (down 1.8%), the InteractiveWeek Internet index slipped 0.4% (down 1.0%), and the Nasdaq Telecommunications index gained 0.8% (up 1.7%). The Biotechs lost 4.2% (down 2.6%). The Broker/Dealers rallied 1.0% (down 6.2%), while the Banks were slammed for 11.0% (down 35.8%). With bullion rallying $56, the HUI Gold index gained 9.6% (up 0.5%).

January 20 - Bloomberg (Lynn Thomasson and Adam Haigh): "The S&P 500 Index is off to its second-worst start, shattering the biggest rally since World War II, as analysts cut earnings estimates by a record 83 percentage points and companies signal worse to come."

One-month Treasury bill rates ended the week at 3 bps and three-month bills at 10 bps. Two-year government yields gained 10 bps to 0.77%. Five-year T-note yields jumped 17 bps this week to 1.58%. Ten-year yields surged 31 bps to 2.585%. Long-bond yields jumped 45 bps to 3.38%, in what Bloomberg is calling the worst week for the 30-year bond since 1987. The implied yield on 3-month December '09 Eurodollars rose 13 bps to 1.325%. Benchmark Fannie MBS yields gained 11 bps to 3.97%. The spread between benchmark MBS and 10-year T-notes narrowed 20 to 136 bps. Agency 10-yr debt spreads narrowed 9 to 84 bps. The 2-year dollar swap spread increased 7.4 to 65.4 bps; the 10-year dollar swap spread increased 5.7 to 15 bps, while the 30-year swap spread declined 8.6 to negative 20 bps. Corporate bond spreads were mostly narrower. An index of investment grade bond spreads narrowed 7 to 208 bps, while an index of junk bond spreads narrowed 26 to 1,259 bps.

January 19 - Bloomberg (Wes Goodman): "A rally that sent U.S. Treasuries to their best year since 1995 is coming to an end, South Korea's National Pension Service, the country's biggest investor, said... 'It's time to sell U.S. Treasuries,' said Kim [Heeseok], who took over as head of investments at the start of the year. 'The stimulus plan may cause inflation. The U.S. will raise the benchmark interest rate.'"

Investment grade issuance included Duke Energy $750 million, Duke University $500 million, Lubrizol $500 million, Jersey Central P&L $300 million, and Puget Sound Energy $250 million.

January 20 - Bloomberg (Jack Kaskey and Shannon D. Harrington): "Ineos Group Holdings, Georgia Gulf Corp. and Chemtura Corp. are crashing on a mountain of takeover debt and may follow Lyondell Chemical Co. into bankruptcy, trading in their bonds shows... A glut in supplies that drove prices of polypropylene down by half since October will make it even harder for plastics makers to meet debt payments, just as manufacturers in the Middle East add millions of tons of new supplies."

January 23 - Bloomberg (Bryan Keogh and Gabrielle Coppola): "Sales of high-yield bonds surged to $1.83 billion, the biggest weekly total since July, as companies took advantage of a six-week market rally to refinance debt. Sales almost doubled last week's $1.05 billion and compare with a weekly average of about $200 million since July..."

Junk issuers included Crown Castle $900 million, Petrohawk Energy $600 million, Nielsen $330 million, and Tennessee Gas Pipeline $250 million.

International issuers included Electricite de France $5.0bn and Codelco $600 million.

U.K. 10-year gilt yields surged 29 bps to 3.68%, and German bund yields jumped 31 bps to 3.24%. The German DAX equities index sank 4.3% (down 13.1% y-t-d). Japanese 10-year "JGB" yields ended the week 1.5bps higher at 1.23%. The Nikkei 225 dropped 5.9% (down 12.6% y-t-d). Emerging bonds and equities were mostly weak, although bonds did ok considering the rise in global bond yields. Brazil's benchmark dollar bond yields rose 9 bps to 6.66%. Brazil's Bovespa equities index declined 3.1% (up 1.6% y-t-d). The Mexican Bolsa dropped 4.8% (down 13.5% y-t-d). Mexico's 10-year $ yields rose 12 bps to 6.25%. Russia's RTS equities index sank 12.1% (down 21.2% y-td). India's Sensex equities index fell 7.0% (down 10.1% y-t-d). China's Shanghai Exchange gained 1.9% (up 9.3% y-t-d).

Freddie Mac 30-year fixed mortgage rates jumped 16 bps to 5.12% (down 36bps y-o-y), with a notable 12-wk decline of 134 bps. Fifteen-year fixed rates rose 15 bps to 4.80% (down 15bps y-o-y). One-year ARMs added 3 bps to 4.92% (down 7bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up a notable 21 bps this week to 7.0% (up 52bps y-o-y).

Bank Credit surged $68.3bn to $9.864 TN (week of 1/14). Bank Credit expanded $605bn year-over-year, or 6.5%. Bank Credit jumped $472bn over the past 19 weeks. For the week, Securities Credit surged $72.3bn. Loans & Leases dipped $3.9bn to $7.087 TN (52-wk gain of $244bn, or 3.6%). C&I loans gained $4.7bn, with 52-wk growth of 8.1%. Real Estate loans added $3.7bn (up 4.7% y-o-y). Consumer loans jumped $13.2bn, while Securities loans dropped $20.8bn. Other loans fell $4.7bn.

M2 (narrow) "money" supply gained $8.0bn to a record $8.223 TN (week of 1/12). Narrow "money" jumped $793bn over the past year, or 10.7%. For the week, Currency added $1.5bn, while Demand & Checkable Deposits sank $37.9bn. Savings Deposits jumped $45.0bn, while Small Denominated Deposits dipped $2.9bn. Retail Money Funds increased $2.4bn.

Total Money Market Fund assets (from Invest Co Inst) dropped $28.9bn to $3.893 TN, with a 52-wk expansion of $641bn, or 19.7% annualized.

Total Commercial Paper outstanding dropped $30.2bn this week to $1.688 TN, with CP down $159bn over the past year (8.6%). Asset-backed CP fell $22.2bn to $749bn, with a 52-wk decline of $86bn (10.3%).

Federal Reserve Credit dropped $19.9bn to $2.049 TN, with a historic 19-wk increase of $1.161 Trillion. Fed Credit expanded $1.188 TN over the past 52 weeks (138%). Fed Foreign Holdings of Treasury, Agency Debt last week (ended 1/21) jumped $13.3bn to a record $2.541 TN. "Custody holdings" were up $446bn over the past year, or 21.3%.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $495bn y-o-y, or 7.9%, to $6.768 TN. International reserves have declined $178bn over the past 14 weeks.

Global Credit Market Dislocation Watch:

January 23 - Bloomberg (Jennifer Ryan): "The U.K. economy shrank more than economists forecast during the fourth quarter in the biggest contraction since 1980 as the financial crisis crippled the banking industry and mired Britain deeper in the recession. Gross domestic product fell 1.5% from the previous quarter... 'This is undeniably grim,' said Stewart Robertson, an economist at Aviva Investors... 'Two or three quarters more like this and you're talking about depression, not recession. This should hasten activity to address the credit and money market issues.'"

January 20 - Bloomberg (Jon Menon and Andrew MacAskill): "Royal Bank of Scotland Group Plc, facing the biggest loss in British history, promised to make 6 billion pounds ($8.7 billion) available to U.K. borrowers as the lender took another step toward full government control. In exchange for government guarantees on losses from toxic debt, the bank will have to sign a binding agreement with the Treasury on how much it will lend and on what terms. Auditors will move in to check the bank is following the government directive. 'We'll be one of the first guinea pigs," RBS Chief Executive Officer Stephen Hester told reporters... Loans will only be made 'on commercial terms and to creditworthy people,' he said."

January 19 - Bloomberg (John Fraher and Gonzalo Vina): "Prime Minister Gordon Brown's government tightened its grip on Britain's financial system, guaranteeing toxic assets and giving the Bank of England unprecedented power to buy securities. The plan will increase the cost of bailing out the nation's banks by at least 100 billion pounds ($147 billion), the Treasury said in a statement today. The government raised its stake in Royal Bank of Scotland Group Plc to 70% and said it would use Northern Rock Plc to spur mortgage lending."

January 22 - Bloomberg (Robert Schmidt and Rebecca Christie): "Timothy Geithner, President Barack Obama's nominee for Treasury secretary, pledged an expanded and prolonged government role in everything from stabilizing banks to ensuring credit for small businesses. Geithner... told lawmakers... 'we're at the beginning of this process of repairing the system, not close to the end.' He committed to much more substantial action' on a 'very dramatic scale.'"

January 23 - Bloomberg (Ari Levy): "The U.S. government's decision to pledge billions of additional dollars with strings attached to Citigroup Inc. and Bank of America Corp. may be nationalization by another name, according to former bankers and regulators. Faced with pressure from lawmakers, banks have shaken up management, eliminated executive bonuses and staff and canceled conventions. They'll be forced to do monthly reports on how they've boosted lending while slashing quarterly dividends to one cent a share for three years. 'When the Treasury tells a bank to pay a penny a share vs. its old dividend, you know who's calling the shots,' said Jon Bruss, a 40-year industry veteran and founder of... Fortress Partners Capital Management Ltd... 'It may not be de jure nationalization but I think it's de facto nationalization.'"

January 21 - Bloomberg (Dara Doyle): "The bloodletting may be far from over for Ireland's banks as the wheels come off what was once Europe's fastest-moving economy... 'Nobody can stop what's happening," said Ken Murray, CEO of Blue Planet Investment Management... 'It's going to carry on, and governments are going to have to come up with the capital because the market doesn't have it.'"

January 20 - Bloomberg (Abigail Moses): "The cost of hedging against losses on government bonds around the world soared to records, according to CMA Datavision. Credit-default swaps on U.K. debt rose 9 bps to 134, and contracts linked to Spain climbed 11.5 to 154."

January 21 - Bloomberg (Patricia Lui): "Foreign direct investment in developing nations will drop by $180 billion, or 31%, this year as a global recession prompts multinationals to cut spending on factories and mines, according to the World Bank."

January 22 - Bloomberg (Alex Nicholson and Emma O'Brien): "Russia's international reserves declined $30.3 billion last week, the second-biggest decline on record, as the central bank sold currency to slow the ruble's decline."

January 21 - Bloomberg (Tasneem Brogger): "Icelandic police used pepper spray on protesters yesterday after a crowd of more than 1,000 people gathered outside parliament demanding the government step down, Reuters reported, citing local police."

January 21 - Bloomberg (Adam Majendie): "Average art prices at auction will drop by as much as 40% this year as many art speculators exit the market, said Daniel Komala, president and co-founder of Jakarta-based Larasati Auctioneers."

January 21 - Bloomberg (Esteban Duarte): "Companies in Europe have already sold almost half the bonds expected for the year as they rush to raise funds before the credit crisis worsens, according to analysts at Societe Generale SA. Non-financial firms issued 31 billion euros ($40 billion) of debt so far this month, already making it the busiest on record, Societe Generale data show."

Currency Watch:

The dollar index gained 1.7% this week to 85.61. For the week on the upside, the Japanese yen gained 2.1%, the Canadian dollar 0.8%, and the Norwegian krone 0.3%. On the downside, British pound declined 6.3%, the Swiss franc 3.2%, the New Zealand dollar 2.8%, the Australian dollar 2.7%, the South African rand 2.6%, the South Korean won 2.3%, the Danish krone 2.1%, and the Euro 2.1%.

Commodities Watch:

January 20 - Bloomberg (Lee J. Miller and Glenys Sim): "During George W. Bush's eight years as U.S. president the price of gold tripled and the cost of a barrel of crude oil... ended comparatively little changed. 'It's a totally different world from when he took office," said Tetsuya Yoshii, vice president for derivative products at Mizuho Corporate Bank... 'Gold has done well because of the different stages the world has been at: first because of its safe-haven status during geopolitical uncertainties, then as a hedge against inflation and now as a store of value.'"

Gold surged 6.6% this week to $899 (up 1.9% y-t-d), and silver gained 6.4% to $11.94 (up 5.7% y-t-d). March Crude rose $3.13 to $45.70 (up 2.5% y-t-d). February Gasoline slipped 1.7% (up 8.1% y-t-d), and February Natural Gas dropped 6.2% (down 19.9% y-t-d). March Copper fell 3.6% (up 4.4% y-t-d). March Wheat rallied 0.8% (down 4.6% y-t-d), while Corn was little changed (down 4.1% y-t-d). The CRB index rallied 2.1% (down 1.6% y-t-d). The Goldman Sachs Commodities Index (GSCI) recovered 2.2% (up 0.4% y-t-d).

China Watch:

January 19 - Bloomberg (Yanping Li): "China faces a 'very grim' job market in 2009 and the government must pay more attention to public welfare and social stability, Premier Wen Jiabao said..."

January 22 - Bloomberg (Kevin Hamlin and Li Yanping): "China's economy expanded at the slowest pace in seven years... Gross domestic product grew 6.8% in the fourth quarter from a year earlier, after a 9% gain in the previous three months... 'It's an astonishingly steep slowdown,' said Paul Cavey, an economist with Macquarie Securities... 'We haven't yet seen all of the pain.'"

January 20 - AFP: "More than half a million Chinese people were thrown out of work in the last three months of 2008 as the impact of the global financial crisis deepened, the government said... As of Dec. 31, 8.86 million urban residents were registered as jobless, up 560,000 from the end of the third quarter..."

January 20 - Bloomberg (Li Yanping): "China's official urban unemployment rate jumped for the first time since 2003 and may climb to an almost 30-year high as exports slump and a slowdown deepens... Registered unemployment rose to 4.2% as of Dec. 31..."

January 19 - Bloomberg (John Liu): "Shanghai office rents, which fell in 2008 for the first time in eight years, are expected to decline further this year as almost 10 million square feet of new property comes onto the market."

Japan Watch:

January 22 - Bloomberg (Jason Clenfield): "Japan's exports plunged by a record in December... Exports plummeted 35% from a year earlier, the sharpest decline since 1980..."

January 21 - Bloomberg (Masumi Suga and Yoshifumi Takemoto): "Japan's steel production fell 28% in December, the steepest decline in six decades, as the global economic recession slashed demand."

January 21 - Bloomberg (Megumi Yamanaka): "Japan's industrial power sales fell the most in more than three decades, plummeting 13% in December from a year earlier, as automakers such as Toyota Motor Co. and steel companies shut plants and scale back output."

January 20 - Bloomberg (Toru Fujioka): "The Japanese government said the economy is 'worsening rapidly' and the collapse in exports and production is likely to prompt companies to fire more workers."

January 20 - Bloomberg (Toru Fujioka): "Japan's consumers became the most pessimistic in at least 26 years, indicating households are likely to keep cutting back as the recession deepens."

Asia Bubble Watch:

January 22 - Bloomberg (William Sim): "South Korea's economy shrank a larger-than-expected 5.6% last quarter, the biggest decline since the Asian financial crisis a decade ago as exports, business investment and consumer spending plunged."

January 21 - Bloomberg (Shamim Adam and Chen Shiyin): "Singapore said its economy may shrink an unprecedented 5% this year, fanning speculation the government will announce record spending in its budget tomorrow to help companies hurt by the global recession."

Latin America Watch:

January 23 - Bloomberg (Jonathan J. Levin and Jeb Blount): "Bolivian President Evo Morales signed a decree today nationalizing BP Plc-controlled Empresa Petrolera Chaco SA 'in its entirety,' according to remarks he made today that were broadcast on Bolivian state television."

Unbalanced Global Economy Watch:

January 21 - Bloomberg (Theophilos Argitis): "Canadian factory owners posted their biggest monthly sales decline on record in November, led by tumbling prices for petroleum manufacturers. New orders dropped 13%."

January 21 - Bloomberg (Jennifer Ryan): "Britain had a 14.9 billion-pound ($20.5 billion) budget deficit in December, the second highest for any month since records began in 1993, as the deepening recession pummeled tax receipts and jobless claims climbed. The shortfall doubled from 7.4 billion pounds a year earlier... Tax income fell 5.5% and spending increased 6%."

January 19 - Bloomberg (Brian Swint and Fergal O'Brien): "The euro-area economy will contract this year for the first time since the currency was introduced a decade ago, the European Commission forecast, cutting its outlook for the region. The economy of the 16 countries sharing the euro will shrink 1.9% in 2009..."

January 19 - Bloomberg (Gabi Thesing): "Germany's Bundesbank said it sees few signs of a credit crunch in Europe's largest economy. While German banks have reported a 'significant tightening of lending standards' since the outbreak of the financial- market crisis, "this is less than across the euro area," the Frankfurt-based Bundesbank said in its monthly report published today. Based on the Bank Lending Survey for Germany, "there are no signs of a supply-side shortage of credit" across the banking system."

January 19 - Bloomberg (Neil Unmack): "Ratings downgrades on European bonds backed by home loans and consumer payments are likely to be 'limited' this year because rising defaults are already factored in, according to Moody's... 'For most asset sectors and geographies, performance is not expected to deteriorate beyond Moody's assumptions,' the...company said..."

January 21 - Bloomberg (Emma Ross-Thomas): "Spain plans to increase net debt issuance by 69% this year in a bid to help plug a growing budget deficit that prompted Standard & Poor's to remove the country's top AAA credit rating. Spain will issue a net 86.5 billion euros ($111.8 billion) of debt..."

January 20 - Bloomberg (Flavia Krause-Jackson): "Italian industrial orders and sales in November suffered their worst collapse since 1991, adding to evidence that Europe's fourth-biggest economy is in its worst recession in more than 30 years."

January 20 - Bloomberg (Johan Carlstrom): "Sweden's economy will shrink by 1.5% in 2009, prompting the central bank to cut the benchmark interest rates to a record, Nordea Bank AB forecast."

January 21 - Bloomberg (Johan Carlstrom): "Norwegian home prices fell 6.2% in the fourth quarter from the previous three months as a slowing economy and rising unemployment dented demand."

January 20 - Bloomberg (Torrey Clark and Emma O'Brien): "Russia's government plans to allocate another $40 billion to banks to support lending after President Dmitry Medvedev criticized the government for moving too slowly on measures to shore up the economy."

January 21 - Bloomberg (Jason McLure): "Inflation in Ethiopia slowed to 39.3% in December as food and fuel costs declined, the Central Statistical Agency said. The inflation rate dropped from 49.4% in the previous month..."

Bursting Bubble Economy Watch:

January 22 - Bloomberg (Timothy R. Homan): "U.S. builders broke ground in December on the fewest houses since record-keeping began as sales and credit dried up, signaling the real-estate slump will keep hurting economic growth. Housing starts fell 16% last month to an annual rate of 550,000...the lowest since the government started compiling statistics in 1959..."

January 23 - Bloomberg (Courtney Dentch and Jeff Kearns): "U.S. companies are reducing dividends at the fastest rate in half a century... Five companies in the Standard & Poor's 500 Index slashed $7.5 billion in outlays this month, more than all the cuts from 2003 to 2007, S&P said. The worst financial crisis since the Great Depression is forcing companies to hoard cash after earnings before one-time costs dropped 38 percent last year, the most since 2001..."

January 23 - Bloomberg (Joe Mysak): "U.S. states and municipalities added employees in 2008 for the fifth year in a row, while businesses eliminated the most jobs since World War II... Last year, state and local governments added 161,000 jobs as private employers eliminated 2.6 million of them, the most since 1945..."

January 23 - Bloomberg (Jerry Hart): "Florida's unemployment rate rose to a 16-year high of 8.1% in December as the state's housing slump cost jobs in construction. The jobless rate rose from a revised 7.4% in November..."

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

January 23 - Bloomberg (William Selway and Martin Z. Braun): "California joined Connecticut and Florida in investigating whether Wall Street banks and financial advisers conspired to overcharge local governments for derivative contracts tied to municipal bonds, a state official said. The antitrust probes follow similar inquiries by the U.S. Justice Department and class action lawsuits by cities from Oakland to Baltimore. They claim banks and advisers cost taxpayers money by rigging bids or fixing prices on financial contracts."

Real Estate Bust Watch:

January 22 - Bloomberg (Daniel Taub): "Apartment rents and occupancy rates declined across the U.S. West and South as the recession cost tenants jobs and forced some to combine households. The average monthly rent dropped to $993 in the three months ended Dec. 31 from $1,002 in the previous quarter... RealFacts said..."

January 22 - Bloomberg (Daniel Taub): "San Francisco Bay Area home prices fell 44% last month from a year earlier as foreclosures accounted for a record half of all deals on existing properties, MDA DataQuick said. The median price declined to $330,000 from $587,500 in the nine-county region..."

GSE Watch:

January 23 - Bloomberg (Dawn Kopecki and Jody Shenn): "The Federal Housing Finance Agency plans to propose new financial requirements next week for Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. The regulatory agency may place new restrictions on Fannie and Freddie's investments and will revamp capital requirements for the home loan banks, director James Lockhart said... He said his agency also plans to release new minimum capital rules for the 12 regional FHLBanks by Jan. 27... 'The 14 of them are so critical to this mortgage market,' Lockhart said..."

Speculator Watch:

January 23 - Bloomberg (Saijel Kishan): "Hedge funds lost more money in 2008 than any year on record. It may get worse in 2009... The $1.2 trillion industry may shed as much as $450 billion in assets, or 37%, through market losses and client withdrawals this year, according to Morgan Stanley analyst Huw van Steenis... That's on top of the $600 billion that disappeared last year and would leave hedge funds with $750 billion, the lowest since 2002."

January 21 - Bloomberg (Saijel Kishan): "Hedge-fund investors withdrew a record $152 billion in the fourth quarter as the industry posted its worst returns in almost two decades, according to Hedge Fund Research Inc. Global assets dropped to $1.4 trillion at the end of the year, the same level as 2006 and $525 billion less than a peak of $1.93 trillion in June..."

January 20 - Bloomberg (Jason Kelly): "Cerberus Capital Management LP, the private-equity firm whose holdings include Chrysler LLC, may cut its workforce by about 10% amid a freeze in leveraged buyouts, according to a person familiar with the matter."

January 20 - Bloomberg (Stephanie Bodoni): "Investments with Bernard Madoff have forced 17 Luxembourg funds and sub funds to suspend redemptions as the New Yorker's alleged fraud strikes Europe's biggest mutual fund market, the country's financial regulator said..."

January 23 - Bloomberg (Gillian Wee and Jason Kelly): "Harvard University didn't sell most of the $1.5 billion of stakes in private-equity funds it put on the market last year because offers were too low, said three people familiar with the matter."

Fiscal Watch:

January 23 - Bloomberg (Dawn Kopecki and Jody Shenn): "Freddie Mac, the mortgage-finance company now under federal control, said it will ask the U.S. Treasury Department for as much as $35 billion more in federal aid. Freddie, which took $13.8 billion from Treasury in November..."

Muni Watch:

January 21 - Bloomberg (Jeremy R. Cooke): "California's general obligation bonds were placed under review for possible downgrade by Moody's... and its short-term notes were cut, as the state struggles to close a record budget deficit. California's A1 long-term rating, tied with Louisiana for the lowest among U.S. states, may be cut along with grades on other state-backed debt together totaling about $67 billion... Moody's said..."

California Watch:

January 23 - Associated Press (Samantha Young): "California's unemployment rate jumped to 9.3% in December, capping a tumultuous year of massive job losses and a housing slump that has struck most of the country. The jobless rate announced Friday by the state Employment Development Department represents a jump from the 8.4% figure in November 2008."

January 20 - United Press International: "A flood of telephone calls, an antiquated computer system and dwindling funds are overwhelming California's jobless benefits delivery system, officials say. At the same time as the state's unemployment insurance fund is running low, California's unemployment rate is approaching a 15-year high, the Los Angeles Times reported... The jobless rate hit 8.4% in November, up from 8.2% in October. Millions of telephone calls to unemployment insurance processing centers are not being answered and the operation's computer system is 30 years old. Similar problems are occurring in at least 10 other states."

January 22 - Bloomberg (Vivien Lou Chen): "An hour's drive through California's Riverside County takes in neighborhoods of deserted homes, boarded-up businesses, busy unemployment offices -- and crews working on millions of dollars in new public projects. Only four years ago, Riverside and nearby San Bernardino, often called the Inland Empire, were California's economic powerhouse, accounting for more than a fifth of the state's new jobs. Today, unemployment reigns in the sprawling region east of Los Angeles. The 9.5% jobless rate in the two counties matches Detroit's as the highest of any major metropolitan area in the U.S."

New York Watch:

January 23 - New York Times (Patrick McGeehan): "Unemployment in New York State rose last month at the fastest pace on record, as some companies laid off workers at a rapid clip while others refrained from their usual hiring around the holidays... The state's jobless rate... was 7% in December, up from 6% in November... That increase -- the largest in any month in 32 years of state record-keeping -- will set off another extension of benefits for many New Yorkers... New York City's unemployment rate... rose even more, jumping to 7.4% from 6.3%..."

Crude Liquidity Watch:

January 19 - Bloomberg (Glen Carey): "Saudi Arabia's annual inflation eased to 9% in December from 9.5% in November as increases in the cost of rents and food slowed, the Saudi Press Agency reported."

January 19 - Bloomberg (Arif Sharif): "Saudi Arabia's central bank cut its repurchase rate to 2% from 2.5% and the reverse repurchase rate to 0.75% from 1.5% to help boost economic growth in the biggest Arab economy."

January 19 - Bloomberg (Arif Sharif): "Dubai property prices may fall 60% by the end of 2009 from their peak in July 2008, The National reported, citing a report by Roy Cherry, an analyst at investment bank Shuaa Capital PSC."

January 22 - Bloomberg (Haris Anwar): "The cost of hedging against losses on debt sold by Bahrain, the smallest of six Gulf Arab economies, climbed to a record on investor concern that plunging oil prices will make it hard for the kingdom to fund its budget. Credit-default swaps linked to Bahrain jumped 25 bps this week to 465, CMA Datavision prices show."

U.K. vs. U.S.:

The U.K. is in trouble. Today it was reported that the British economy contracted a much worst-than-expected 1.5% during the fourth quarter (not annualized!), the steepest economic decline since the dark days of 1980. Manufacturing activity sank a dismal 4.6%, while services contracted by 1%. Some forecasts now have the British economy this year suffering the most severe economic contraction since 1946. There's now a strong case for using "depression" when describing this deepening financial and economic malaise.

The pound today traded at the lowest level against the dollar since 1985. This currency has depreciated 30% against the dollar over the past 12 months. Against the yen, the pound has collapsed 42% during the past a year. There is little room left for conventional monetary policy. At 1.50%, the Bank of England's (BofE) base lending rate is today at the lowest level since 1694.

Curiously, the British pound has declined 6.5% against the dollar so far this month, while the dollar index has gained about 6%. I say "curiously," as I would argue that in key aspects of financial and economic structuring, the U.K. provides a microcosm of our own systemic vulnerabilities. In a recent Bloomberg interview, Jim Rogers stated "The pound sterling is going to be under pressure. The U.K hasn't got much to sell the world anymore." His comments to the Financial Times were even harsher: "I don't think there is a sound U.K. bank now, at least, if there is one I don't know about it... The City of London is finished, the financial centre of the world is moving east. All the money is in Asia. Why would it go back to the west? You don't need London."

Following our direction, the U.K. over the past decade gutted their already shrunken manufacturing base as it shifted headlong into "services" and finance. While this finance and asset inflation-driven Bubble economy seemed to work miraculously during the boom, the post-Bubble reality is a severely impaired financial system and an economic structure incapable of sufficient real wealth creation.

I feel for British policymakers. Just five short quarters ago, overheated nominal GDP was expanding at about a 6% pace. And with inflation surging to the 5% level, the Bank of England pushed its base lending rate to 5.75% (summer of '07). I'll give the BofE Credit for trying to tighten financial conditions. It was, however, in vain, as Acute Global Monetary Disorder overwhelmed domestic policymaking. BofE tightening only widened interest-rate differentials, especially compared to near zero borrowing rates in Japan. Finance inundated the City of London in a finale of unwieldy speculative excess, setting the stage for a reversal of flows, de-leveraging and today's collapse.

Yesterday, U.S. insurance company Aflac dropped 37% on concerns for its exposure to European "hybrid" securities - in particular preferred-type instruments issued by the large U.K. banks. According to research by Morgan Stanley (Nigel Dally), "When it comes to capital adequacy and investment portfolio strength, Aflac has historically been viewed as the gold standard across the industry." Accordingly, the Street responded violently to the report highlighting the company's potentially significant exposure to securities that have suffered huge losses in market value (Aflac rallied sharply today). According to the Morgan Stanley report, some of the hybrid securities issued by U.K. lenders Royal Bank of Scotland (RBS), HBOS, and Barclays are now trading at between 15 and 45 cents on the dollar.

Not long ago during the boom's heyday, these types of securities were viewed as low risk instruments. They were, after all, issued by major - and at the time well-capitalized -banking institutions. In the worst-case scenario, these institutions (and their hybrid securities) were viewed as too big to fail. In reality, these banks were issuing a most dangerous class of securities - higher yielding ("money-like") instruments appealing to even the more conservative investors. Today, the entire U.K. banking system is enveloped in a vicious downward spiral. Tens of billions of securities that only a short time ago were perceived as safe are being heavily discounted for the possibility the issuing institution will be "nationalized."

On Wednesday, troubled Royal Bank of Scotland promised to lend $8.7bn in exchange for various lines of government support. The market took the news as a huge leap toward nationalization and governmental control over the U.K. banking sector. Even RBS's CEO was quoted as saying, "We'll be one the first guinea pigs." The markets now view that U.K. policymakers will have few available options other than borrowing hundreds of billions to recapitalize their banks and support the securities markets.

Ten-year government "gilt" yields spiked 29 basis points higher this week to 3.68%, with a 2-wk gain of 55 bps. On Tuesday, Britain reported a $20.5bn (14.9bn pounds) fiscal deficit for the month of December. Spending was up 6%, while tax receipts were down 5.5%. The European Commission is now forecasting the U.K. deficit to surpass 8% of GDP this year. After trading at about 20 bps this past June, the cost of U.K. Credit default swap protection has spiked to 147 bps (traded as high as 165bps Wednesday).

The U.K. gilt market seemed to lead global bond rates higher this week. As the scope of global financial sector capital shortfalls and forthcoming economic stimulus become clearer, bond market nervousness grows. U.S. 10-year yields ended the week 31 bps higher at 2.59%, about 110 bps below comparable gilts. There should be little doubt that our new Administration will move quickly and decisively to try to bolster the financial sector and stabilize the real economy.

I fully expect our Post-Bubble Financial and Economic Predicament to parallel that of Britain. At some point, our problems will likely be of much greater scope due to, among other things, our system's larger size. So far, the U.K. has suffered a more acute crisis due to its inability to stabilize its troubled financial sector. For one, it is suffering through a more destabilizing outflow of speculative finance (unwind of carry trades). Also, the U.K. financial structure has traditionally been less government-influenced - leaving it today more vulnerable to a crisis of confidence. Outside of government debt instruments, confidence has faltered for large cross-sections of U.K.'s financial claims ("moneyness" has been lost).

Our system has to this point proved relatively more stable due primarily, I believe, to the instrumental role played by government and quasi-government institutions such as the FHA, Fannie, Freddie and the Federal Home Loan Banks. The market's perception of "moneyness" is retained for multi-Trillions of U.S. claims - a dynamic that bolsters the view that the U.S. dollar retains its "reserve currency" and safe-haven status. And as long as this confidence holds, faith in the government's capacity for system "reflation" endures. But it all has the look of a fragile confidence game, and I fully expect the invaluable attribute of "moneyness" to be tested at some point.

There is absolutely no doubt that a massive inflation of U.S. financial claims is in the offing. One would suspect it is only a matter of when market perceptions of "moneyness" adjust. This week's jump in gilt yields could portend a troubling new phase in the U.K. financial crisis. It could also be a harbinger of a more general crisis of confidence for global currencies and debt markets. The long-bond suffered its worst week since 1987 (according to Bloomberg). Gold was up $43 today and $56 for the week.