For the week, the S&P500 jumped 2.1% (up 9.2% y-t-d), and the Dow gained 1.7% (up 7.4%). The broader market fire runs hot. The S&P 400 Mid-Caps surged 3.6% (up 16.9%), and the small cap Russell 2000 gained 3.8% (up 18.6%). The Banks surged 5.8% (up 35.7 %), and the Broker/Dealers gained 3.4% (up 7.8%). The Morgan Stanley Cyclicals rose 3.4% (up 16.5%), and the Transports increased 2.3% (up 15.9%). The Morgan Stanley Consumer index gained 1.9% (up 9.0%), and the Utilities advanced 2.3% (down 2.1%). The Nasdaq100 increased 2.1% (up 10.5%), and the Morgan Stanley High Tech index added 0.9% (up 7.8%). The Semiconductors gained 1.7% (up 11.3%). The InteractiveWeek Internet index added 0.8% (up 10.3%). The Biotechs declined 2.5%, reducing 2010 gains to 26.9%. With bullion rallying $19, the HUI gold index gained 3.3% (up 2.8%).

One-month Treasury bill rates ended the week at 14 bps and three-month bills closed at 15 bps. Two-year government yields jumped 11 bps to 1.025%. Five-year T-note yields rose 12 bps to 2.56%. Ten-year yields gained 5 bps to 3.82%. Long bond yields dipped one basis point to 4.66%. Benchmark Fannie MBS yields jumped 9 bps to 4.50%. The spread between 10-year Treasury and benchmark MBS yields widened 4 bps to 68 bps. Agency 10-yr debt spreads widened 3.5 to 37 bps. The implied yield on December 2010 eurodollar futures jumped 13.5 bps to 0.83%. The 10-year dollar swap spread increased 2.75 to end the week at zero. The 30-year swap spread increased 3 to negative 18.5. Corporate bond spreads were mixed. An index of investment grade bond spreads increased one to 88 bps, while an index of junk spreads dropped 14 bps to 480 bps.

It was another strong week for debt sales. Investment grade issuers included Regions Financial $750 million, Orix $750 million, and Biomed Realty $250 million.

Junk issuers included Agile Property Holdings $650 million, Phillips-Van Heusen $600 million, Berry Plastics $500 million, Allbritton Communications $455 million, Gray Television $365 million, Kaisa Group $350 million, Telcordia Technologies $350 million, Penn Virginia $300 million, Standard Pacific $300 million, Live Nation Entertainment $250 million, Kemet Corp $230 million, Global Geophysical Services $200 million, Thermon Industries $210 million, and Cleaver-Brooks $185 million.

Convert issues included MGIC $300 million and Evergreen Solar $165 million.

International dollar debt sales remain robust. Issuers included Russia $5.0bn, Dexia $4.5bn, Standard Charter $2.0bn, Egypt $1.5bn, BNP Paribas $1.15bn, RBS Global $1.1bn, Anglogold $1.0bn, Banco Brasil $950 million, Dtek Finance $500 million, MHP $330 million and Premier Aircraft $190 million.

U.K. 10-year gilt yields rose 6 bps to 4.04%, while German bund yields dipped 2 bps to 3.06%. Greek bond yields spiked 128 bps to 8.65%. The German DAX equities index increased 1.3% (up 5.1% y-t-d). Japanese 10-year "JGB" yields declined 3 bps to 1.31%. The Nikkei 225 declined 1.7% (up 3.5%). Emerging markets were mixed to lower. For the week, Brazil's Bovespa equities index declined 1.4% (up 1.3%), while Mexico's Bolsa gained 0.7% (up 5.4%). Russia's RTS equities index added 0.4% (up 11.3%). India's Sensex equities index increased 0.6% (up 1.3%). China's Shanghai Exchange sank 4.7% (down 9.0%). Brazil's benchmark dollar bond yields declined 4 bps to 4.77%, while Mexico's benchmark bond yields rose 7 bps to 4.88%.

Freddie Mac 30-year fixed mortgage rates were unchanged last week at 5.07% (up 27bps y-o-y). Fifteen-year fixed rates slipped one basis point to 4.39% (down 9bps y-o-y). One-year ARMs jumped 9 bps to 4.22% (down 60bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 3 bps to 5.83% (down 48bps y-o-y).

Federal Reserve Credit jumped $20.5bn last week to a record $2.318 TN. Fed Credit was up $98.3bn y-t-d (14.4% annualized) and $149bn, or 6.9%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 4/21) surged $21.8bn to a record $3.056 TN. "Custody holdings" have increased $100.9bn y-t-d (11.1% annualized), with a one-year rise of $409bn, or 15.4%.

M2 (narrow) "money" supply sank $36.2bn to $8.467 TN (week of 4/12). Narrow "money" has declined $45.9bn y-t-d. Over the past year, M2 grew 1.6%. For the week, Currency added $2.1bn, while Demand & Checkable Deposits dropped $22.7bn. Savings Deposits fell $7.8bn, and Small Denominated Deposits declined $3.1bn. Retail Money Funds fell $4.7bn.

Total Money Market Fund assets (from Invest Co Inst) dropped $35bn to $2.878 TN. In the first 16 weeks of the year, money fund assets have dropped $416bn, with a one-year decline of $928bn, or 24.4%.

Total Commercial Paper outstanding added $1.5bn last week to $1.076 TN. CP has declined $94bn, or 26.2% annualized year-to-date, and was down $396bn over the past year (27%).

International reserve assets (excluding gold) - as tallied by Bloomberg's Alex Tanzi - were up $1.261 TN y-o-y, or 18.9%, to a record $7.924 TN.

Global Credit Market Watch:

April 22 - Bloomberg (Matthew Brown): "Greek bonds plunged, driving two- year yields above 11%, after the nation's 2009 budget deficit was larger than previously forecast and investors grew concerned the government will cut or delay its debt payments. The cost of insuring against default soared, rising above Ukraine and putting it closer to Argentina and Venezuela."

April 23 - Bloomberg (Jonathan Stearns and Maria Petrakis): "Greece called for activation of a financial lifeline of as much as 45 billion euros ($60 billion) this year in an unprecedented test of the euro's stability and European political cohesion. The appeal for help from the European Union and International Monetary Fund follows a surge in borrowing costs to what Greek Prime Minister George Papandreou called unsustainable levels... 'There was no response from the markets, either because they didn't believe in the political will of the EU or because they decided to go on with speculation,' Papandreou said... 'The situation threatens to demolish not only the sacrifices of the people but also the regular course of the economy.'"

April 23 - Bloomberg (Bryan Keogh): "Financial markets face the risk of a seizure similar to when Lehman Brothers Holdings Inc. went bankrupt if Greece restructures its debt to the detriment of investors, Deutsche Bank AG said. The surge in the cost of insuring the country from default shows traders aren't convinced Greece will get a full bailout, Jim Reid, head of fundamental strategy at Deutsche Bank, wrote... A restructuring of Greek's debt, while unlikely in the short-term, would have 'huge ramifications' for global financial markets... 'As soon as you set a restructuring template for stressed sovereigns, then you run a huge risk of a Lehman-type event with confidence in other stressed sovereigns evaporating,' including Portugal, Ireland and Spain, Reid wrote. 'It's not just Greece that needs the bail-out, the others need it as a first line of defense.'"

April 22 - Bloomberg (Matthew Brown): "Greece is likely to cut or delay payments to bond investors even as the country negotiates a bailout package with the European Commission and International Monetary Fund, according to Goldman Sachs... 'Look out for signs that the government might offer a voluntary debt-restructuring arrangement sometime over the next few months,' Erik F. Nielsen, chief European economist at Goldman... wrote... 'A large multi-year official rescue package combined with a voluntary debt restructuring would create a much longer breathing space for the government to undertake the necessary reforms.'"

April 19 - Bloomberg (Sarah Mulholland): "Bonds backed by commercial real estate loans are gaining as investors flush with cash seek higher returns and the economic recovery gains steam. Yields on senior top-rated securities backed by mortgage payments for skyscrapers, hotels and shopping malls fell 0.11 percentage point to 2.19 percentage points more than Treasuries... The $700 billion market for commercial-mortgage backed securities 'has seen a violent rally' as gains across credit markets push buyers toward investments with higher yields, according to... Bank of America Corp."

April 22 - Bloomberg (Denis Maternovsky, Sonja Cheung and Caroline Hyde): "Russia priced $5.5 billion of bonds, the second biggest emerging-market dollar debt offering on record, as the country seized on all-time low yields to return to world capital markets for the first time since defaulting in 1998."

Global Government Finance Bubble Watch:

April 22 - Bloomberg (Svenja O'Donnell): "Britain registered its biggest annual budget deficit since the second world war as the political dispute over the government finances intensified. The 152.8 billion-pound ($234 billion) shortfall in the fiscal year through March was 76% higher than a year earlier..."

April 22 - Bloomberg (Simone Meier): "The euro area's budget deficit widened to more than double the European Union's 3% limit in 2009, led by Greece and Ireland. The total budget gap for the 16-nation euro region widened to 6.3% of gross domestic product last year, the biggest since the introduction of the euro in 1999..."

April 20 - Bloomberg (Sandrine Rastello): "The International Monetary Fund cautioned that rising government debt has replaced financial industry stress as the biggest threat to the global economy..."

April 22 - Bloomberg (Sandrine Rastello): "The International Monetary Fund raised its forecast for global growth this year led by China and cautioned that a failure of nations to contain soaring public debt might have 'severe' consequences..."

Currency Watch:

The dollar index gained 0.7% this week to 81.42 (up 4.6% y-t-d). For the week on the upside, the Canadian dollar increased 1.3%, the New Zealand dollar 1.2%, the Mexican peso 0.8%, the Singapore dollar 0.4%, and the Australian dollar 0.3%. For the week on the downside, the Japanese yen declined 1.9%, the Swiss franc 1.1%, the Danish krone 1.1%, and the euro 1.0%.

Commodities Watch:

April 20 - Bloomberg (Henry Meyer): "Li Wei, a Chinese diplomat in Riyadh, had only just seen off a Ministry of Commerce delegation to Saudi Arabia this month when he started preparing for another Chinese governmental visit in two weeks. 'Every month we have delegations coming to Saudi Arabia,' said Li... 'We are too busy.' China, the world's second-largest oil consumer, and Saudi Arabia, holder of about a fifth of global crude reserves, are forging ever closer ties as the Persian Gulf kingdom responds to a Chinese drive to feed its rising energy needs."

April 21 - Bloomberg: "Copper imports by China, the world's largest consumer of the metal, rose for a second month... Shipments of refined copper were 337,125 metric tons last month... 14% more than in the same period of 2009..."

April 19 - Bloomberg (Patrick McKiernan): "Lumber prices rose, extending a rally to the highest price since May 2006."

The CRB index gained 1.0% (down 1.5% y-t-d). The Goldman Sachs Commodities Index (GSCI) rose 0.9% (up 4.6% y-t-d). Spot Gold rallied 1.7% to $1,156 (up 5.4% y-t-d). Silver jumped 3.3% to $18.29 (up 8.6% y-t-d). June Crude gained 42 cents to $85.09 (up 7.2% y-t-d). May Gasoline jumped 3.4% (up 14.6% y-t-d), and May Natural Gas rose 5.6% (down 23.5% y-t-d). May Copper was little changed (up 6% y-t-d). May Wheat gained 0.6% (down 9% y-t-d), while May Corn declined 3.0% (down 15% y-t-d).

China Bubble Watch:

April 19 - Bloomberg (Chia-Peck Wong): "China told banks to stop loans for third-home purchases as the government steps up measures to cool property prices with some of the 'most draconian' orders yet. Shares of developers and banks tumbled. Banks should also suspend lending to buyers who can't provide tax returns or proof of social security contributions, the State Council said... The latest measures come on top of orders to banks this year to set aside more deposits as reserves and raise mortgage rates, and steps to re-impose a sales tax on homes. 'These are the most draconian measures on the property market in history," Jun Ma, Deutsche Bank AG's Greater China chief economist, said... Chinese press reports point to 'panic selling' by investors who own more than one home in Shanghai, Beijing and Shenzhen, he said."

April 21 - Bloomberg: "China's banking regulator told larger banks to conduct quarterly stress tests on property loans and ensure the risks attached to such lending is strictly controlled after the government tightened credit rules to crack down on real-estate speculation. Financial institutions must implement the central government's property controls and use mortgage loan policies to 'strictly' limit housing speculation, Liu Mingkang, head of the China Banking Regulatory Commission, said..."

April 21 - Bloomberg (Chia-Peck Wong and Liza Lin): "China's 'excessive' credit expansion and surging real estate prices are 'danger signals' that growth is peaking, investor Marc Faber said. 'There are some symptoms of a bubble building in China, with the increase in foreign exchange reserves, rapidly rising property prices... From here on, the China economy will slow down regardless. Whether it will crash this year or later, I don't know... If you believe the government can steer the economy like a car, that's not my view," said Faber... Government measures 'always lead to unintended consequences.'"

Japan Watch:

April 22 - Bloomberg (Aki Ito): "Japan's exports grew for a fourth month in March, evidence that sustained gains in overseas demand are fueling the recovery as prices slump at home. Shipments abroad advanced 43.5% from a year earlier..."

India Watch:

April 22 - Bloomberg (Unni Krishnan): "India's food inflation accelerated... An index measuring wholesale prices... rose 17.65% in the week ended April 10 from a year earlier."

April 20 - Bloomberg (Cherian Thomas): "India's central bank raised interest rates for the second time in a month... to contain the fastest inflation among the Group of 20 nations. The Reserve Bank of India increased the reverse repurchase rate to 3.75% from 3.5%..."

April 21 - Bloomberg (Kartik Goyal and Unni Krishnan): "The Reserve Bank of India's path of quarter-point interest-rate increases may fail to stem the nation's accelerating inflation... The finance ministry plans to sell 1.64 trillion rupees ($37 billion) of bonds this quarter, 36% of the total issuance planned for the financial year. 'If government borrowings weren't an issue, they would have probably done a more aggressive tightening,' said Sonal Varma... economist at Nomura Holdings Inc. 'Monetary conditions are too loose for the current stage of economic cycle.'"

Latin America Bubble Watch:

April 23 - Bloomberg (Thomas Black and Andres R. Martinez): "Brazilian credit is growing at an unsustainable rate and will slow when the central bank begins to raise rates at next week's meeting, said Emilson Alonso, chief of Latin America for HSBC... Brazil's credit as a percentage of the economy rose to 41% last year from 23% in 2004, he said. 'Brazil is booming and it's not sustainable,' Alonso said... 'Inflation is showing signs of some increase.' Brazil's banking assets had been growing at 20% to 25% a year..."

April 22 - Bloomberg (Iuri Dantas and Arnaldo Galvao): "Brazil's current account gap widened in March to the highest this year... The deficit... rose to $5.1 billion in March after a $3.3 billion gap in February..."

April 19 - Bloomberg (Daniel Cancel): "China... will lend Venezuela $20 billion and form a venture to pump crude from the Orinoco Belt, President Hugo Chavez said... The financing from China is separate from a $12 billion bilateral investment fund, Chavez said..."

Unbalanced Global Economy Watch:

April 20 - Bloomberg (Svenja O'Donnell): "The U.K.'s inflation rate jumped more than economists forecast in March, breaching the government's upper limit for the second time this year... Consumer prices limbed 3.4% from a year earlier...

April 20 - Bloomberg: "Russian billionaire Roman Abramovich's new yacht, measuring nearly 560 feet long, is the biggest private yacht in the world. The yacht... reportedly features a missile defense system, an anti-paparazzi laser shield and at least one mini-submarine."

U.S. Bubble Economy Watch:

April 20 - Bloomberg (Alexis Leondis): "Rising health-care costs are a top concern for a majority of wealthy Americans, according to a Bank of America Corp. survey."

Derivatives Watch:

April 22 - Bloomberg (Phil Mattingly): "The Senate Agriculture Committee approved derivatives legislation that would require U.S. lenders such as JPMorgan Chase & Co. and Bank of America Corp. to spin off their swaps trading desks. The panel voted 13-8 to back a bill drafted by Committee Chairman Blanche Lincoln... The provision to make lenders separate swaps trading from commercial bank operations has been among the most contentious issues as lawmakers weigh new rules for Wall Street."

April 23 - Bloomberg (Jesse Westbrook): "Moody's... and Standard & Poor's were too influenced by Wall Street, had insufficient resources and used outdated models to grade mortgage securities that blew up when the U.S. housing market collapsed in 2007, Senate investigators said in a report. The Senate Permanent Subcommittee on Investigations concluded after an 18-month probe that the credit-rating firms had conflicts of interest and ignored signs that fraud and lax lending had infected the housing market.... 'Credit-rating agencies allowed Wall Street to impact their analysis, their independence and their reputation for reliability,' Senator Carl Levin...said... 'They did it for the money.'"

April 23 - Bloomberg (Jody Shenn): "Moody's... cared more about losing market share than potentially committing 'securities fraud,' even as the rating company realized it needed to step up downgrades on subprime-mortgage bonds, the former head of a structured-products group said. In September 2007, a manager at the... firm resisted a plan to grade new collateralized debt obligations filled with mortgage bonds by including an assumption that Moody's rankings on the underlying home-loan securities were no longer accurate, Eric Kolchinsky told the Senate Permanent Subcommittee on Investigations in prepared testimony.

Central Bank Watch:

April 20 - Bloomberg (Jacob Greber): "Concern that Australia's mining boom will stoke inflation was a key reason the central bank raised borrowing costs toward 'more normal levels' two weeks ago and signaled further moves in 2010, policy makers said."

California Watch:

April 23 - Bloomberg (James Kraus): "California state and local governments have $325 billion in unfunded pension liabilities, the Los Angeles Times reported, citing pension consultant Girard Miller. Miller, speaking to the state's Little Hoover Commission, said the shortfall amounted to $22,000 for every working adult in California..."

New York Watch:

April 21 - Bloomberg (Henry Goldman): "New York's general fund may run out of cash in June and will for the first time in state history end the months of May through August with a negative cash balance, state Comptroller Thomas DiNapoli said."

April 19 - Bloomberg (Henry Goldman): "More than half of New York state's electorate want to levy a temporary tax on bonuses of people earning $250,000 or more, a Siena College survey reported..."

April 19 - Bloomberg (Oshrat Carmiel): "Home sales in the Hamptons, the New York oceanside resort favored by financiers and celebrities, more than doubled in the first quarter... Transactions climbed to 292 from 106 a year earlier... according to... Town & Country Real Estate. The median price... was $1.1 million, or 51% higher than a year ago..."

Speculation Watch:

April 20 - Financial Times (Sam Jones): "Assets managed by the global hedge fund industry are just 2% shy of their previous all-time high, set in October 2007... Hedge funds collectively now manage about $1,670bn of assets, according to HFR."

April 19 - Bloomberg (Bei Hu): "Sovereign wealth funds in Asia- Pacific, Europe, Middle East and Africa increased assets by 19% over nine months, according to a survey... by State Street Corp... Total assets of the funds rose to $136 billion..."

Deficits and Private-Sector Credit

The small cap Russell 2000 index has gained 18.6% so far this year, slightly ahead of the S&P400 Mid-Cap's rise of 16.9%. The S&P 500 Homebuilding index has surged 38.6%, and the Morgan Stanley Cyclical Index has advanced 16.5%. The Morgan Stanley Retail Index has jumped 28.0%, trading today to a new record high.

The bullish contingent is these days increasingly confident that there is much more to the recovery than a mere stimulus-induced "sugar high." The marketplace now comfortably disregards bearish developments - and becomes further emboldened by "market resiliency". The market this week brushed aside issues with Greece, China, Goldman and financial reform.

Complacency abounds, in true Bubble fashion. The U.S. stock market dismisses that there could be meaningful ramifications from the unfolding Greek debt crisis. Chinese authorities' recent determination to restrict mortgage Credit barely garners a headline. And while the Goldman allegations generate great interest and discussion, few believe they will have much general market impact. Financial reform, well, it's an afterthought when the market is open. Market participants are enamored with the notion that the securities markets and real economy are now conjoined in the initial phase of a big bull cycle.

Count me a subscriber of the "sugar high" thesis. The combination of double-digit (to GDP) deficits, protracted near-zero rates, and the Fed's unprecedented Trillion-plus monetization has worked wonders. Government stimulus stabilized the Credit system, asset prices, system incomes and economic output. The bulls today believe that a new expansionary cycle has commenced, and fundamentals and prospects couldn't be much more encouraging from their point of view. Surging stock prices have the optimists disregarding the possibility of a systemic addiction to massive government spending, ultra-low rates, and overabundant marketplace liquidity. Potential issues in the area of risk intermediation are not on the radar screen.

Yet, the sustainability of this recovery will be determined by private sector Credit - eventually. The markets assume private Credit growth will snap back after its long recuperation - as it always has in the past. But, mostly, analysts expend little energy pondering this issue. Deficits of about 10% of GDP, rapid expansion of government-backed Credit (MBS, "build America bonds," student loans, bank deposits, etc.), and near-zero rates have created a recovery backdrop where minimal private-sector growth has sufficed. This won't always be the case.

Greek Credit default protection began December at 176 bps. Not many months ago there was little fear of a debt Crisis and no worry of default. Yet here we are today with Greece 2-year debt yielding 11% and annual default protection priced at about 600 bps. Markets fear insolvency and debt restructuring.

The U.S. Treasury borrows these days for three months at 15 bps and for two years at 1.02%. No one dares contemplate how dramatically the world would change if fear injected itself into the equation. While there is certainly more recognition of the structural debt issues confronting our government borrowers (local, state and federal), there is no concern for short-term funding issues. There was an important aspect of the Wall Street/mortgage finance Bubble that receives little attention: The explosion of Credit provided an enormous boost to governmental receipts. Especially in the case of federal debt ratios, boom-related revenues reduced borrowing requirements and distorted debt-to-GDP ratios.

At about 70% of GDP, outstanding Treasury debt is not on the surface overly alarming. Obviously, if one throws in GSE liabilities and the massive future spending obligations related to social security, healthcare, pensions, etc., things are much worse. Yet it is conventional wisdom that the U.S. has the luxury of several years to get its fiscal house in order. And there is today great faith that economic recovery will, as it always does, lead a revival of government receipts and ensure rapidly declining deficits. Count me skeptical. The previous Bubble helped disguise underlying structural debt issues at the state, local and federal levels. Going forward it's payback time.

First of all, economic recovery on its own won't rectify the federal deficit problem. Instead, the expansion of private-sector Credit will prove the key. Economic recovery is thus far having little impact on deficits specifically because the current expansion is financed chiefly through government borrowing and spending. It is the expansion of private-sector debt that creates government receipts that are not offset by rising expenditures - thus reducing fiscal deficits. The optimists take it for granted that this recovery will work as they always do - that fretting over U.S. structural debt problems is premature by a number years.

There are important factors unique to this cycle that I believe make it improbable that private-sector Credit will expand sufficiently to promote federal government debt relief. First, in the post-housing mania environment, it will take years for a substantial rebound in private mortgage Credit growth - and perhaps decades to return to 2005's and 2006's $1.4 Trillion annual expansions. The demand for borrowings is much reduced, while Credit standards have tightened meaningfully from the manic years.

Moreover, it was the historic expansion of mortgage Credit over the past decade that so inflated system Credit and, in the process, altered the underlying structure of the U.S. "Bubble economy." The inflation of asset prices, incomes, corporate cash flows, and government receipts fashioned a system acutely dependent on robust Credit creation. The entire system became dependent on enormous, uninterrupted and risky Credit expansion. Today, the private-sector Credit mechanism suffers from severe post-Bubble impairment. At the same time, massive Federal government intervention has sustained the Bubble economic structure with its outsized Credit appetite.

In the current stock market frenzy, the economy's structure and the prospects for private-sector Credit hardly seem relevant. The underlying fragility of private-sector Credit is masked. The markets are buoyant, while economic recovery gains momentum. Apparently, there's no reason to focus on Greek debt woes, China's vulnerable Bubble, Goldman's and Wall Street's trust issues, or the uncertainties associated with financial reform - not with corporate earnings surging and many stocks in virtual melt-up. Expectations have adjusted sharply higher, with most now believing the markets are discounting quite favorable economic prospects. I would instead hold the view that reflated securities markets are again nurturing financial and economic vulnerability.

Recent issues in Greece, China, Wall Street and Washington should not be dismissed. Importantly, this confluence of developments holds the potential to further restrict the capacity and stability of private-sector Credit. The Greek debt crisis appears to have created dislocation in the Credit default swaps marketplace. This will likely increase market volatility, along with heightened susceptibility for market yields to lurch higher, while perhaps hurting liquidity in government debt markets generally. This may not be an issue for Treasuries today, but it could foster debt market vulnerability going forward and make the inevitable bear market even more challenging.

The SEC's allegations against Goldman increase the odds of meaningful financial reform. Risk-taking by the major financial institutions will be further reigned in; trust in contemporary Wall Street finance will be further shaken. There will be more intense efforts to crack down on over-the-counter derivatives and push derivative trading to the exchanges. None of this would seem to have a major impact today - but I view these developments supporting my expectation for restrained private-sector Credit growth going forward.

Over the years, I've emphasized the prominent role "Wall Street alchemy" played in fueling Credit Bubble excess. The Street's astounding capacity to transform risky loans into perceived safe and liquid securities was absolutely fundamental to the Credit Bubble. The OTC derivatives markets - including collateralized debt obligations, asset-backed securities, Credit default swaps, auction-rate securities, etc. - were critical for the intermediation of risky, high-yielding loans into "money"-like securities. This brand of risk intermediation and distortion was instrumental to the historic boom and bust - and this week it returned to the regulation spotlight.

As I've attempted to explain over the years, risk intermediation invariably becomes a central issue inherent to protracted Credit Bubbles and their resulting Bubble Economies. The amount of Credit necessary to sustain the Bubbles rises each year. And each passing year requires an increasing (exponentially-rising) amount of riskier Credit. Our government's massive injection of Credit/purchasing power coupled with interest rate and market liquidity intervention sustained the existing economic structure. As they say, "that's the good news."

For the private-sector Credit mechanism to supplant government Credit will require an enormous expansion of risky loans. These risky Credits must then either be held directly by the financial sector or intermediated and sold into the marketplace. Admittedly, this may not be much of an issue today - with government Credit expansion and monetary stimulus abounding. But there is no escaping the harsh reality that acute Credit vulnerability is only held at bay by Trillion dollar deficits and ultra-loose financial conditions. I am skeptical of notions of shrinking deficits and a graceful Fed exit.

The unfolding Greek debt crisis, China Bubble vulnerability, and more intense scrutiny of Wall Street risk intermediation now work in confluence to increase the probability for a negative surprise in our risk markets. Sure, the equities bulls have become intoxicated by some incredible stock and sector performance. But equity market reflation must be approaching the point of unnerving the bond market. And it can't help sentiment that, as reported today by CNBC's Steve Liesman, a rising number of FOMC members support a timely sale of assets and a removal of the Fed's extraordinary liquidity measures. More bearish fundamentals for the private-sector Credit mechanism gladly ignored by a stock market Bubble.