For the week, the S&P500 declined 1.9% (down 2.7% y-t-d), and the Dow fell 1.6% (down 7.2% y-t-d). The Morgan Stanley Cyclicals sank 3.6% (up 10.2%), and the Transports lost 1.5% (down 12.0%). The Morgan Stanley Consumer index decreased 1.6% (down 2.1%), and the Utilities fell 1.4% (down 7.9%). The S&P 400 Mid-Caps dropped 3.2% (up 1.6%), and the small cap Russell 2000 fell 3.3% (down 3.7%). The Banks declined 2.3% (down 22.7%), and the Broker/Dealers dropped 2.8% (up 20.2%). The Nasdaq100 slipped 1.8% (up 17.2%), and the Morgan Stanley High Tech index fell 1.8% (up 27.7%). The Semiconductors dropped 1.8% (up 22.1%), and the InteractiveWeek Internet index gave back 2.1% (up 34.0%). The Biotechs dropped 2.7% (down 0.1%). With Bullion down $19.50, the HUI gold index sank 8.4% (up 3.8%).

One-month Treasury bill rates ended the week at 15 bps, and three-month bills closed at 18 bps. Two-year government yields dropped 10 bps to 0.82%. Five-year T-note yields sank 21 bps to 2.17%. Ten-year yields dropped 21 bps to 3.30%. The long-bond saw yields end the week bps to 4.3%. The implied yield on 3-month December '09 Eurodollars bps to 0.9%. Benchmark Fannie MBS yields were down 19 bps to 4.35%. Agency 10-yr debt spreads widened 2 to 105 bps. The 2-year dollar swap spread declined 1.75 to 39.5 bps; the 10-year dollar swap spread declined 3.5 to 17.75 bps; and the 30-year swap spread declined 10.75 to negative 25.0 bps. Corporate bond spreads were mixed. An index of investment grade bond spreads was 8 wider to 197 bps, while an index of junk spreads narrowed 6 to 884 bps.

Investment grade issuers included Oracle $4.5bn, Meccanica Holdings $800 million, MetLife $500 million, Interstate P&L $300 million, Mid-America Energy $250 million, Tampa Electric $250 million, and Wisconsin P&L $250 million.

Junk bond funds saw inflows of $269 million (from AMG). The list of recent junk issuers included Wind Acquisition $2.0bn, Toys R Us $950 million, AgriBank $500 million, Regal Cinemas $400 million, Discover Financial $400 million, Royal Caribbean $300 million, Targa Resources $250 million, Cytec Industries $250 million, Bill Barrett Corp $250 million, Commercial Barge Line $200 million, and Real Mex Restaurants $130 million.

I saw no convert issuance this week.

International dollar debt issuers included Petrobras $2.75bn, National Bank of Australia $2.75bn, Barclays $2.5bn, Peru $2.25bn, Poland $2.0bn, Export-Import Bank of Korea $1.5bn, Macquarie Group $1.2bn, Australia $1.2bn, BNP Paribas $550 million, Digicel $510 million, Korea Gas $500 million, Empresa Nacional $300 million, and Commonwealth Bank of Australia $250 million.

U.K. 10-year gilt yields added one basis point to 3.74%, while German bund yields declined 8 bps to 3.26%. The German DAX equities index dropped 2.8% (down 4.9%). Japanese 10-year "JGB" yields dipped 2.5 bps to 1.295%. The Nikkei 225 sank 5.4% (up 4.8%). Emerging debt markets held their own, while equities were mostly under pressure. Brazil's benchmark dollar bond yields declined 2 bps to 5.94%. Brazil's Bovespa equities index fell 3.7% (up 30.9% y-t-d). The Mexican Bolsa declined 1.6% (up 5.7% y-t-d). Mexico's 10-year $ yields added one basis point to 5.95%. Russia's RTS equities index sank 12.1% (up 32.2%). India's Sensex equities index dropped 9.4% (up 40.0%). China's Shanghai Exchange added 0.8% (up 71.0%).

Freddie Mac 30-year fixed mortgage rates dropped 12 bps to a 6-wk low 5.20% (down 117bps y-o-y). Fifteen-year fixed rates fell 8 bps to 4.69% (down 122bps y-o-y). One-year ARMs declined 12 bps to 4.82% (down 35bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 13 bps to 6.37% (down 94bps y-o-y).

Federal Reserve Credit declined $9.5bn last week to $1.977 TN. Fed Credit has declined $269bn y-t-d, although it expanded $1.090 TN over the past 52 weeks (123%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 7/8) jumped $20.5bn to a record $2.787 TN. "Custody holdings" have been expanding at a 20.7% rate y-t-d, and were up $437bn over the past year, or 18.6%.

Year-to-date total US ABS issuance of $75.3bn (tallied by JPMorgan's Christopher Flanagan) compares to the $110.3bn from the same period of 2008. U.S. CDO issuance of $23.7bn compares to last year's y-t-d $16.9bn.

M2 (narrow) "money" supply dropped $36bn to $8.349 TN (week of 6/29). Narrow "money" has expanded at a 3.7% rate y-t-d and 9.1% over the past year. For the week, Currency slipped $1.5bn, and Demand & Checkable Deposits fell $14.7bn. Savings Deposits dropped $16.6bn, and Small Denominated Deposits declined $4.6bn. Retail Money Funds added $1.2bn.

Total Money Market Fund assets (from Invest Co Inst) gained $4.4bn to $3.668 TN. Money fund assets have declined $162bn y-t-d, or 8.2% annualized. Money funds expanded $162bn, or 4.6%, over the past year.

Total Commercial Paper outstanding was unchanged last week at $1.136 TN. CP has declined $545bn y-t-d (62.4% annualized) and $623bn over the past year (35.4%). Asset-backed CP fell $11.0bn to $457bn, with a 52-wk drop of $294bn (39.2%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were down $32bn y-o-y to $6.817 TN (last week $6.806TN). Reserves have increased $52bn year-to-date.

Global Credit Market Watch:

July 7 - Bloomberg (James G. Neuger): "The world's most affluent nations will take decades to work off the biggest buildup in debt since World War II. The political costs may be permanent, laid bare at this week's Group of Eight summit of leading industrial powers. Bank bailouts and recession-fighting measures will explode the debt of the advanced economies to at least 114% of gross domestic product in 2014, more than triple the 35% of the main emerging economies including China, the International Monetary Fund forecasts. The run-up in debt has hastened a power shift that is sapping the industrial world's authority to impose its economic doctrine, currency arrangements or greenhouse-gas reduction strategies. Even some G-8 officials acknowledge that the group has lost its grip amid the global recession they spawned. The eight-nation forum... is 'a lot less relevant given its makeup and given developments in the world,' French Finance Minister Christine Lagarde said... 'Big players, like emerging economies, India, China or Mexico, are invited, but they're given only a jump seat outside of the main summit.'"

June 30 - Reuters (Jonathan Stempel): "JPMorgan Chase... was the world's top underwriter of stocks and bonds in the second quarter and first half... Global equity issuance more than tripled in the second quarter from the first quarter -- though much came from banks rebuilding capital -- while U.S. junk bond sales roughly quadrupled, according to... Thomson Reuters... Second-quarter debt and equity issuance totaled nearly $1.79 trillion, down 6% from a year earlier but up 2% from the first quarter. First-half volume of $3.53 trillion was up 7% from a year earlier."

July 1 - Wall Street Journal (Randall Smith): "A burst of new issues by financial institutions seeking to pay back government investments, plus a big stock-market rebound, fueled a pickup in securities underwriting in the second quarter... The volume of new second-quarter stock and bond sales rose to $1.94 trillion, up 9% from the first quarter but down 0.5% from the second quarter of 2008, according to Dealogic... The good news was that new-issue volume for the first half of the year was more than double that of the second half of 2008... And the volume of new stock sales... more than tripled to $273.4 billion from the anemic pace of the first quarter, and hit the highest level in 1½ years..."

June 30 - Reuters (Dena Aubin): "U.S. high-grade corporate bond sales fell in the first half... Excluding government-backed sales, investment-grade corporate bond sales fell to $384 billion from $503 billion a year earlier, according to Thomson Reuters... U.S. junk bond sales rose to $58 billion from $31 billion a year earlier... Counting $160 billion of government-backed issuance in the first half, high-grade bond sales by U.S. corporations were actually higher than a year earlier.

June 30 - Reuters (Julie Haviv): "U.S. mortgage-backed securities issuance plunged in the first six months of 2009... Thomson Reuters said U.S. mortgage-backed securities issuance totaled $87.5 billion in the first half of 2009, down sharply from $143.2 billion in the same period a year earlier..."

June 30 - Reuters: "U.S. asset-backed securities issuance fell 30% in this year's second quarter... ABS issuance fell to $49.7 billion in the second quarter from $71.6 billion of debt sold in 2008's second quarter."

Government Finance Bubble Watch:

July 7 - Bloomberg (Shamim Adam): "The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was 'a bit too small,' said Laura Tyson, an adviser to President... Obama. The current plan 'will have a positive effect, but the real economy is a sicker patient,' Tyson said... Tyson...told reporters that the U.S. can afford to pay for a second package, even as the fiscal deficit soars. She said the budget shortfall is 'likely to be worse' than the equivalent of 12% of gross domestic product that the administration forecast for 2009 and the 8% to 9% it projected for next year. The professor at the University of California's... School of Business downplayed worries from China and other countries with dollar reserves that the U.S. will let inflation soar as the deficit expands. 'The concern is that the U.S. will have to inflate away its debt. I do not think that is a valid concern... The Federal Reserve is not going to let the U.S. government inflate away its debt.'"

July 9 - Bloomberg (Laura Marcinek): "Government insured home loans jumped to 36 percent of all U.S. mortgage applications in June, the highest since 1990, the Mortgage Bankers Association said. Federal Housing Administration and Veterans Administration loan applications increased in market share from 25.7 percent in May and from 27 percent a year earlier, the Washington-based trade group said today in a statement."

July 8 - Bloomberg (Catherine Dodge): "About $29 billion from President Barack Obama's $787 billion economic stimulus package has been provided to state and local governments.... Most of the money is allocated for health care and education and makes up about 60% of the stimulus funding states and local governments will get for fiscal 2009... More than 90% of those funds are being used to maintain benefits under Medicaid, the government health-care plan for low-income Americans, and to shore up education programs, the report said."

July 7 - Bloomberg (Svenja O'Donnell): "The Bank of England should ask the government for permission to start a further phase in its money- printing program because a recovery from the recession 'is not guaranteed,' the British Chambers of Commerce said....The central bank should extend its asset- purchase program to the full 150 billion pounds authorized... and it should seek permission to spend even more, the BCC said."

July 6 - Bloomberg (Theophilos Argitis): "Canadian Finance Minister Jim Flaherty's budget will remain in deficit through 2014, longer than advertised, generating shortfalls of C$156 billion ($134bn) over the next five years, according to a new report."

Currency Watch:

July 9 - Financial Times (George Parker, Guy Dinmore, Krishna Guha and Justine Lau): "China has launched its highest-profile criticism of the dominant role of the US dollar as a global reserve currency at a meeting of the world's biggest economies. Dai Bingguo, Chinese state councillor, raised the issue... when he joined the leaders of four other emerging economies for talks with the leaders of the Group of Eight industrialized nations... The remarks, in front of Mr Obama, caused concern among western leaders, some of whom fear that even discussion of long-term currency issues could unsettle markets and undercut economic recovery... 'We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies exchange rates and promote a diversified and rational international reserve currency system,' said Mr Dai..."

July 8 - Bloomberg: "Huang Xinyuan, who sells mining equipment and pesticides to customers across China's border with Vietnam, says he no longer wants payment in U.S. dollars and prefers the yuan. Sales using the greenback at Guangxi Jinbei Group, where Huang is vice president, dropped to 30% of contracts in 2008 from 87% in 2007. The yuan, which has gained 21% since it was allowed to strengthen against the dollar starting in 2005, offers greater stability, he said."

The dollar index was little changed this week at 80.26. For the week on the upside, the Japanese yen gained 3.74% and the Swiss franc 0.1%. On the downside, the South African rand declined 3.8%, the Mexican peso 3.4%, the Australian dollar 2.3%, the Brazilian real 2.1%, the Swedish krona 1.9%, the Norwegian krone 1.7%, the South Korean won 1.3%, the British pound 0.8% and the Euro 0.3%.

Commodities Watch:

Gold ended the week down 2.1% to $913 (up 3.5% y-t-d). Silver sank 5.5% to $12.67 (up 12.1% y-t-d). August Crude dropped $7.04 to $59.69 (up 34% y-t-d). August Gasoline sank 7.2% (up 56% y-t-d), and August Natural Gas fell 6.8% (down 40% y-t-d). September Copper declined 3.9% (up 57% y-t-d). August Wheat declined 1.9% (down 15% y-t-d), and August Corn fell 5.1% (down 19% y-t-d). The CRB index dropped 5.0% (up 1.7% y-t-d). The Goldman Sachs Commodities Index (GSCI) sank 7.2% (up 15.9% y-t-d).

China Reflation Watch:

July 8 - Bloomberg: "China's new lending more than doubled in June from a month earlier, increasing concerns bad loans and asset bubbles will emerge amid a credit boom. New lending was 1.53 trillion yuan ($224 billion)... bringing total lending this year to 7.4 trillion yuan... The government is countering an export collapse by flooding the economy with money to fuel domestic demand. Rapid credit growth poses a risk to the nation's lenders and a concentration of credit in some industries and businesses may damage the stability of the financial system, the banking regulator said..."

July 7 - Bloomberg: "China's banking regulator said rapid credit growth poses a risk to the nation's lenders and a concentration of credit to some industries and businesses may damage the stability of the financial system. Banks should offer more syndicated loans to share the risk of defaults, Wang Huaqing, the disciplinary secretary of the China Banking Regulatory Commission, said... Chinese banks advanced a record 5.84 trillion yuan ($850bn) of new loans in the first five months, almost triple the amount of a year earlier..."

July 9 - Financial Times (Patti Waldmeir): "China's passenger car sales rose 48% in June from the same month last year, consolidating a remarkable recovery that has catapulted China to top position in the world vehicle market so far this year... The strength of China's vehicle sales - total vehicles sales rose 18% for the first half year to 6.1m from the same period last year - has surprised auto market analysts, government officials and even the country's automakers, many of whom are scrambling to produce enough vehicles to meet demand. Some auto dealerships have reported shortages of vehicles..."

July 8 - Bloomberg: "Crude steel production by China, the largest maker, rose to 45.4 million metric tons in June, the highest level this year... The output was 1% less than the record 46.94 million tons set June, 2008, and was 7% higher than a month ago..."

India Watch:

July 8 - Bloomberg (Kartik Goyal): "India's industrial production increased at the fastest pace in eight months as record-low interest rates and government stimulus measures helped revive demand and investment. Output at factories, utilities and mines jumped 2.7% in May from a year earlier...Economies across Asia are starting to show signs of recovery from the worst global recession since the Great Depression..."

Asia Bubble Watch:

July 11 - Bloomberg (Arijit Ghosh): "Indonesia's economy may double in the next six years as the world's biggest exporter of power-station coal and largest producer of palm oil taps surging demand from India and China, CLSA Asia-Pacific Markets said. China, India and Indonesia will generate $10 trillion of wealth for investors by 2015, Nicholas Cashmore, head of Indonesia research at CLSA Asia-Pacific Markets, said in a note titled "Chindonesia: Enter the Komodo," a reference to the reptile found only in eastern Indonesia. The three economies are Asia's 'next growth triangle,' he said."

Latin America Watch:

July 7 - Bloomberg (Valerie Rota and Lester Pimentel): "Brazil's ability to react faster to the global credit crisis than Mexico is prompting credit rating companies to reassess Latin America's two largest economies, according to Goldman Sachs... Moody's... put Brazil on review for a credit rating increase yesterday as Standard & Poor's and Fitch Ratings reiterated concerns that Mexico may fail to pass tax legislation needed to stave off a rating cut..."

Unbalanced Global Economy Watch:

July 7 - Bloomberg (Gabi Thesing): "German manufacturing orders jumped the most in almost two years in May, adding to signs that the deepest economic slump since World War II is abating. Orders, adjusted for seasonal swings and inflation, rose 4.4% from April..."

Bursting Bubble Economy Watch:

July 8 - Bloomberg (Alan Bjerga): "A record 33.8 million people received food stamps in April, up 20% from a year earlier, as unemployment surged toward a 26-year high... It was the fifth straight month of record participation in the Supplemental Nutrition Assistance Program, according to the U.S. Department of Agriculture, and up 1.8% from the prior month. Total spending was $4.5 billion, up 19% from the previous all-time high reached in March, the USDA said."

July 8 - Miami Herald (Matthew Haggman): "As Miami-Dade County commissioners worked late into the night to finalize financing for the Florida Marlins stadium last week. Commissioner Katy Sorenson posed a simple question: What's the total cost of financing going to be? 'I don't know off the top of my head,' County Manager George Burgess replied. With bonds issued last week in New York, the total cost is finally in black and white: $2.4 billion, spread over 40 years... The total exceeds earlier estimates... The prime reasons for the rising figure: The county is paying higher interest rates than anticipated -- and is putting off huge pieces of the repayment until decades down the road."

Central Banker Watch:

July 6 - Bloomberg (Michael McKee): "The Federal Reserve should break with past policy and try to identify and deflate developing asset bubbles before they can damage the U.S. economy, New York Federal Reserve Bank President William Dudley said. While interest-rate policy may not be the appropriate tool for popping bubbles, Fed officials have 'other instruments in their toolbox' that could be used...The Fed's view has been that bubbles can only be identified in hindsight, and all the central bank can do is be prepared to clean up after they burst. The current financial crisis shows that policy is a mistake, Dudley said. 'Asset bubbles may not be that hard to identify,' he said. 'This crisis has demonstrated that the cost of waiting to clean up asset bubbles after they burst can be very high.'"

Real Estate Bust Watch:

July 8 - Bloomberg (Hui-yong Yu): "U.S. office vacancies rose to the highest in four years in the second quarter as job losses mounted and demand for space declined, Reis Inc. said. The vacancy rate increased to 15.9% from 13.2% a year earlier..."

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

July 8 - Bloomberg (Hui-yong Yu): "Vacancies at U.S. retail properties rose in the second quarter to the highest in at least a decade... Reis Inc. said. Shopping center vacancies climbed to 10% from 8.1% a year earlier... Mall vacancies increased to 8.4% from 6.3% a year earlier..."

California Watch:

July 10 - Bloomberg (William Selway and Ryan Flinn): "California Governor Arnold Schwarzenegger shuttered government offices today and the biggest banks were poised to stop accepting IOUs the state issued amid a political deadlock over a $26 billion budget deficit. The shutdown is part of Schwarzenegger's order forcing more than 200,000 employees to take a third unpaid day off every month to save cash. Meanwhile, Bank of America Corp., JPMorgan Chase & Co., and Wells Fargo & Co. said they plan to stop exchanging California's IOUs for cash after today, threatening to strain businesses and individuals owed money by a state whose finances have been roiled by the U.S. recession."

Speculator Watch:

July 8 - Bloomberg (Katherine Burton and Saijel Kishan): "John Meriwether, who roiled global markets when Long-Term Capital Management LP collapsed in 1998, plans to shut his current hedge fund... JWM Partners LLC is closing its main Relative Value Opportunity II fund after losing 44% from September 2007 to February 2009. Meriwether... returned an average of 1.46% a year with his new fund since opening in 1999..."

Speculator: Policymaker Foe or Friend?

I believe it was sometime in late 2002 - or perhaps early 2003. I recall one of the major macro hedge fund managers appearing on CNBC. He made what I thought at the time was an extraordinary comment: "The government wants me to buy junk bonds, so I'm buying junk bonds."

It was always my view that Fed chairman Greenspan directly targeted the leveraged speculating community, as necessary, for use as a mechanism for monetary stimulus/reflation. The Greenspan Fed would actively manipulate market interest-rates, hence speculative profits. If financial crisis erupted - such as with the collapse of Long-Term Capital Management, the bursting of the Tech Bubble, or 9/11 - Greenspan would immediately collapse short-term borrowing costs, assure the marketplace ample liquidity and, accordingly, inflate the price of most fixed income securities.

This signaled to the leveraged players that it was an opportunistic time to buy risk assets - especially corporate debt and mortgages. These purchases would reduce market borrowing costs, increase Credit Availability, and boost marketplace liquidity. And like clockwork, ultra-loose financial conditions would work their magic on the equities and real estate prices, as well as the real economy. After awhile, speculators simply loaded up on risk assets - anticipating the next crisis and Fed-induced speculative profit bonanza.

With the Fed able and willing to manipulate speculative profits and (along with the GSE) "backstop" marketplace liquidity, leveraged speculation flourished and expanded to unimaginable dimensions. The leveraged speculating community evolved into the most powerful monetary force in history - and the Federal Reserve was soon playing with a bonfire.

July 8 - New York Times (Edmund L. Andrews): "Reacting to the violent swings in oil prices in recent months, federal regulators announced... that they were considering new restrictions on 'speculative' traders in markets for oil, natural gas and other energy products. The move is a big departure from the hands-off approach to market regulation of the last two decades. It also highlights a broader shift toward tougher government oversight... In the case of oil and gas trading, regulators made it clear that they were willing to move, without waiting for Congress to act on Mr. Obama's overhaul, invoking their existing powers. The Commodity Futures Trading Commission said it would consider imposing volume limits on trading of energy futures by purely financial investors... 'My firm belief is that we must aggressively use all existing authorities to ensure market integrity,' said Gary Gensler, chairman of the commission... He said regulators would also examine whether to impose federal 'speculative limits' on futures contracts for energy products."

Mr. Gensler's comments really caught the markets off guard. Isn't he a long-time Wall Street, free-markets guy? And while one can view the clampdown on "speculative" energy trading as simply part of the tough new post-Bubble regulatory backdrop, I suspect there's more to it.

The good ole' days of policymakers enticing the leveraged players into junk bonds and mortgages have past. Recall that the Bernanke Fed cut rates 200 bps during 2008's first quarter. Instead of the typical signal to buy US debt securities, speculative flows rushed to trade out of dollar securities for real things that can't be so easily devalued away. Over several months, commodities prices rocketed to record highs, as crude oil reached an astounding $145 a barrel. At that point, the leveraged speculating community had been lost as a reliable Fed monetary management tool. Indeed, the inevitable day had arrived when speculation was viewed as one huge problem in a gigantic mess.

Washington has a dilemma. Unprecedented monetary and fiscal stimulation are being employed in hopes of spurring rapid economic recovery. But these policy measures risk unwieldy - and self-reinforcing - speculative flows out of dollar securities and into "undollar" assets such as energy and commodities. And recall that it was about a month ago that the dollar was breaking down, commodities were on a run, and crude was approaching $75. At that that time, 10-year Treasury yields jumped to almost 4% and MBS yields spiked to 5.07% (up more than 100bps in a month). Housing and economic recoveries were in trouble.

Ironically, stock investors a month back were interpreting the rise in commodities and market yields as positive confirmation that recovery was taking hold. Fast forward a month - with crude and commodities now sinking - and sentiment has shifted somewhat negatively. I tend to hold the view that markets fluctuate - and news/analysis is there waiting to follow market direction. I don't want to over-read commodities price moves as an indicator of the vitality of global reflation.

As expected, the US economy is lodged in deep mud. Europe remains very weak. But the global reflation thesis rests first and foremost upon happenings in China and Asia. China, in particular, is living up to all my reflationary expectations - and then some.

China's preliminary June bank lending data was out this week. Incredibly, loans increased by $224bn. First half loan growth surpassed $1.0 Trillion, about three times the year ago rate and way above government forecasts. As a Credit analyst, these numbers gave me the chills. The Chinese Credit system appears to have commenced the "terminal phase" of Credit excess. Export industries may remain weak, but Chinese housing, auto and equities markets - the current focal point of Credit expansion - are generally robust.

Perhaps Chinese authorities are already moving behind the scenes to try to rein in excesses. Yet a key facet of a Credit Bubble's "terminal phase" is that it becomes a formidable challenge to muscle the Jeanie back in the bottle. Over time, Bubble economies become increasingly unstable. As we witnessed here at home, a point is reached where policymakers view the risks of bursting the Bubble as too great - and they justify and rationalize. Too many - individual and institutions - become dangerously exposed to inflated asset prices. The unbalanced and maladjusted economy becomes acutely vulnerable to a downward spiral. Erratic behavior engulfs assets markets, economic activity and speculative flows, creating confusion and policymaker paralysis. And, especially relevant to the current Chinese predicament, an increasingly unequal distribution of (Bubble economy) wealth creates a volatile social backdrop. When push comes to shove, authorities will generally feed the Credit beast - and the unchecked "terminal phase" is left to run completely out of control.

"Macro" analysis remains as fascinating as it is challenging. Here at home, Washington seems poised to move against unhelpful speculation. The marketplace has good reason to fear heavy-handedness. But don't be surprised if it turns out more a case of light coddling: "Speculators please take notice that it is to your advantage to buy corporate bonds and mortgages instead of oil futures contracts." Fiscal and monetary policymakers are formulating a recovery strategy. I would expect them to pull out all the stops - and not give up easily - in their efforts to accomplish objectives.

And despite the recent bludgeoning meted out in the commodities markets, I'm not keen to abandon the global reflation thesis. At its root, global reflation is premised upon a synchronized global government finance Bubble consequent to bursting Credit Bubbles and the breakdown in the global dollar reserve system. I am comfortable with the thesis yet recognize the analysis is tough and the circumstances fluid. Mostly, uncertainty and market volatility are as expected.

The global system remains in historic, uncharted, troubled and uncertain waters. But with $2 Trillion of US federal debt issuance on tap this year - perhaps matched by upwards of (a previously unimaginable) $2 Trillion of Chinese bank Credit growth - ongoing "Monetary Disorder" remains the best bet. And, of course, our policymakers are keen to this dynamic, and it would be typical of policymakers in such a predicament to resort to increasingly creative means to try to stabilize a desperately unstable pricing system. Can Washington rein in speculative flows? Can they channel and mobilize them?