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Periphery Rising

The S&P500 rose 3.3% (down 6.7% y-t-d), and the Dow increased 3.1% (down 8.6%). The broader market was much stronger. The S&P400 Mid-Caps surged 5.1% (down 2.6%), and the small cap Russell 2000 jumped 6.3% (down 6.7%). The Morgan Stanley Retail index rose 7.6%, increasing y-t-d gains to a noteworthy 18.6%. The Morgan Stanley Cyclicals jumped 8.3% (down 8.7%), and the Morgan Stanley Consumer index gained 2.5% (down 6.4%). The Transports gained 7.2% (down 15.8%), and the Utilities increased 1.7% (down 10.5%). The Nasdaq100 jumped 5.2%, increasing y-t-d gains to 8.6%. The Morgan Stanley High Tech index surged 7.4% (up 16.4%), the Semiconductors rose 4.6% (up 18.3%), and the InteractiveWeek Interactive index jumped 7.9% (up 21.9%). The Biotechs declined 3.9% (down 3.5%). The Broker/Dealers rose 5.3% (up 8.9%), and the Banks rallied 5.6% (down 30.5%). With Bullion dropping $31, the HUI Gold index sank 5.5% (up 1.7%).

One-month Treasury bill rates ended the week at 15 bps, and three-month bills were at 22 bps. Two-year government yields increased 5 bps to 0.91%. Five year T-note yields jumped 9 bps to 1.81%. Ten-year yields rose 13 bps to 2.86%. The long-bond saw yields rise 6 bps to 3.73%. The implied yield on 3-month December '09 Eurodollars jumped 7.5 bps to 1.38%. Benchmark Fannie MBS yields rose 15 bps to 4.085%. The spread between benchmark MBS and 10-year T-notes widened 2 to 118 bps. Agency 10-yr debt spreads narrowed a notable 14.5 to 70 bps. The 2-year dollar swap spread increased 2 to 57.25 bps; the 10-year dollar swap spread declined 0.75 to 18 bps, and the 30-year swap spread increased 1.75 to negative 29.25 bps. Corporate bond spreads were mostly narrower. An index of investment grade bond spreads widened 12 to 260 bps, while an index of junk spreads narrowed 41 to a 6-wk low 1,181 bps.

It was a decent week of corporate debt sales. Investment grade issuance included PNC Funding $1.0bn, Ingersoll-Rand $655 million, Dell $500 million, and TJX Cos. $375 million.

Junk issuers included Energy Transfer Partners $1.0bn, Plains Exploration $565 million, AES Corporation $535 million, Black & Decker $350 million, National Fuel Gas $250 million, Bway $230 million and Coca-Cola Bottling.

Convert issues included Teradyne $190 million.

International debt issues this week included European Investment Bank $3.5bn, Qatar $3.0bn, Anglo American $2.0bn, Hana Bank $1.0bn and Odebrecht Finance $200 million.

U.K. 10-year gilt yields jumped 14 bps to a 5-wk high 3.42%, and German bund yields rose 13 bps to 3.22%. The German DAX equities index rallied 4.3% (down 8.8%). Japanese 10-year "JGB" yields jumped 9 bps to 1.415% (high since 12/15/08). The Nikkei 225 gained 1.4% (down 1.2%). The emerging market rally continued. Brazil's benchmark dollar bond yields sank 11 bps to a 3-month low 6.41%. Brazil's Bovespa equities index surged 5.8% (up 18.0% y-t-d). The Mexican Bolsa rallied 3.0% (down 6.5% y-t-d). Mexico's 10-year $ yields collapsed 46 bps to 5.91. Russia's RTS equities index gained 3.4% (up 18.1%). India's Sensex equities index rose 3.5% (up 7.3%). China's Shanghai Exchange added 1.9% (up 32.9%).

April 3 - Bloomberg (Laura Cochrane): "Emerging-market governments and companies borrowed more in international bond markets this week than at any time in the past two years as interest costs plunged on optimism the worst of the global recession may be over. Abu Dhabi, the oil-rich emirate with the world's largest sovereign wealth fund, and nearby Qatar raised a record $3 billion each, pushing sales by developing-nation borrowers to $9.5 billion, the most since June 2007, according to data compiled by Bloomberg. South Africa is considering approaching international bondholders for the first time in nearly two years along with Turkey and Bahrain."

Freddie Mac 30-year fixed mortgage rates dropped 8 bps to a record low 4.78% (down 110 bps y-o-y). Fifteen-year fixed rates declined 6 bps to 4.52% (down 90bps y-o-y). One-year ARMs dropped 10 bps to 4.75% (down 44 bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up 4 bps this week to 6.46% (down 59bps y-o-y).

Federal Reserve Credit slipped $2.3bn last week to $2.049 TN. Fed Credit has dropped $198bn y-t-d, although it expanded $1.173 TN over the past 52 weeks (135%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt last week (ended 4/1) jumped $14.6bn to a record $2.609 TN. "Custody holdings" have been expanding at a 14.8% rate y-t-d, and were up $403bn over the past year, or 18.3%.

Bank Credit dropped $21.6bn to $9.699 TN (week of 3/25). Bank Credit was up $163bn year-over-year, or 1.7%. Bank Credit increased $307bn over the past 29 weeks. For the week, Securities Credit added $1.9bn. Loans & Leases sank $23.5bn to $7.022 TN (52-wk gain of $90bn, or 1.3%). C&I loans fell $6.7bn, with one-year growth of 2.9%. Real Estate loans gained $8.6bn (up 3.8% y-o-y). Consumer loans dropped $9.2bn, and Securities loans fell $24.9bn. Other loans expanded $8.6bn.

M2 (narrow) "money" supply slipped $2.9bn to $8.372 TN (week of 3/23). Narrow "money" has now inflated at a 16.7% rate over the past 27 weeks and $753bn over the past year, or 9.9%. For the week, Currency added $1.3bn, while Demand & Checkable Deposits dropped $14.2bn. Savings Deposits jumped $22.9bn (11-wk gain of $303bn), while Small Denominated Deposits declined $2.5bn. Retail Money Funds fell $10.2bn.

Total Money Market Fund assets (from Invest Co Inst) dropped $22.2bn to $3.834 TN. The 52-wk expansion was reduced to $336bn, or 9.6%. Money Funds have expanded at a 0.4% rate y-t-d.

Asset-Backed Securities (ABS) issuance remained slow this week. Year-to-date total US ABS issuance of $18bn (tallied by JPMorgan's Christopher Flanagan) is a fraction of the $47.7bn for comparable 2008.

Total Commercial Paper outstanding fell $14.8bn this past week to $1.477 TN. CP has declined $205bn y-t-d (49% annualized) and $351bn over the past year (19.2%). Asset-backed CP dipped $1.1bn last week to $701bn, with a 52-wk drop of $109bn (13.5%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $184bn y-o-y, or 2.8%, to $6.660 TN. Reserves have declined $386bn over the past 24 weeks.

Global Credit Market Dislocation Watch:

April 1 - Bloomberg (Gonzalo Vina): "U.K. Prime Minister Gordon Brown said Group of 20 nations has already agreed the biggest fiscal stimulus in history and will tomorrow show how their combined effort top $2 trillion. 'We are in the midst of the biggest fiscal boost that the world has ever had," Brown said... 'The combination of all of this is the most substantial fiscal stimulus, something on the order of $2 trillion. It is remarkable this is happening. We want to push it forward tomorrow and I think we will.'"

April 3 - Bloomberg (Gonzalo Vina): "The International Monetary Fund, dismissed as increasingly irrelevant when the world economy was booming, will now wield more than $1 trillion to help bring it back to life. Leaders from the world's most powerful nations, meeting in London yesterday, agreed to triple the money the IMF can lend to rescue crisis-stricken nations, to $750 billion. The agency will also get another $250 billion in Special Drawing Rights, an overdraft facility for its 185 members."

March 30 - MarketWatch (Lisa Twaronite): "Corporate investment-grade bond volume reached a record $824.4 billion in the first quarter of 2009, more than double the volume of the same quarter a year ago... Debt capital markets around the world raised a total $1.53 trillion in 3,370 deals -- a 26% on-year increase, despite a 44% drop in deal activity... said the report from Dealogic... Government-guaranteed debt reached $367.6 billion in the quarter, compared to $219.5 billion in the fourth quarter of 2008... U.S. debt market volume reached $563.8 billion, down 6% on year, marked by a 72% drop in securitized debt which totaled just $31.3 billion. But U.S. corporate investment-grade bond volume reached a record $298.4 billion -- up 80% on year, Dealogic said."

March 29 - Financial Times (Lina Saigol, Paul J Davies and Julie MacIntosh): "Companies borrowed $1,500bn in the bond markets during the first quarter, but global merger and acquisition slumped 36% year-on-year. Groups seen as relatively safe - in non-cyclical industries or with high credit ratings - took advantage of investor appetite for corporate debt, raising a record $825.6bn in the first three months of 2009... Governments helped stem the complete collapse of M&A activity by investing $145.8bn - 28% of the total - in banks and insurance companies, on top of the $409.3bn they committed to the sectors last year."

March 29 - Financial Times (Paul J Davies): "Corporate bond sales hit record levels in the first quarter... Equity sales and syndicated loans saw their worst global volumes since the first quarter of 2003, in the run-up to the invasion of Iraq, while issuance of preference shares was at the lowest level since the first quarter of 2000."

March 31 - Dow Jones (David M. Levitt): "The amount of money raised in the global debt capital markets in the first quarter of 2009 increased 26% versus the same period of last year, figures from data provider Dealogic... show. Global DCM issuance was $1.53 trillion in the first three months of this year, compared with $1.22 trillion in the same period of 2008... In the troubled structured finance market... volumes fell 69% versus the first quarter of last year, to $43.5 billion.. U.S. issuance actually fell 6% versus the first three months of 2008, to $563.8 billion, largely thanks to a 72% drop in securitized debt volumes to just $31.3 billion. However, this was almost made up for by an 80% rise in U.S. investment grade corporate bond volumes, which hit a record high of $298.4 billion."

March 31 - Dow Jones (Ditas Lopez): "International-bond issuance from Asia will likely sustain a newfound momentum in the second quarter... Total debt issuance - including local-currency and convertible bonds - totaled $176.3 billion, a record first quarter for the region, Dealogic said. That's up 55% on year, outpacing the 31% increase in global issuance."

April 2 - Bloomberg (Jody Shenn): "Treasury Secretary Timothy Geithner's plan to rid banks and markets of devalued assets may be a boon for Pacific Investment Management Co.'s Bill Gross. The plan may reward investors with 20% annual returns on 'really toxic' mortgages bought at 45 cents on the dollar by allowing them to borrow six times their money with 'non-recourse' government-backed debt... Credit Suisse Group AG analysts Carl Lantz and Dominic Konstam wrote... Geithner's Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors."

April 1 - Bloomberg (Edgar Ortega): "For the first time in six months the market for convertible bonds is open for business as companies whose credit was shut off turn to the securities to refinance debt. Nine borrowers raised $3.2 billion this year with notes that can be exchanged for common shares as U.S. stocks rallied... Newell Rubbermaid Inc., Johnson Controls Inc. and Teradyne Inc., which hadn't sold debt for a year or more, are using convertibles to pay back loans."

March 31 - Bloomberg (Chris Peterson): "Two of the U.K. government ministers behind the radical series of market reforms in the 1980s known as Big Bang say they now question the system of unrestrained capitalism it unleashed, The Wall Street Journal reported, citing former Chancellor of the Exchquer Nigel Lawson and one-time Trade and Industry Secretary Cecil Parkinson. Both men, now members of Britain's upper house, the House of Lords say one unforeseen consequence of the deregulation they set in motion was the emergence of large international banking entities, whose global influence was largely untouched by regulators..."

Currency Watch:

April 3 - Bloomberg (Rich Miller and Simon Kennedy): "Global leaders took their biggest steps yet toward a new world order that's less U.S.-centric with a more heavily regulated financial industry and a greater role for international institutions and emerging markets. At the end of a summit in London, policy makers from the Group of 20... delivered a regulatory blueprint that French President Nicholas Sarkozy said turned the page on the Anglo-Saxon model of free markets by placing stricter limits on hedge funds and other financiers. The leaders also pledged to triple the resources of the International Monetary Fund and to hand China and other developing economies a greater say in the management of the world economy. 'It's the passing of an era,' said Robert Hormats, vice chairman of Goldman Sachs International, who helped prepare summits for presidents Gerald R. Ford, Jimmy Carter and Ronald Reagan. 'The U.S. is becoming less dominant while other nations are gaining influence.'"

April 3 - New York Times (Don Lee): "Reporting from Shanghai -- Could the world's currency of choice have the face of Mao Tse-tung on it, not George Washington? Quixotic or not, the Chinese are preparing for that day. In a series of what might be called baby steps, Chinese officials recently have moved to globalize the yuan and promote its influence overseas, with Shanghai designated as command central. Since last December, China has signed deals with six countries, including South Korea, Malaysia and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems... 'The central bank has set promoting the renminbi for payment settlements as the main task for this year's work,' said Shi Lei, an analyst...at Bank of China... China is also spreading the yuan's influence in Asia by making loans and investments in other countries... Meanwhile, Chinese officials have called attention to the risks of an international monetary system that relies on the dollar, which many analysts have begun to see as unstable because of heavy deficit spending embraced by Washington to combat the recession."

The dollar index declined 1.1% this week to 84.165 (up 3.5% y-t-d). For the week on the upside, the Mexican peso increased 5.8%, the South African rand 5.8%, the Brazilian real 3.7%, the British pound 3.6%, the Swedish krona 3.1%, the Australian dollar 2.9%, the New Zealand dollar 2.5%, the Norwegian krone 1.5%, the Taiwanese dollar 1.5%, and the Euro 1.5%. On the downside, the Japanese yen declined 2.4%. In the emerging currencies, the Polish zloty increased 6.7%, the Turkish lira 5.7%, the Czech koruna 5.1%, and the Hungarian forint 4.5%.

Commodities Watch:

Gold dropped 3.4% this week to $892 (up 1.1% y-t-d), and silver sank 4.0% to $12.73 (up 12.7% y-t-d). May Crude was little changed at $52.46 (up 18% y-t-d). May Gasoline slipped 0.7% (up 41% y-t-d), while May Natural Gas rallied 1.8% (down 32% y-t-d). Highflying May Copper jumped another 8.0% (up 41% y-t-d). May Wheat surged 11.1% (down 8% y-t-d), and May Corn gained 4.5% (down 1% y-t-d). The CRB index rallied 3.0% (down 0.3% y-t-d). The Goldman Sachs Commodities Index (GSCI) gained 1.9% (up 7.6% y-t-d).

China Reflation Watch:

April 2 - Bloomberg (Jian Guo Jiang): "China's new bank loans were about 1.6 trillion yuan ($234 billion) last month, Caijing Magazine reported, citing an unidentified bank executive. New loans at Industrial & Commercial Bank of China Ltd., Bank of China Ltd., China Construction Bank Corp. and Bank of Communications Co. were almost 800 billion yuan combined, the report said..."

March 31 - Bloomberg (Belinda Cao): "China's central bank said it's in talks to sign more currency-swap agreements to bolster international trade, after sealing six such accords since November 2008. The People's Bank of China has set up 650 billion yuan ($95 billion) worth of swaps to provide short-term liquidity... The central bank said the funding will promote bilateral trade and direct investment by allowing one country to pay for imports in another nation's currency... The central bank has entered swap agreements with Indonesia, Malaysia, South Korea, Hong Kong, Belarus and Argentina, broadening access to the yuan, which isn't freely convertible. They also underscore China's efforts to expand the country's economic reach in activities that don't involve the U.S. dollar."

April 2 - Bloomberg (Chua Kong Ho): "Shanghai's residential property sales rose to a 16-month high, China Business News reported, citing Yungching Realty Inc. Home sales in Shanghai totaled 1.5 million square meters in March, a 91% increase from the previous month..."

March 31 - Bloomberg (Chia-Peck Wong): "The pace of decline in Hong Kong prime office rents picked up in the first quarter, leading property agency DTZ to bring forward its forecast for leases dropping by 20% to the first half of 2009."

Japan Watch:

April 1 - Bloomberg (Jason Clenfield): "Japan's slide into its worst postwar recession drove manufacturer confidence to a record low and prompted executives to signal more spending and job cuts. The Bank of Japan's Tankan index of sentiment among large makers of cars, electronics and other goods slid more than forecast to minus 58... the lowest since the survey began in 1974."

April 1 - Bloomberg (Naoko Fujimura): "Toyota Motor Corp. and Nissan Motor Co. led a 32% drop in Japan's auto sales to the lowest level in 35 years..."

March 31 - Bloomberg (Toru Fujioka): "Japan's recession deepened as the unemployment rate surged to a three-year high, wages fell and job openings plunged at the fastest pace in three decades. The jobless rate rose to 4.4% last month from 4.1%... The ratio of jobs available to each applicant tumbled to 0.59 from 0.67, the biggest drop since 1974..."

April 2 - MarketWatch: "Japan's monetary base rose 6.9% in March from a year earlier, its fastest pace of expansion in nearly five years... The monetary aggregate reached 94.46 trillion yen ($956.3 billion), compared to 93.65 trillion yen in February. The rate of growth was the quickest since May 2004."

March 31 - Bloomberg (Lily Nonomiya): "Japan's public debt is likely to surge to 197.3% of gross domestic product next year, limiting the government's ability to spend more to revive growth, the Organization for Economic Cooperation and Development said. 'With the debt ratio projected to approach 200% in 2010, the scope for additional fiscal stimulus is limited,' the... organization said... 'It will be important to focus again on fiscal consolidation as the economy stabilizes.'"

India Watch:

April 1 - Bloomberg (M.C. Govardhana Rangan): "India Infrastructure Finance Co. and Reliance Gas Transportation Infrastructure Ltd. led Indian corporate bond sales to a record quarter... Companies raised 378 billion rupees ($7.45 billion) in the three months to March 31, 44% more than a year earlier..."

April 1 - Bloomberg (Kartik Goyal): "India's exports fell the most in at least 13 years... Merchandise shipments dropped 21.7% from a year earlier to $11.9 billion... That was the biggest decline since 1995... Imports fell 23.3%..."

Asia Reflation Watch:

April 1 - Bloomberg (Seyoon Kim): "South Korea's exports fell for a fifth month in March... Overseas shipments declined 21.2% to $28.4 billion from a year ago..."

Latin America Watch:

April 1 - Bloomberg (Diana Kinch and Andre Soliani): "Brazil's industrial output fell 17.0% in February from the year-ago month..."

Central Banker Watch:

April 2 - MarketNews International (Isobel Kennedy): "The New York Federal Reserve made net purchases of $32.9 billion in agency mortgage-backed securities in the week ended April 1, the second largest weekly purchase since the program began this past January. The New York Fed made gross purchases of $68.5 billion and sold $35.6 billion during the week. The New York Fed has been conducting purchases of agency MBS since January 7 this year but in the last two weeks those purchases have increased. That is undoubtedly due to the fact that the Fed recently expanded the potential size of its purchase program to $1.25 trillion this year from an original target of $500 billion."

April 1 - Bloomberg (Sandrine Rastello): "European Central Bank President Jean-Claude Trichet said the U.S. and Europe should be careful not to push spending and deficits too far, Le Monde reported... 'It's acknowledged on both sides of the Atlantic that you can't indefinitely increase spending and deficits: Instead of boosting households' and businesses' confidence, we would lose their trust, and the economy would be worse off instead of better off,' Trichet was quoted as saying."

March 31 - Financial Times (Daniel Pimlott): "The Organisation for Economic Co-operation and Development... urged the European Central Bank to cut interest rates closer to zero and begin quantitative easing... The call to the ECB to begin creating money in order to head off deflation comes after the central bank has been less aggressive in cutting interest rates than its American and British counterparts."

Fiscal Watch:

March 30 - Bloomberg (Ryan J. Donmoyer): "U.S. Treasury Secretary Timothy Geithner said some financial institutions will need substantial government aid, while warning against any attempt to tax investors who join a federal program to buy tainted assets from banks. 'Some banks are going to need some large amounts of assistance,' Geithner said..."

March 30 - Wall Street Journal (James R. Hagerty): "Defaults on home mortgages insured by the Federal Housing Administration... increased from a year earlier. ...7.5% of FHA loans were 'seriously delinquent' at the end of February, up from 6.2% a year earlier... The FHA's share of the U.S. mortgage market soared to nearly a third of loans originated in last year's fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance... That is increasing the risk to taxpayers if the FHA's reserves prove inadequate... As of January, the cities with the highest FHA default rates in January were Punta Gorda, Fla., at 18%; Detroit, 15.6%; Flint, Mich., 15.1%; Fort Myers-Cape Coral, Fla., 15%, and Elkhart-Goshen, Ind., 12.1%..."

GSE Watch:

April 1 - Bloomberg (Dawn Kopecki): "The Seattle Federal Home Loan Bank found 'material weaknesses' in how management accounted for losses on mortgage bond investments, a flaw that may take as long as six months to fix. The bank, a lending cooperative whose biggest customers include JPMorgan Chase & Co. and Bank of America Corp., failed to adequately oversee 'significant accounting estimates and assumptions' used to tally losses...Connie Waks, a bank spokeswoman, said 'rapidly changing market conditions' led to the deficiencies in valuations and accounting controls."

March 31 - Dow Jones (Prabha Natarajan): "Fannie Mae saw the largest increase in a month of its single-family delinquency rate among prime borrowers in January. The mortgage finance company said this rate shot up to a historic high of 2.77% in January from 2.42% in December, a record 35 bps increase... This compares to a delinquency rate of 1.06% in January 2008."

Real Estate Bubble Watch:

April 2 - Bloomberg (David M. Levitt): "Commercial property loans in default or foreclosure grew in the first quarter as the U.S. recession cut occupancies and the credit crisis stymied refinancing. Delinquent loans increased by 43% in the first three month of this year to $65.9 billion, according to... Real Capital Analytics Inc. That's up from $46 billion at the end of 2008. A total of 3,678 U.S. properties are now listed as in distress by Real Capital. Commercial real estate values have fallen at least 30% since their 2007 peak..."

April 2 - Wall Street Journal (Dawn Wotapka): "Manhattan's real-estate market has come crashing back to earth. Sales of units in newly constructed buildings dropped 67% in the first quarter, and closings slid 52% compared with a year earlier. Inventory climbed 29% to 12,336 listings in March, the highest level in more than eight years..."

March 31 - Bloomberg (Kathleen M. Howley): "The amount of Manhattan office space available for rent in the first quarter rose to 12% and rents fell as companies fired workers, FirstService Williams said."

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

March 31 - Bloomberg (Hui-yong Yu): "Boston's John Hancock Tower, the tallest skyscraper in New England, may be sold to lenders led by Normandy Real Estate Partners for about half the $1.3 billion paid in 2006 by Broadway Partners, which defaulted on its loan."

Unbalanced Global Economy Watch:

March 31 - Bloomberg (Brian Swint): "U.K. consumer confidence increased to the highest level since May after the Bank of England cut interest rates to a record low, GfK NOP said."

April 1 - Bloomberg (Colm Heatley): "Irish unemployment rose to a record in March, adding to pressure on the public finances as the government grapples with a soaring budget deficit... The unemployment rate jumped to 11% from 10.4%."

April 1 - Bloomberg (Jurjen van de Pol): "European unemployment increased more than economists expected in February to the highest in almost three years... The jobless rate in the euro zone rose to 8.5% from a revised 8.3% in January..."

April 1 - Bloomberg (Simone Meier): "German plant and machinery orders extended a record decline in February... Orders dropped 49% from a year earlier after declining an annual 42% in January..."

April 2 - Bloomberg (Hellmuth Tromm): "German car sales rose 40% in March to the highest since 1992, the German VDA auto association said. Sales rose 18% to 868,000 vehicles in the first quarter..."

April 1 - Bloomberg (Johan Carlstrom and Toby Alder): "Sweden's economy, the biggest in the Nordic region, will probably contract 4.2% this year and may shrink further, the government predicted."

March 31 - Bloomberg (Chris Kirkham): "Ukraine's economy shrank between 25% and 30% in the first two months of the year, President Viktor Yushchenko said..."

March 31 - Bloomberg (Torrey Clark): "Russia's trade surplus may contract by about 75% to 39.3 billion rubles ($1.16 billion) this year, Vedomosti reported..."

March 31 - Bloomberg (Steve Bryant): "Turkey's economy contracted for the first time in seven years in the fourth quarter... Gross domestic product fell 6.2% from a year earlier..."

Bursting Bubble Economy Watch:

April 3 - Bloomberg (Bob Willis): "The U.S. unemployment rate climbed in March to the highest level since 1983 and the economy lost more than 650,000 jobs for a fourth consecutive month, a sign renewed reductions in spending might slow a recovery. The jobless rate increased to 8.5%... from 8.1% in February... Employers cut 663,000 workers from staff, bringing total losses since the recession began to about 5.1 million, the biggest slump in the postwar era."

April 1 - Econoplay.com (Gary Rosenberger): "Employment prospects have turned even dimmer for this year's graduating class as the two mainstays of campus recruiting - big banks and big consulting firms - bowed out in dramatic fashion, campus career centers report. Public sector hiring is almost as disappointing. State and local agencies are under severe budgetary constraints, while hiring at the Federal level is too time-consuming and convoluted to make much of a dent. Some who did land jobs last fall (before the magnitude of the economic downturn was fully evident) are now being told that their start dates will be moved into 2010. Yet wages appear to be maintaining."

April 2 - Washington Post (Amy Shipley): "Players in major sports will face salary decreases and poorly run franchises and sports entities will fail as the full force of the economic crisis hits the sports world in the coming years, according to several members on a high-profile panel at a sports business conference... Previously negotiated contracts -- such as television and naming rights deals -- have thus far blunted the effects of the crisis in sports, but as those deals expire they will bring significant financial travails..."

April 2 - Bloomberg (Michael McDonald and John Lauerman): "Harvard University is planning to cut yearly capital spending by as much as half as it faces a 30% drop in its endowment. Harvard... planned to spend $1 billion yearly for three to four years to upgrade its campus... The school now may trim as much as $500 million a year from its plans to help it weather the recession..."

April 1 - Bloomberg (Tim Mullaney): "No startups staged initial public offerings for a second quarter in a row, marking the first time in at least 38 years that six months have passed without an IPO of a venture-capital-backed company."

California Watch:

April 1 - Bloomberg (Michael B. Marois): "California will likely need $11 billion to pay bills in what may be its largest cash-flow borrowing since 2003, state finance officials said. The state will have exhausted all available cash by August along with $19 billion in internal funds and may need to bridge a $10.6 billion gap between projected monthly expenditures and revenue..."

New York Watch:

April 1 - Bloomberg (Michael Quint): "New York lawmakers began voting on bills for a record $131.8 billion budget crafted by Governor David Paterson and legislative leaders after weeks of closed- door negotiations... New York faced a $17.7 billion budget deficit for this fiscal year, up from $5 billion forecast a year ago... The gap was closed with $5.1 billion of spending cuts, $5.2 billion of new or increased taxes, $6.2 billion of federal stimulus money and $1.1 billion of one-time revenue..."

March 29 - Bloomberg (Michael Quint): "New York Governor David Paterson agreed with legislative leaders on a budget plan that calls for higher income taxes on households earning more than $300,000..."

April 2 - Bloomberg (Oshrat Carmiel): "Manhattan co-op prices dropped the most since 1995 and transactions for all apartments plummeted 48% in the first quarter from a year earlier as the recession and Wall Street unemployment cut demand. The median price for co-operative apartments fell 22% to $587,500, according to...Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate."

Muni Watch:

March 31 - Bloomberg (Jeremy R. Cooke): "U.S. municipal bonds headed for their best quarterly performance in 4 1/2 years... The total-return Municipal Master Index from Merrill Lynch & Co. gained 4.02% this year through last week..."

April 2 - Bloomberg (Terrence Dopp): "The New Jersey pension fund for teachers and other school employees is short $15.1 billion for estimated future payments. The Teachers' Pension and Annuity Fund had $36.6 billion in assets as of June 20, 2008, and $51.7 billion in liabilities, resulting in a funding ratio of 70.8%..."

Speculator Watch:

April 2 - Dow Jones: "Bridgewater Associates has decided against participating in the Treasury's plan to get private investors to buy banks' toxic assets, The New York Post reported... Bridgewater's Ray Dalio cited economic and political concerns with the Public-Private Investment Program.'When the program was first announced, we were originally interested' because the leverage the government was promising made the assets cheaper, Dalio wrote. 'However, as things now stand, very little leverage is actually being offered via the 'Legacy Securities Program,'" he wrote... He also said the program is ripe for conflicts. 'The managers are clearly in a conflict-of-interest position because they have both the government and the investors to please and because they will get their fees regardless of how these investments turn out,' Dalio wrote. He also questioned the program's political risks, saying the limited number of managers 'raises possibilities (or at least perceived possibilities) of them colluding because they all know each other.'"

March 31 - Bloomberg (Jason Kelly and Jonathan Keehner): "Apollo Global Management LLC, the private-equity firm run by Leon Black, and Colony Capital LLC may start funds to participate in the Obama administration's program to buy distressed mortgage debt from U.S. banks. The firms are among buyout groups that are considering raising as much as $1 billion each to invest in government- backed deals..."

April 1 - Financial Times (Anuj Gangahar): "The number of hedge funds managing more than $1bn fell by more than 40% globally last year... The annual hedge fund database survey from PerTrac Financial Solutions... says about 200 funds held assets in excess of $1bn, down from 350 in the previous year's survey... It found a total of about 22,350 distinct investment vehicles among those databases at the end of last year. Total assets stood at $1,330bn, down more than a third from the year before"

March 31 - Bloomberg (Jonathan Keehner and Jason Kelly): "Cerberus Capital Management LP, the $27 billion investment firm founded by billionaire Stephen Feinberg, may use stakes in a new fund to pay investors seeking withdrawals from a hedge fund after redemptions surged. Setting up a so-called special purpose vehicle to meet redemption requests from Cerberus Partners LP, which capped withdrawals in December after its assets slumped, is one option being considered by the...firm..."

Periphery Rising:

The Shanghai Composite, China's leading equities index, has posted a 33% y-t-d gain. Taiwan's Taiex index has gained 20.4% so far in 2009, with major indexes in South Korea up 14.2%, Indonesia 10.7%, Philippines 8.3%, Hong Kong 8.7%, and India 7.3%. The Russian RTS index has posted an 18.1% y-t-d gain, with fellow "Bric" nation Brazil up 18.0%. Benchmark Brazilian dollar bond yields are down 60 bps over the past month to 6.40%, and Mexico's dollar bond yields have declined 100 bps to 5.91%.

This week, G20 leaders lent extraordinary support to global reflation efforts. Anthony Failoa and Mary Jordan captured the essence of the G20's accomplishment in their article featured in today's Washington Post:

"The $1.1 trillion pledged by world leaders to combat the worst economic crisis since World War II effectively amounts to a rescue package for both poor and rich countries, potentially including the United States. The bulk of that money will be channeled through the Washington-based International Monetary Fund, which emerges from the summit with a vastly redefined and enhanced mission. The IMF has long focused almost exclusively on helping developing nations in crisis. As part of Thursday's agreement, it will take the extraordinary step of effectively extending a $250 billion line of credit to boost liquidity in nations hobbled by the credit crunch, with the bulk of the funds going to the industrialized nations of Europe, United States and Japan. The fact that the United States, for instance, could draw as much as $42.5 billion of those funds to help jump-start domestic lending underscores the breadth of the global plan, which has both short-and long-term fixes for a crisis that has hit nations small and large, wealthy and not."

In our age of really big numbers, the G20's pledge of $1.0 TN of loans and guarantees for new IMF (bailout) programs and another $100bn for World Bank lending didn't raise eyebrows. It is nonetheless an incredible case of institutions virtually given up for dead coming back to adrenaline-induced vivacity - and likely sporting greater influence than ever before. "Developing" economies - having feared they had nowhere to turn for help in stabilizing their financial systems and economies - suddenly know precisely where they will be greeted with open arms. IMF director Dominique Strauss-Kahn celebrated the organization's newfound "firepower" and exclaimed, "The IMF is back." The International Monetary Fund's new resources and mandate must have the "Periphery" pinching themselves with giddiness. Markets are giddy.

If pledges and commitments are indeed fulfilled, the IMF will possess a formidable $750bn war chest to do battle with. In addition, the IMF will expand ("print") its own currency of account - "Special Drawing Rights" (SDRs) by $250bn - to be distributed to member countries both large and small. This is a nice win for the Chinese and Russian policymakers that have called for SDRs to play an expanding role as a world reserve "currency."

Today, from Bloomberg's Rich Miller and Simon Kennedy: "Global leaders took their biggest steps yet toward a new world order that's less U.S.-centric with a more heavily regulated financial industry and a greater role for international institutions and emerging markets... 'It's the passing of an era,' said Robert Hormats, vice chairman of Goldman Sachs International, who helped prepare summits for presidents Gerald R. Ford, Jimmy Carter and Ronald Reagan. 'The U.S. is becoming less dominant while other nations are gaining influence.'

The days of the U.S. dictating the workings of the Group of Five (the U.S., France, Germany, Japan, the UK), later the G-6 (Italy was later included), the G-7 (Canada added in 1976), the G-8 (when Russia was included) or even the G8+5 have given way to altogether different power dynamics with the relatively nascent G20 (Group of Twenty Finance Ministers and Central Bank Governors).

Having accumulated Trillions of (chiefly dollar) reserves during the Bubble years, China, Russia, India, Brazil, OPEC and others today wield unprecedented power and influence when it comes to the course of international policymaking. U.S. influence has waned remarkably. And the days of the Washington-based IMF responding to global crisis by imposing monetary tightness, fiscal discipline and economic overhaul (i.e. SE Asia 1997) are over. From an analytical perspective, the (U.S.) "Core" and the ("developing") "Periphery" of the world system are these days atypically like-minded when it comes to supporting the cause of unbridled global bailouts, stimulus, and reflationary measures more generally. It all leave ample fodder to fuel the ongoing inflation versus deflation debate. Yet when pondering the prospective global monetary structure perhaps the strongest case is to be made for Ongoing Monetary Disorder.

One could argue that the "Core" has made such a mess of domestic and global finance that a shift of power out to the "Periphery" couldn't make things any worse. From a Credit perspective, however, there are important nuances. For decades, the U.S.-dominated "dollar reserve" system at least at the margin constrained "Periphery" Credit systems. Regrettably, this dollar-based system failed to discipline the U.S. Credit system, and this failing has led to the failure of this monetary structure.

The dysfunctional global "system's" recurring boom and bust cycles saw the "Periphery" flooded with hot "money," only to then have these Credit systems crushed by the inevitable reversal of speculative flows. The "Periphery" became absolutely fed up. More importantly, they are now finally in a position to do something about it. A new system is in the works that would seemingly ensure that even the "Periphery" becomes insulated from market discipline.

Today from the Los Angeles Times' Don Lee: "Could the world's currency of choice have the face of Mao Tse-tung on it, not George Washington? Quixotic or not, the Chinese are preparing for that day. In a series of what might be called baby steps, Chinese officials recently have moved to globalize the yuan and promote its influence overseas, with Shanghai designated as command central. Since last December, China has signed deals with six countries, including South Korea, Malaysia and most recently Argentina, for currency swaps that would inject Chinese money into foreign banking systems. That would allow foreign companies to pay for goods they import from China in yuan, bypassing the dollar... Beijing is also taking initiatives to use the yuan... to settle trade accounts between some Chinese provinces and neighboring states... 'The central bank has set promoting the renminbi for payment settlements as the main task for this year's work,' said Shi Lei, an analyst... at Bank of China... China is also spreading the yuan's influence in Asia by making loans and investments in other countries..."

The media and Internet are abuzz with commentary contrasting the declining U.S. position to that of China Rising. For the moment, my analytical focus is not in passing judgment on disconcerting secular trends. I'm instead trying to figure out the more immediate consequences of (moving-target) reflationary policymaking at home and abroad. Many analysts that focus primarily on the U.S. Credit system and economy see only an intractable deflationary spiral. Examining the incredible global policy and monetary backdrop, I see potential "firepower" that I do not want to dismiss or underestimate.

When the technology Bubble burst in 2000, there was an unappreciated fledgling Mortgage Finance Bubble poised to balloon to unimaginable extremes. I have theorized that a Global Government Finance Bubble today exerts a robust inflationary bias, counterbalancing the collapse of the Wall Street Bubble. The extent and duration of this ongoing "counterbalancing" is an open issue of great significance. I view the resuscitation of the IMF and World Bank as critical developments for the unfolding Government Finance Bubble thesis. I view the heightened role of the "Periphery" in global matters as supportive of global "reflation." And, most importantly, I view the dynamic of an increasingly assertive China as integral to global reflationary efforts.

Back in 2000, conventional thinking (including that of the Fed) was convinced the collapse of technology stocks equated to the bursting of THE U.S. Bubble. Similarly, today the bursting of the U.S. Bubble is thought to correspond with bursting of Bubbles across the globe. Especially when one examines the horrendous numbers coming out of its export sector, it is reasonable to presume that China is intertwined in the U.S. bust. It's my view that China is in fact a historic Bubble - and that it may have commenced what may prove a powerful new phase of inflationary excess.

It is commonly appreciated that China has about $2 TN in reserves to go with its population of 1.3 billion. This alone provides China unprecedented reflationary capabilities. China also maintains a tight relationship between its banking system and government policymakers, and it is worth noting that recent reports have Chinese bank lending posting another eye-opening month of expansion ($234bn!). China is also now aggressively using currency swaps and other financing mechanisms to drive exports and trade, especially in Asia. There is also increased talk of the Chinese government providing global vendor financing for its major industries, a potentially huge development from both China and global perspectives. Clearly, if Chinese industrial policy seeks to elevate the status of key domestic industries, current global tumult provides quite a rare opportunity to press decidedly ahead. Moreover, if China moves to develop its northern region as it has developed the south, there is really no bounds to the amount of "money" that could be spent.

On a short-term basis, the Chinese are (as always) fixated on maintaining social stability. As an analyst, I have to presume this is constructive to reflationary policymaking - especially considering the extraordinary nature of today's global financial and economic risks. To what extent longer-term ambitions of global power and influence also work to spur near-term Chinese stimulus is more difficult to gauge. But until I see something to convince me otherwise, I will assume that today's global backdrop provides China an opportunity to focus on - and move forward with - its long-term objectives. In the age of synchronized global stimulus, I don't see why China wouldn't "compete" fiercely in such endeavors as well. And I believe this dynamic could very well prove a powerful force in spurring global reflation. History may look back at this week's G20 meeting in London as a key inflection point. The "Core" is in shambles, yet the surprising development may turn out to be the Periphery Rising (inflating).


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