For the week, the S&P500 declined 2.2% (up 15.6% y-t-d), and the Dow gave back 1.6% (up 10.1% y-t-d). The Morgan Stanley Consumer index dipped 1.1% (up 14.8%), and the Utilities declined 1.5% (down 0.5%). The Morgan Stanley Cyclicals sank 4.4% (up 51.4%), and Transports dropped 4.3% (up 7.7%). The Banks fell 3.3% (up 4.1%), and the Broker/Dealers dropped 3.4% (up 48.7%). The broader market pulled back. The S&P 400 Mid-Caps lost 3.3% (up 26.0%), and the small cap Russell 2000 fell 3.1% (up 19.9%). The Nasdaq100 declined 1.8% (up 39.8%) and the Morgan Stanley High Tech index fell 2.8% (up 53.8%). The Semiconductors declined 1.7% (up 51.3%). The InteractiveWeek Internet index declined 1.5% (up 60.5%). The Biotechs dropped 3.1% (up 43.2%). With Bullion down $16.75, the HUI gold index sank 6.2% (up 31.5%).

One-month Treasury bill rates ended the week at 2 bps, and three-month bills closed at 10 bps. Two-year government yields fell 7 bps to 0.87%. Five-year T-note yields sank 12 bps to 2.30%. Ten-year yields were 14 bps lower to 3.32%. Long bond yields dropped 11 bps to 4.10%. Benchmark Fannie MBS yields fell 12 bps to 4.27%. The spread between 10-year Treasuries and benchmark MBS widened 2 to 95. Agency 10-yr debt spreads narrowed 3 to 13 bps. The implied yield on December 2010 eurodollar futures declined 10.5 bps to 1.765%. The 2-year dollar swap spread declined 4.75 to 32 bps; the 10-year dollar swap spread narrowed 4 to 16 bps; and the 30-year swap spread declined 2.25 to negative 11.75 bps. Corporate bond spreads continue their collapse. An index of investment grade bond spreads bps to a 16-month low 133, and an index of junk spreads narrowed 23 to 635 bps.

Corporate debt issuance is booming. Investment grade issuers included Wells Fargo $2.0bn, Enterprise Products $1.1bn, Potash $1.0bn, Burlington Northern $750 million, Jefferies Group $700 million, Allegheny Energy $600 million, Ohio Power $500 million, Niagara Mohawk $500 million, Kroger $500 million, Thomson Reuters $500 million, BB&T $500 million, Private Export Funding $400 million, Unum Group $350 million, Willis North America $300 million, Cabot Corp $300 million, Arrow Electronics $300 million, GATX $300 million and Viacom $250 million.

Junk bond funds enjoyed inflows of $283 million (from AMG). Junk issuers included Delta Airlines $1.35bn, QVC $1.0bn, Acco Brands $460 million, American Airlines $450 million, Dish $400 million, Geoeye $400 million, Spirit Aerosystems $350 million, Developers Diversified $300 million, Seacor Holdings $250 million, Brandywine $250 million, North American Energy $205 million, Nebraska Book $200 million and Inverness Medical $100 million.

Convert issuance included Incyte $350 million.

International dollar-denominated debt issuance remained strong. Issuers included Mexico $5.5bn, EDP Finance $1.0bn, African Development Bank $1.0bn, Total Capital $1.0bn, Finance for Danish Investment $800 million, Banco Bradesco $750 million, Eurasian Development Bank $500 million, Uruguay $500 million, Arcos Dorados $450 million, and Holcim Capital $1.0bn.

U.K. 10-year gilt yields sank 13 bps to 3.61%, and German bund yields fell 12 bps to 3.26%. The German DAX equities index slid 2.3% (up 16.2%). Japanese 10-year "JGB" yields declined 3 bps to 1.31%. The Nikkei 225 fell 1.0% (up 15.9%). Emerging markets were mostly on the defensive. Russia's RTS equities index declined 1.6% (up 93.9%). India's Sensex equities was unchanged (up 73.0%). China's Shanghai Exchange sank 4.2%, lowering 2009 gains to 55.9%. Brazil's benchmark dollar bond yields rose 6 bps to 5.12%. Brazil's Bovespa equities index slipped only 0.6% (up 60.7% y-t-d). The Mexican Bolsa sank 3.9% (up 28.5% y-t-d). Mexico's 10-year $ yields rose 12 bps to 5.28%.

Freddie Mac 30-year fixed mortgage rates were unchanged at 5.04% (down 105bps y-o-y). Fifteen-year fixed rates dipped one basis point to 4.46% (down 131bps y-o-y). One-year ARMs dropped 6 bps to 4.52% (down 64bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down one basis point to 6.17% (down 101bps y-o-y).

Federal Reserve Credit jumped $44.1bn last week to a 17-wk high $2.133 TN. Fed Credit has declined $114bn y-t-d, although it expanded $998bn over the past 52 weeks (88%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 9/23) increased $11.6bn to a record $2.854 TN. "Custody holdings" have expanded at an 18.4% rate y-t-d, and were up $432bn over the past year, or 17.9%.

M2 (narrow) "money" supply slipped $3.9bn to $8.303 TN (week of 9/14). Narrow "money" has expanded at a 1.9% rate y-t-d and 7.6% over the past year. For the week, Currency added $0.7bn, and Demand & Checkable Deposits increased $1.2bn. Savings Deposits rose $10.3bn, while Small Denominated Deposits fell $13.1bn. Retail Money Funds declined $2.9bn.

Total Money Market Fund assets (from Invest Co Inst) were little changed at $3.483 TN. Money fund assets have declined $350bn y-t-d, or 12.4% annualized. Money funds increased $85bn, or 2.5%, over the past year.

Total Commercial Paper outstanding jumped another $22.5bn (6-wk gain of $138bn) to a 15-wk high $1.212 TN. CP has declined $469bn y-t-d (38% annualized) and $490bn over the past year (29%). Asset-backed CP rose $19.3bn to $521bn, with a 52-wk drop of $233bn (31%).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $285bn y-o-y to $7.211 TN. Reserves have increased $446bn year-to-date.

Global Credit Market Watch:

September 25 - Bloomberg (Jody Shenn): "Cash continues to pour into bond funds... according to Bank of America Corp. analysts. About $295 billion has been added this year to funds targeting debt including corporate bonds, bank loans and municipal notes... Net outflows from equity funds have been trimmed to $31 billion, from $77 billion in April."

September 23 - Dow Jones (Stan Rosenberg): "California... completed its sale of $8.8 billion in revenue anticipation notes meant mainly to help meet the state's cash flow needs for the balance of its current fiscal year. Pricing terms remained unchanged from levels set Tuesday in an order period for individual investors at yields of 1.25% for notes coming due next May and 1.5% for June securities."

September 24 - Bloomberg (Katrina Nicholas): "Junk bond sales in Asia will register robust growth as investor appetite for riskier debt increases and companies turn attention toward 2010 financing requirements, according to Nomura Holdings Inc. Issuance of junk, or high yield, securities in the region will follow a resurgence in U.S. and European sales, Glenn Schiffman... said... 'High yield in Asia is about to come back strongly,' Schiffman said... Junk bond sales in the U.S. total $99 billion this year, a 63 percent increase on the same period in 2008."

Government Finance Bubble Watch:

September 25 - Bloomberg (Mark Pittman and Bob Ivry): "The Federal Reserve decided to keep pumping $1.25 trillion of new money into the mortgage market to focus on rescuing the U.S. economy as the financial system revives and banks ask for less help... The U.S. has lent, spent or guaranteed $11.6 trillion to bolster banks and fight the longest recession in 70 years, according to data compiled by Bloomberg."

September 22 - New York Times (Stephen Labaton): "Tired of the government bailing out banks? Get ready for this: officials may soon ask banks to bail out the government. Senior regulators say they are seriously considering a plan to have the nation's healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors... The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune... 'It's a nice irony,' said Karen Shaw Petrou, managing partner of Federal Financial Analytics... 'Like so much of this crisis, this is an issue that involves the least worst options.'"

September 23 - Bloomberg (Sandrine Rastello): "International Monetary Fund Managing Director Dominique Strauss-Kahn called on leaders from the Group of 20 nations to maintain efforts to pull the world economy out of a recession, warning that the crisis isn't over. 'This recovery will be rather sluggish, at an average lower than growth we had before the crisis,' Strauss-Kahn said... 'It's too early to say the crisis is behind us.'"

September 25 - Bloomberg (Lee J. Miller and Marco Babic): "With China poised to surpass Japan as the second-largest economy, the decision by world leaders to make the Group of 20 nations the main forum for global economic coordination instead of the G-8 reflects the increasing power of emerging markets... 'The G-8 has long since outlived its purpose,' said Jim O'Neill, chief economist at Goldman Sachs..."

September 23 - Bloomberg (Alex Nicholson): "The Russian government approved a draft of its 2010 budget, which contains an estimated deficit equivalent to 6.8% of gross domestic product..."

September 25 - Bloomberg (Rebecca Christie and Sandrine Rastello): "European nations are resisting the transfer of more power to emerging markets at the International Monetary Fund..."

September 23 - Bloomberg (Alex Nicholson): "Russia's government plans to spend 1.9 trillion rubles ($53 billion) next year on infrastructure projects and the 'modernization' of the economy, Prime Mininster Vladimir Putin said..."

Currency Watch:

September 24 - Bloomberg (Lori Rothman and Matt Townsend): "The dollar would be facing a lack of confidence over budget deficits if it weren't the world's reserve currency, said Robert Sinche, an independent strategist. 'If the U.S. was an emerging market country, we know there would be a crisis of confidence in the currency,' Sinche, former head of strategy for global rates, currencies and commodities at Bank of America Corp., said..."

September 23 - Bloomberg (Christopher Anstey): "China's central bank deputy governor, Hu Xiaolian, proposed setting up a multinational sovereign wealth fund to invest in developing nations and help reduce the danger of another financial crisis. 'Considerations can be to setting up a 'supra-sovereign wealth investment fund' to help channel capital inflow" into developing nations to help them become engines of global growth, Hu said in a paper posted on a Group of 20 Web site... Hu reiterated Chinese calls for greater use of special drawing rights, the International Monetary Fund's unit of account, instead of the dollar."

The dollar index this week added 0.4% in a volatile trading week to 76.74. For the week on the upside, the South Korean won increased 1.8%, the Japanese yen 1.8%, the New Zealand dollar 1.1%, the Norwegian krone 1.0%, the Brazilian real 0.7%, and the Swiss franc 0.1%. On the downside, the Mexican peso declined 2.1%, the Canadian dollar 2.1%, the British pound 2.1%, the Swedish krone 1.3%, and the Euro 0.2%.

Commodities Watch:

September 23 - Bloomberg (Lee J. Miller and Jay Wang): "China's appetite for commodities will increase as the government pushes to add roads, railroads and warehouses, causing bottlenecks in land-locked parts of the world's most-populous nation, according to Societe General SA. 'China started stockpiling commodities in February and ran into physical warehousing constraints around May as China simply does not have the infrastructure to distribute these stockpiles quickly,' Glenn Maguire, SocGen's chief Asia-Pacific economist, said... 'That dynamic now appears to be reversing. Freight carried suggests inventories have been cleared and the August data suggest commodity imports are again surging.'"

September 25 - Bloomberg (Yi Tian): "Sugar futures may triple to the highest price since 1974 as a 'perfect storm' of technical and fundamental indicators 'come together in a pretty strong way,' said Martin Snow at commodity broker PFGBest... The price has gained 94% this year as adverse weather hampered harvests in Brazil and India, the world's largest producers..."

Gold declined 1.7% to close at $991 (up 12.3% y-t-d). Silver sank 5.9% to $16.05 (up 42% y-t-d). November Crude dropped $6.44 to $66.05 (up 48% y-t-d). October Gasoline sank 11.6% (up 53% y-t-d), while October Natural Gas rose 5.2% (down 29% y-t-d). December Copper declined 1.7% (up 94% y-t-d). December Wheat fell 1.6% (down 26% y-t-d), while December Corn gained 5.0% (down 18% y-t-d). The CRB index sank 3.7% (up 9.1% y-t-d). The Goldman Sachs Commodities Index (GSCI) dropped 6.0% (up 26.3% y-t-d).

China Bubble Watch:

September 22 - Bloomberg: "Ford Motor Co. will build a third car factory in China as the nation's economic growth spurs auto demand, two people familiar with the plans said... Ford plans to add capacity after China Ford-brand car sales jumped 30% in the first eight months..."

September 23 - Bloomberg: "China's economic growth has enabled the nation to have a greater voice internationally, the state- run Xinhua News Agency cited central bank Governor Zhou Xiaochuan as saying. China will play a bigger role in representing the interests of developing economies in international issues, Zhou was cited as saying."

Japan Watch:

September 24 - Bloomberg (Jason Clenfield and Kyoko Shimodoi): "Japan's exports fell for an 11th month in August as the economic recovery struggled to gain traction. Shipments abroad dropped 36% from a year earlier compared with a 36.5% decline in July..."

India Watch:

September 23 - Bloomberg (Sandrine Rastello): "The World Bank said it approved loans to India totaling $4.3 billion to finance infrastructure projects and to support the government's economic stimulus. The loans include $2 billion to boost the capital of state banks and maintain credit growth, and $2.2 billion to help improve India's roads, ports and power supply, the... bank said..."

September 24 - Bloomberg (Kartik Goyal): "India's merchandise exports dropped 19.7% in August from a year earlier... That compares with an average 30% slide in the six months through July."

Asia Bubble Watch:

September 22 - Bloomberg (Karl Lester M. Yap): "The Asian Development Bank raised its economic growth forecast for the region on strengthening expansions in China, India and Indonesia, and said it's too early for governments to withdraw stimulus policies. Asia, excluding Japan, will grow 3.9% in 2009, faster than a March estimate of 3.4%... Growth may accelerate in 2010 to 6.4%, it said."

Unbalanced Global Economy Watch:

September 24 - Bloomberg (Anchalee Worrachate and Brian Parkin): "Germany, Europe's biggest economy, said it lowered its planned fourth-quarter debt issuance by 22% because of a reduction in funding requirements. The nation will sell 59 billion euros ($87bn) of debt in the period..."

September 23 - Bloomberg (Brad Skillman and Tom Keene): "Iceland President Olafur Ragnar Grimsson said the country's economy has 'great strength" and that its banks did not violate regulations. Iceland is 'coming out of crisis,' Grimsson said..."

September 23 - Bloomberg (Tracy Withers): "New Zealand emerged from its worst recession in three decades, unexpectedly expanding for the first time in six quarters... Gross domestic product increased 0.1% in the three months to June 30 following a 0.8% drop in the first quarter..."

U.S. Bubble Economy Watch:

September 22 - Bloomberg (Timothy R. Homan): "Five U.S. states that were among the hardest hit by job losses and the construction slump also had declines in household incomes during the first year of the recession... Arizona, California, Florida, Indiana and Michigan all saw median household incomes drop in 2008, the Census Bureau said... Only one state had a decline the previous year."

September 22 - Bloomberg (Peter Woodifield): "The global recession is taking its toll on even the priciest shopping streets, where rents have plunged the most in at least 24 years, according to Cushman & Wakefield... Manhattan's Fifth Avenue ranked as the world's most expensive retail address for the eighth straight year, even as annual rents dropped 8.1%... to $1,700 a square foot..."

September 23 - Bloomberg (Cynthia Cotts): "Many students entering their final year at top law schools, including Harvard and New York University, haven't landed the full-time jobs they would normally have claimed by now, firms and school officials said, a reflection of the shrinking demand for legal services."

September 25 - Bloomberg (Jeff Plungis): "Stephen Serio, a Waltham, Massachusetts classic-car dealer, expects the 1966 Ferrari 275GTB on his lot to sell for about $810,000. Five years ago, the same car sold for $500,000. 'When you have something they're not making any more of, the value goes up,' said comedian Jay Leno... 'If you're knowledgeable, you'll probably end up making money.'"

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

September 24 - Bloomberg (Pierre Paulden and Shannon D. Harrington): "Babson Capital Management LLC and GoldenTree Asset Management LP are among investors bargain- hunting in the $650 billion market for collateralized debt obligations linked to corporate debt as credit markets open. An estimated $11 billion of CDOs backed by high-yield, high-risk loans or linked to corporate bonds using credit derivatives, have exchanged hands this year..."

Real Estate Watch:

September 23 - Bloomberg (John Gittelsohn): "Manhattan apartment rents dropped an average of at least 8% in the year's most active leasing season as Wall Street job cuts and the recession rippled through the economy, real estate broker Citi Habitats said..."

September 24 - Bloomberg (Nadja Brandt): "Luxury hotel owners risk defaulting on their debt as the recession cuts occupancies and the credit crunch constrains refinancing. Loans secured by more than 1,500 hotels with a total outstanding balance of $24.5 billion may be in danger of default, according to Realpoint LLC..."

September 24 - Bloomberg (Peter Woodifield and Linda Sandler): "Lehman Brothers... owes its London landlord $4.3 billion in rent and charges, according to a claim filed by Canary Wharf Group Plc."

Central Banker Watch:

September 23 - Bloomberg (Josiane Kremer): "Norway's central bank kept its benchmark interest rate at a record low and said it considered raising borrowing costs as the economic rebound gained strength... Deputy Governor Jan F. Qvigstad said rate-setters 'considered the alternative of increasing the key policy rate.'"

September 23 - Bloomberg (Greg Quinn): "Bank of Canada Governor Mark Carney said there are signs of economic growth in all major global regions, and the rebound still lacks signs of 'self- sustaining' private demand to underpin it. 'That growth that we are seeing is largely the result of policy: monetary policy, fiscal policy, the measures to stabilize the financial system, Carney, 44, said... 'We have a ways to go before we are really going to see true growth, self- sustaining private sector growth.'"

September 24 - Bloomberg (Mike Dorning): "Former Federal Reserve Chairman Paul Volcker called on U.S. lawmakers to give the central bank more authority to oversee the financial system... The Fed has 'the independence from political pressures, the prestige and the essential qualifications of experience to serve as overseer of the financial system,' Volcker... said in testimony to the House Financial Services Committee."

Muni Watch:

September 25 - Bloomberg (Jeremy R. Cooke): "Benchmark borrowing costs for highly rated state and local governments dropped to a 42-year low this week... Net cash flows into municipal bond mutual funds rose to a record four-week moving average of $2.7 billion yesterday..."

New York Watch:

September 23 - Bloomberg (Michael Quint): "New York Governor David Paterson said the state's budget deficit this year may reach $3 billion, up from $2.1 billion the Division of Budget estimated July 30... Personal income tax collections are down about 35% rather than the projected 15%, Paterson said."

September 23 - Bloomberg (Michael Quint): "New York Governor David Paterson proposed a 2% cap on spending growth next year on the eve of a meeting with legislative leaders to discuss the state's current $2.1 billion budget deficit. State agencies were told yesterday to prepare for spending cuts to help close the gap for the fiscal year that ends March 31, according to a letter from Budget Director Robert Megna. Agencies will be told how much to pare later this month, the letter said."

Speculator Watch:

September 23 - Bloomberg (Tomoko Yamazaki): "Hedge funds assets increased by $21.4 billion in August, rising for a fourth straight month...Eurekahedge Pte said. Net inflows into the industry totaled $12.6 billion, while gains through performance were $8.8 billion, bringing total assets under management to $1.38 trillion..."

From Bear to Bear

I was inspired to put a few thoughts together after pondering Jim Grant's interesting op-ed piece in last Saturday's Wall Street Journal, "From Bear to Bull."

Along with Mr. Grant, I don't want to be associated with the term "permabear." It implies a dogmatic lack of objectivity - the kiss of death for sound analysis. I've been bearish for awhile and I remain so. My view is firmly analytically based. Yet it doesn't mean that I expect the stock market to always go south or the current recession to last indefinitely. Indeed, I am firmly in the global reflation camp, going so far as to posit the emergence of a powerful "Global Government Finance Bubble."

I remain bearish because, from my analytical framework, deleterious Credit system developments suggest worse yet to come - perhaps much worse. The global Credit boom has not fully run its course, so the depths of the downturn remain indeterminable.

Total U.S. system Credit almost doubled during the nineties to $25.4 Trillion. System Credit has again doubled to end Q2 at $52.8 Trillion. I view this - in conjunction with corresponding global excesses - as history's greatest Credit Bubble. Over the past 12 months, Treasury debt increased $1.9 TN and GSE MBS jumped $400bn - and counting. I believe unprecedented Credit-related maladjustment over decades continues to manifest itself in a severely impaired U.S. "Bubble" economy.

Such deep structural impairment is rectified only through a long and sobering period of retrenchment and rejuvenation, with adjustment not gaining critical momentum until Bubble-era destabilizing Monetary Processes are discontinued, stable financial flows are established, and significant economic liquidation has transpired. From my analytical perch, I don't yet see the beginnings of significant structural readjustment. Determined to limit the level of hardship, policymakers have moved aggressively to sustain previous financial and economic structures. Both from a domestic and international standpoint, sound financial and economic footing will not have a chance until some semblance of a disciplined monetary regime supplants the current "system" of synchronized Credit inflation.

There is a popular view that holds that the U.S. economy benefits from an inherent upward trajectory, a dynamic some say ensures a resumption of growth as soon as financial crisis headwinds tail off. And then there is history - always elucidated so eloquently by Mr. Grant - that suggests the worse the economic downturn the more robust the subsequent recovery. I tend to dismiss the "inherent upward trajectory" thesis and believe the historical reliable recovery viewpoint requires important qualifications.

First, the "inherent upward trajectory" thesis does not square well with my analytical framework. First, I believe that the Credit/financial system generally dictates the workings/"trajectory" of economic system activity. This has especially been the case over the past two decades on the back of profound developments throughout contemporary money and Credit. The bursting of the Wall Street/mortgage finance Bubble marked a momentous inflection point in Credit. The "trajectory" of Credit - its type, flow and quantity - going forward will be markedly different from the past twenty years, which will translate into a much altered economic landscape. These days, caution is in order when it comes to extrapolating past economic performance.

I would also caution against using historical parallels. This time is different: History's greatest Credit Bubble; unmatched changes to the underlying structure of the U.S. "services" and unbalanced global economy; and an unrestrained and rudderless global monetary "system" are just the most conspicuous characteristic that set the current backdrop apart from anything previously experienced.

Jim Grant quoted one of my favorite economic analysts, Michael Darda: "The most important determinant of the strength of an economy recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period."

It is worth noting that the level of nominal GDP from 1929 was not attained again until 1941 - after bottoming seven years earlier in 1934 (five years after the crash!). Statistically, GDP posted relatively strong growth in 1935, 1936, 1937, 1939, 1940 and 1941 - but in aggregate this period of "strength" only returned output back to the late-twenties level. And anyone turning bullish in 1931 - two years after the financial Bubble burst - would have had to endure a nominal GDP drop of another 25% and even worse percentage declines in the stock market. It was many years after the bursting of the financial Bubble before bullishness had much relevance.

For comparison, Q2 2009 nominal GDP was about 3% below the peak level from last year, with the consensus view holding that this will be almost fully recovered next year. It is hard to read dire expectations from current economic forecasts. And keep in mind that non-financial Credit grew 6.0% last year and expanded about 4.5% annualized during this year's first half. We have by no means experienced the worst-case scenario from a Credit standpoint.

Today's Durable Goods report and this week's housing data confirm sluggish recovery. Considering the double-digit federal deficit and zero interest-rate monetary policy, economic performance remains unimpressive. Expectations have been bolstered by stock market gains, and one would expect ultra-loose monetary conditions to support output. But I'm sticking with the view that the housing and consumption sectors of our economy will lag. Recall that the second quarter saw contractions in both U.S. household Credit and mortgage borrowings.

The consumption-based U.S. economy evolved over many years and is today poorly positioned for the unfolding global reflationary backdrop. Granted, policymakers reversed the downward financial and economic spiral. But stemming a crisis and fostering sound and sustainable recovery is not necessarily the same thing.

In past crises, government reflationary policymaking would help recapitalize the private-sector Credit system. Almost immediately, a Fed-induced manipulation of financial conditions would spur borrowing, lending, and leveraged speculation (not necessarily in that order). Private Credit growth would recover almost immediately, especially in housing related Credit. Indeed, home mortgage debt growth jumped to 9.4% in 1999 (post-LTCM reflation) and 13.4% in 2002 (post-technology Bubble reflation). This rapid increase in mortgage Credit corresponded to strong financial sector expansion - with financial sector borrowings increasing 16.2% in 1999 and 9.6% in 2002.

In my analytical vernacular, for two decades mortgage Credit demonstrated a robust "inflatationary bias." This Credit characteristic provided the Federal Reserve a powerful mechanism for monetary stimulus. And the results were predictable: in crisis, the Fed would aggressively cuts rates, in the process creating a strong incentive for leveraged speculation in mortgage securities (and other risk assets). Meanwhile, the dramatic loosening in mortgage Credit would incite a refi boom and enormous equity extraction - not to mention a strong upsurge in home sales and construction.

The timely refi, home equity, construction and home transaction booms worked to both increase system Credit and boost economic output. And it was not long before this powerful reflationary dynamic created a self-reinforcing rise in home prices, household financial wealth, household consumption and business investment. It was like clockwork, ensuring virtually uninterrupted Credit expansion, the mildest of economic downturns, deeply ingrained confidence, and the greatest Credit Bubble in the history of mankind. The Fed misused its power to manipulate private Credit expansion, system spending, market psychology and financial speculation.

There is at this point ample confirmation that, with the bursting of the Wall Street/mortgage finance Bubble, this previously steadfast inflationary dynamic has turned impotent. The combination of securitized finance, the proliferation of leveraged speculation, contemporary unconstrained finance, and activist central banking nurtured a financial and economic environment unlike any in recent history. But analysts should no longer extrapolate from this previous boom period. Previous Credit and economic dynamics no longer apply.

And if the nuances of the past twenty years (or more) argue against extrapolation, I contend that the emergence of the Government Finance Bubble argue only further complicates drawing historical inferences. First of all, massive monetary and fiscal stimulus has supported system-wide incomes, spending, and corporate revenues. Policies also incited an unwind of bearish positions and a rather robust, albeit speculative, stock market rebound. Thus far, zero rates and Trillion dollar deficits has created the illusion of normalcy - when it comes to both the markets and real economy. This creates an "analytical" hook that will snare many.

In contrast to previous mortgage-Credit dominated reflations, the evolving global reflation will prove unique for its lack of self-reinforcing dynamics here at home. Before, a Trillion of net additional mortgage Credit would reliably inflate home prices and induce more borrowing, consumption and investment - all of which worked to bolster self-reinforcing confidence in the underlying Credit apparatus and the overall soundness of the general boom-time economy. Today, faith in this private-sector Credit machine is broken, while housing Bubble/consumption psychology is badly shattered.

The $2 Trillion of federal Credit over the past year may have stabilized national income, but it has not reflated home prices or rejuvenated household and mortgage Credit growth. I don't expect another $2 Trillion to have a much bigger impact, creating a backdrop where the lack of a self-reinforcing private-Credit growth dynamic creates acute systemic vulnerability to any withdrawal of massive federal government spending. Moreover, any backup in market yields - perhaps in anticipation of Federal Reserve "exit strategies" - would weigh heavily on private-sector Credit recovery.

I'll look to remove the bear from my lapel when a sounder Credit backdrop emerges at home and globally. It's just not moving in that direction. I don't see Trillions of federal government Credit as sustainable or constructive - and wouldn't extrapolate recent system stabilization out to a sustainable economic recovery. I don't see any semblance of restraint or monetary discipline - the requirements of a sustainable monetary regime - in key domestic Credit systems internationally. And I wouldn't assume that the worst of Credit dislocation is behind us. And, I'll add, the worst-case scenario at this point would include a robust global rejuvenation of Credit and asset Bubbles, rapid synchronized economic recovery, and a rebirth of bullish expectations. I do see all the makings for a grinding, debilitating, secular bear market.