In what was another volatile week, the S&P500 declined 2.1% (down 4.5% y-t-d), and the Dow fell 2.3% (down 3.2% y-t-d). The Banks sank 4.8% (up 11.5%), and the Broker/Dealers declined 2.1% (down 7.5%). The Morgan Stanley Cyclicals sank 5.2% (down 2.4%), and the Transports lost 4.3% (up 1.4%). The Morgan Stanley Consumer index declined 1.5% (down 2.1%), and the Utilities fell 2.1% (down 10.1%). The S&P 400 Mid-Caps sank 3.6% (up 1.3%), and the small cap Russell 2000 dropped 4.4% (up 1.4%). The Nasdaq100 declined 1.1% (down 1.5%), and the Morgan Stanley High Tech index fell 1.3% (down 5.9%). The Semiconductors declined 2.1% (down 3.2%). The InteractiveWeek Internet index lost 1.3% (up 0.1%). The Biotechs dipped 0.8%, reducing 2010 gains to 10.8%. Although bullion added about $5.0, the HUI gold index dropped 2.1% (up 3.4%).

One-month Treasury bill rates ended the week at 10 bps and three-month bills closed at 11 bps. Two-year government yields declined 3 bps to 0.68%. Five-year T-note yields fell 11 bps to 1.92%. Ten-year yields fell 9 bps to 3.20%. Long bond yields declined 9 bps to 4.13%. Benchmark Fannie MBS yields dropped 9 bps to 4.04%. The spread between 10-year Treasury and benchmark MBS yields was unchanged at 84 bps. Agency 10-yr debt spreads declined one basis point to 34 bps. The implied yield on December 2010 eurodollar futures declined 5 bps to 0.945%. The 10-year dollar swap spread increased 3.25 to 11.50. The 30-year swap spread increased 3.0 to negative 15.50. Corporate bond spreads were wider. An index of investment grade spreads widened 10 to 126 bps, and index of junk bond spreads widened 40 to a six-month high 587 bps.

Debt issuance remained quite slow. Investment grade issuers included Con Edison NY $700 million, Waste Management $600 million, Health Care REIT $450 million, Duke Energy $450 million, Tristate Generation $400 million, International Game Technology $300 million, Tanger Factory Outlet $300 million and Oklahoma Gas & Electric $250 million.

Junk issuers included Spectrum Brands $750 million.

I saw no converts issued.

International dollar debt sales included Bank of Montreal $2.0bn.

U.K. 10-year gilt yields fell 7 bps to 3.51%, and German bund yields sank 10 bps to a record low 2.58%. Greek 10-year bond yields jumped 48 bps to 8.14%, and 10-year Portuguese yields surged 44 bps to 5.11%. The German DAX equities index was little changed (down 0.3% y-t-d). Japanese 10-year "JGB" yields rose about 2 bps to 1.265%. The Nikkei 225 rallied 1.4% (down 6.1%). Emerging markets were mostly weaker. For the week, Brazil's Bovespa equities index dipped 0.4% (down 10.1%), and Mexico's Bolsa declined 1.8% (down 3.5%). Russia's RTS equities index fell 2.7% (down 6.8%). India's Sensex equities index gained 1.5% (down 2.0%). China's Shanghai Exchange was hit for 3.8% (down 22.1%). Brazil's benchmark dollar bond yields increased 2 bps to 4.84%, while Mexico's benchmark bond yields declined 6 bps to 4.81%.

Freddie Mac 30-year fixed mortgage rates added one basis point last week to 4.79% (down 50bps y-o-y). Fifteen-year fixed rates declined one basis point to 4.20% (down 59bps y-o-y). One-year ARMs were unchanged at 3.95% (down 86bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates up one basis point to 5.65% (down 83bps y-o-y).

Federal Reserve Credit declined $4.0bn last week to $2.320 TN. Fed Credit was up $99.8bn y-t-d (10.6% annualized) and $254bn, or 12.3%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 6/2) jumped $9.6bn to a record $3.076 TN. "Custody holdings" have increased $121bn y-t-d (9.6% annualized), with a one-year rise of $344bn, or 12.6%.

M2 (narrow) "money" supply was little changed to $8.574 TN (week of 5/24). Narrow "money" has increased $61.4bn y-t-d. Over the past year, M2 grew 1.7%. For the week, Currency dipped $0.6bn, while Demand & Checkable Deposits rose $16.8bn. Savings Deposits declined $12.3bn, and Small Denominated Deposits declined $1.7bn. Retail Money Fund assets declined $1.5bn.

Total Money Market Fund assets (from Invest Co Inst) declined $9.0bn to $2.840 TN. In the first 22 weeks of the year, money fund assets dropped $454bn, with a one-year decline of $924bn, or 24.5%.

Total Commercial Paper outstanding dropped $10.2bn last week to $1.063.2 TN. CP has declined $106.8bn, or 21.6% annualized, year-to-date, and was down $181bn from a year ago.

International reserve assets (excluding gold) - as tallied by Bloomberg's Alex Tanzi - were up $1.597 TN y-o-y, or 23.6%, to a record $8.367 TN.

Global Credit Market Watch:

June 4 - Bloomberg (Kate Haywood): "Credit-default swaps on sovereign bonds surged to a record on speculation Europe's debt crisis is worsening after Hungary said it's in a 'very grave situation' because a previous government lied about the economy. The cost of insuring against losses on Hungarian sovereign debt jumped 107.5 bps to a record 416... Swaps on France, Austria, Belgium and Germany also rose, sending the Markit iTraxx SovX Western Europe Index of contracts on 15 governments 21 bps higher to an-all time high of 174.4."

June 4 - Bloomberg (Sapna Maheshwari): "Sales of U.S. corporate bonds fell 53% this week and issuance of high-yield company debt halted on sustained concern that the sovereign debt crisis in Europe may slow global economic growth... Overall sales declined to the third-lowest this year..."

June 4 - Bloomberg (Emre Peker): "Calpine Corp., the largest U.S. generator of natural-gas-fueled electricity, and at least five more borrowers are being forced to boost interest rates on proposed loans after the market's worst month since 2008. The margin Calpine offered to pay over lending benchmarks for a $1.3 billion loan increased by as much as 2 percentage points to 5.5 percentage points, while the remaining companies had to raise rates from 0.75 percentage point to 4.5 percentage points...Prices of high-yield, high-risk loans fell 3.89% during last month..."

June 3 - Bloomberg (Keith Jenkins and Justin Carrigan): "The European Central Bank's purchases of the region's government bonds are failing to entice other buyers into the market, Nomura International Plc said. 'Prospects for country spreads now look to be almost entirely dependent on central-bank purchase operations and there appears to be little buying interest elsewhere,' Ylva Cederholm... wrote... 'The program has been successful to the extent that it has brought some relative stability. However, it does not seem enough to generate any self-sustaining momentum and it is hard to see this changing until more concrete judgements on problem-state fiscal progress can be made.'"

June 3 - Financial Times (Tom Braithwaite): "Congressional negotiators are moving to toughen finanical reform legislation, raising the chances that banks will face a strict ban on proprietary trading and a new conflict of interest rule, people involved in the deliberations say. Lawmakers return from recess next week to merge bills passed by the House of Representatives and Senate, and a proposal - opposed by banks - to toughen a ban on proprietary trading and stop them from betting against products they sell to customers has re-emerged during preparatory work. The provision, sponsored by Jeff Merkley and Carl Levin, two Democratic senators, would toughen the 'Volcker rule', which bans banks from trading for their own account or owning hedge funds and private equity firms... Mr Levin said even though the Treasury would 'probably...want as much power as they can get to...modify [the bill]', he thought Congress should write a strong final version. 'Merkley-Levin in general is very much alive,' Mr Levin said. 'The proprietary trading provisions from a legislative perspective are very much in the mix.'"

June 2 - Bloomberg (Christine Harper): "Wall Street's biggest firms are considering the suitability of selling opaque financial products to governments, endowments and not-for-profit institutions after the contracts magnified credit-market losses that plunged the U.S. into a recession. 'There is no distinction among very different groups of investors, and this is where things might change,' said Dino Kos, a managing director at Portales Partners... and former head of the Federal Reserve Bank of New York's open market operations. 'Wall Street cannot pretend anymore that the treasurer of a small town in the Midwest on a civil service salary and no analytical support has the same level of sophistication as a specialized hedge fund.'"

June 3 - Bloomberg (Gabi Thesing): "Overnight deposits with the European Central Bank rose to a record yesterday as the sovereign debt crisis made banks wary of lending to each other. Banks lodged 320.4 billion euros ($394 billion) in the ECB's overnight deposit facility at 0.25%, compared with 316.4 billion euros the previous day..."

June 2 - Bloomberg (Sapna Maheshwari and Kate Haywood): "The market for corporate bond sales closed as concern European banks will take more writedowns and losses led investors to shun all but the safest government debt. No companies issued bonds in the U.S. yesterday... The global new issue market failed to revive after declining to $70 billion last month, less than half of April's tally and the least since August 2003..."

Global Government Finance Bubble Watch:

June 3 - Bloomberg (Darrell Preston): "U.S. states reduced spending for a second consecutive year as the longest U.S. recession since the 1930s cut tax revenue, a survey by two associations said. Governors may struggle to raise spending in fiscal 2011... as they close deficits without the aid of federal stimulus money that runs out this year, according to a report by the National Governors Association and National Association of State Budget Officers. States will have dealt with $296.6 billion of budget deficits from fiscal 2009 to 2012, covered in part by $135 billion of federal money received under stimulus legislation, the groups said. Governors still face $127.4 billion of deficits for the rest of fiscal 2010, 2011 and 2012. 'The federal government has helped states avoid even more significant cuts to state services and/or proposed tax increases,' according to the report... 'The loss of these funds combined with the anticipated slow recovery of state revenues is expected to result in the continuation of difficult state fiscal conditions.'"

June 2 - Bloomberg (Andrew Frye and William Selway): "Warren Buffett, whose Berkshire Hathaway Inc. has been trimming its investment in municipal debt, predicted a 'terrible problem' for the bonds in coming years. 'There will be a terrible problem and then the question becomes will the federal government help,' Buffett, 79, said today at the U.S. Financial Crisis Inquiry Commission... 'I don't know how I would rate them myself. It's a bet on how the federal government will act over time.'"

June 2 - Bloomberg (Keiko Ujikane and Tatsuo Ito): "The Japanese government may suffer fiscal collapse in 10 to 15 years if the ruling Democratic Party of Japan maintains its expansionary spending policy, said Takao Komine, a professor at Hosei University and former bureaucrat. Even though 'Japan's fiscal conditions are very severe, people were saying voicing such concern was like crying wolf,' Komine, 63, said... 'However, since the wolf has appeared in Greece, people have started worrying it may show up in Japan as well.'"

Currency Watch:

The dollar index rose 2.0% to 88.239 (up 13.3% y-t-d). For the week on the upside, the British pound increased 0.2%. For the week on the downside, the Australian dollar declined 2.8%, the Brazilian real 2.5%, the Euro 2.4%, the Danish krone 2.4%, the Swedish krona 2.1%, the South African rand 2.1%, the Norwegian krone 1.7%, the New Zealand dollar 1.2%, the Japanese yen 1.0%, the Canadian dollar 0.6%, the Singapore dollar 0.6%, and the Swiss franc 0.3%.

Commodities Watch:

June 3 - Bloomberg (Garth Theunissen): "Rand Refinery Ltd., the world's largest gold-smelting facility, raised production of Krugerrand coins to a 25-year high... Output last week jumped 50% to 30,000 ounces of blank coins for minting..."

The CRB index declined 2.3% (down 12.2% y-t-d). The Goldman Sachs Commodities Index (GSCI) fell 2.7% (down 9.5% y-t-d). Spot Gold added 0.4% to $1,220 (up 11.2% y-t-d). Silver dropped 5.3% to $17.44 (up 3.5% y-t-d). July Crude dropped $2.87 to $71.10 (down 10% y-t-d). July Gasoline declined 1.6% (down 3% y-t-d), while July Natural Gas surged 10.5% (down 14% y-t-d). July Copper sank 9.6% (down 16% y-t-d). July Wheat dropped 4.8% (down 20% y-t-d), and July Corn sank 5.3% (down 18% y-t-d).

China Watch:

June 3 - Bloomberg: "China will extend its home-appliance trade-in program until the end of 2011 and may add to or change the number of products available under the plan to boost sales, the Ministry of Commerce said... The trade-in, which started in June last year as part of the government's $586 billion stimulus package, will also be gradually extended nationwide from the nine provinces and cities currently offering subsidies..."

June 2 - Bloomberg (Weiyi Lim): "Hon Hai Group, the assembler of Apple Inc.'s iPhones, will raise workers' salaries by at least 30%, more than indicated earlier, after a series of suicides at the world's largest contract manufacturer of electronics. Workers with a monthly wage of 900 yuan ($131.77) will be paid 1,200 yuan effective immediately..."

May 31 - Bloomberg (Makiko Kitamura): "Honda Motor Co., Japan's second- biggest automaker, will raise workers' monthly wages after a parts factory strike shut down almost all Chinese production. The workers will receive a 24% pay increase to 1,910 yuan ($280 dollars) per month..."

May 31 - Bloomberg (Bei Hu): "A senior adviser to China's $130 billion state pension pool and a former Asia prime brokerage head at Morgan Stanley are teaming up to start a China-focused hedge fund in September... The fund will trade Chinese stocks listed domestically or on an international exchange such as Hong Kong or the U.S., he said."

May 31 - Bloomberg (Le-Min Lim): "Zao Wou-ki showed he is Asia's top-selling living artist at auction when all 17 of his canvases offered at a Hong Kong sale beat estimates... The abstract paintings by China-born, Paris-based Zao (1921-) sparked a frenzy of bidding each time they came on the block, often pushing prices to several times estimates at Christie's International's auction... Zao's works fetched a combined HK$332.3 million ($43 million) during the marathon two-day sale..."

June 3 - Bloomberg (Le-Min Lim): "Paintings, imperial Chinese treasures and gems were auctioned for HK$2.29 billion ($294 million) in Hong Kong, the second-highest tally for an art sale in the city, with Chinese buyers paying top dollar for the rarest items."

India Watch:

May 31 - Bloomberg (Kartik Goyal): "India's economic growth accelerated, adding pressure on the central bank to raise interest rates... Gross domestic product rose 8.6% in the three months ended March 31 from a year earlier after a revised 6.5% gain in the previous quarter..."

June 3 - Bloomberg (Unni Krishnan): "India's central bank needs to consider a cash crunch in setting interest rates as companies pay third-generation phone license fees, said Kaushik Basu, the chief economic adviser in the finance ministry. 'With the 3G auction and demand for credit having picked up, there is a credit hunger now,' Basu, 58, said... 'The Reserve Bank of India will need to take stock of it as it balances the demands of inflation management and growth in deciding actions on policy rates.'"

Asia Bubble Watch:

June 3 - Bloomberg (Sangim Han and William Sim): "South Korea's 2010 trade surplus will probably exceed the government's earlier estimate of $20 billion as the global economic recovery spurs demand for the nation's goods, the Knowledge Economy Ministry said."

Latin America Watch:

May 31 - Bloomberg (Paulo Winterstein): "Brazilian local government debt sales fell to a 17-month low in May after Europe's debt crisis drove up emerging-market borrowing costs."

Unbalanced Global Economy Watch:

May 31 - Bloomberg (Greg Quinn): "Canada's economy expanded at the fastest pace in a decade in the first quarter... Gross domestic product grew 6.1% at an annualized pace..."

June 3 - Bloomberg (Scott Reyburn): "A Claude Monet water-lily painting is expected to fetch as much as 40 million pounds ($58.6 million) in what will be the U.K.'s most valuable art auction ever, host Christie's International said..."

June 2 - Bloomberg (Simone Meier): "European producer-price inflation accelerated to the fastest pace in more than a year in April... Factory-gate prices in the euro region rose 2.8% from a year earlier..."

June 3 - Bloomberg (Mark Deen and Gregory Viscusi): "France's unemployment rate was unchanged in the first quarter... The jobless rate was unchanged from a revised 9.9%..."

June 2 - Bloomberg (Emma Ross-Thomas): "Spain's consumer confidence fell the most on record in May as the government announced the deepest budget cuts in at least three decades to stem borrowing costs."

June 2 - Bloomberg (Jacob Greber): "Australia's economy expanded for a fifth straight quarter as government stimulus spending helped counter consumer demand that weakened after... interest-rate increases. Gross domestic product rose 0.5% in the three months to March 31..."

June 3 - Bloomberg (Jacob Greber): "Australian exports excluding farm goods surged by the most in almost three decades in April as shipments of iron ore and coal to China pushed the trade balance to a surplus for the first time in 12 months. Shipments of non-farm goods jumped 18.4% from March to A$14.8 billion ($12.5 billion)..."

May 31 - Bloomberg (Tracy Withers): "New Zealand business confidence increased to an 11-year high in May, adding to signs of an acceleration in economic growth."

U.S. Bubble Economy Watch:

June 4 - Bloomberg (Shobhana Chandra): "Unemployed Americans are facing the longest wait on record to find work... The average duration of unemployment jumped to 34.4 weeks in May from 33 weeks the prior month and 16.5 weeks in December 2007... The number of unemployed has almost doubled to 15 million since the start of worst slump since the 1930s."

Central Bank Watch:

May 31 - Bloomberg (Eunkyung Seo): "South Korea proposed central banks set up a permanent arrangement for foreign-currency swaps to help address the type of funding shortages that emerged during the global financial crisis. 'Broadening and institutionalization' of such measures could help establish 'a global financial safety net,' Bank of Korea Governor Kim Choong Soo said... at a conference of central bankers."

May 31 - Bloomberg (Maria Levitov): "Russia's central bank cut its main interest rates for the 14th time in as many months to bolster the country's economic recovery... Bank Rossii pared the refinancing rate by a quarter point to 7.75%..."

June 3 - Bloomberg (Svenja O'Donnell): "Bank of England Governor Mervyn King, the highest-paid among the world's top central bankers last year, refused a raise for this year and 2011 as an era of wage restraint looms to curb Britain's record budget deficit."

Real Estate Watch:

June 4 - Bloomberg (Sarah Mulholland): "Late payments on commercial mortgages bundled and sold as bonds rose 49 bps to 7.97% last month, according to Fitch... The increase was fueled by a $1 billion jump in delinquencies on office loans..."

Muni Watch:

June 4 - Bloomberg (Dunstan McNichol): "Janet and Mark Hartmann, a New Jersey couple with 68 years of government jobs between them, may retire ahead of plan because the state is $102 billion short of funds needed to pay all the benefits it owes. New Jersey and 20 other states are urging early retirements, cutting benefits and demanding employees contribute more in the face of what the Pew Center on the States says is a $1 trillion gap between available assets and what's owed workers. Declining tax revenue has left governments unable to make up the $724 billion of market losses suffered by the 100 largest state retirement plans in the two years that ended last June... Some states have skipped payments to retirement accounts or borrowed to make them, endangering their credit ratings."

June 4 - Bloomberg (Martin Z. Braun): "Interest rates on adjustable-rate municipal bonds guaranteed by BP Plc have risen as much as 10-fold on concern that cleanup and litigation costs... will further damage its credit rating. Yields on $288.5 million of floating-rate debt issued by a Lincoln, Nebraska, municipal gas utility and guaranteed by BP rose to 5%... from 0.5% last week... Bonds issued to finance sewage and solid-waste disposal facilities at BP's U.S. refineries and chemical plants rose to 2.7% from 0.27%... BP backs more than $3.5 billion of U.S. municipal obligations..."

New York Watch:

June 3 - Bloomberg (Henry Goldman): "New York City Mayor Michael Bloomberg may confront larger-than-predicted budget deficits because of increased labor costs and declining federal economic stimulus aid, state Comptroller Thomas DiNapoli said. The comptroller...said Bloomberg may face a $729 million deficit in his $64 billion spending proposal for the 2011 fiscal year starting July 1; a $5.5 billion gap, $1.7 billion more than projected, for fiscal 2012; and a $6.6 billion imbalance for 2013, or $2 billion more than forecast. 'Our review indicates these gaps could be significantly larger depending on the outcome of collective bargaining, and on how the state and city address the loss of federal stimulus funds allocated for education,' DiNapoli's office said..."

June 2 - Bloomberg (Michael Quint): "New York lawmakers passed a ninth consecutive weekly emergency spending bill to keep the state government running while they remain divided over how to close a $9.2 billion budget gap... New York lacks about $600 million to pay all its June 1 bills..."

June 2 - Bloomberg (Allison Bennett): "New York City Mayor Michael Bloomberg said he will eliminate scheduled raises for teachers and principals for the next two years to cope with the loss of state funding for education."

Speculator Watch:

June 1 - Bloomberg (Katherine Burton and Saijel Kishan): "John Paulson, Louis Bacon and Andreas Halvorsen navigated the global market turmoil of 2008 with little or no damage. They weren't as successful last month as the Dow Jones Industrial average had its worst May since 1940. Hedge funds lost an average of 2.7% through May 27, according to the HFRX Global Hedge Fund Index... It was the biggest decline since November 2008, when hedge funds lost 3% in the wake of Lehman Brothers Holdings Inc.'s bankruptcy... Almost every strategy lost money in May, according to Hedge Fund Research Inc...."

Crude Liquidity Watch:

June 3 - Bloomberg (Zainab Fattah): "Dubai house prices, which halved since mid-2008, may drop another 15% to 20% this year on an increase in supply as more real estate projects are completed, Credit Suisse Group AG said."

Gauging Financial Conditions:

Until this afternoon's sale, there hadn't been a junk bond issued in more than a week. Total dollar corporate bond issuance dropped to about $5.2bn (according to Bloomberg), including $2.0bn sold by Bank of Montreal. This week's corporate debt sales were down significantly from the 2010 average of about $21bn. For the month of May, junk issuance fell to $6.8bn, down about 80% from March and April levels.

Junk bond spreads (to Treasuries) widened a notable 40 bps this week to 587 bps, the widest level in six months. During the past month, junk spreads have jumped more than 100 bps. Investment-grade spreads widened 10 bps this week to 126 bps, up from the low earlier this year of 75 bps. Leveraged loan and private-label MBS prices have weakened.

European Credit markets this week saw even more dramatic price moves. Europe's Credit default swap (CDS) market is in disarray. Default protection (5-yr) on Greek bonds jumped 90 bps this week to 740bps. More troubling were big increases in the cost of buying default protection on other European sovereign issuers. Portugal CDS rose 28 bps to 353 bps. Ireland CDS rose 50 bps to 285 bps. Spain CDS jumped 48 bps to 265 bps, and Italy rose 30 bps to 235 bps. It's a rout.

Have financial conditions tightened, and what would this mean for U.S. economic prospects? There is mounting evidence that the overall U.S. economy has slowed over the past month. Today's jobs data were not encouraging. The 41,000 private-sector payroll gain was down from April's 218,000 and the weakest since January's 16,000. It is worth noting that recent retail sales data have demonstrated a marked slowdown, while weekly mortgage application data have been dismal. The track of global financial conditions is not supportive of growth abroad or at home.

Importantly, there have been changes in some of the key dynamics that were responsible for the historic loosening of financial conditions experienced over the past 18 months or so. I have referred to this extraordinary backdrop as the emergence of Global Government Finance Bubble dynamics. A key facet to this latest Bubble included market perceptions that government fiscal and monetary policymakers would sustain financial and economic recoveries. They had the right prescription (massive fiscal and monetary stimulus), and there were no near-term impediments to implementing their market-friendly programs - or so the markets thought.

Global markets are rapidly reassessing views regarding the competence, effectiveness, and overall capacity of policymaking. European politicians were incapable of moving capably to thwart and contain the Greek debt crisis. Here at home, the pendulum had swung with force in the direction of great hopes and expectations for a greater government role in managing the economy. Rather quickly, fragile public faith in the capacity of Washington to resolve problems has faltered. The powerlessness to stop a gushing oil well on the bottom of the Gulf of Mexico - viewed live on the Internet - does not inspire confidence. Less confidence and more uncertainty equate with reduced risk-taking.

Still, most view the U.S. situation in a positive light. There is faith in the underlying strength of the economic recovery. And the consensus view holds that the U.S. financial system is rather immune from European debt problems. This view is bolstered by recent strength in Treasuries and the dollar. The risk of a bursting Bubble doesn't appear on anyone's radar.

Gauging overall U.S. financial conditions is no easy endeavor. From the bearish perspective, corporate debt markets have tightened meaningfully. Financial flows have reversed away from risk assets. I would expect these developments to stop any fledgling jobs recovery in its tracks. Traditionally, a crisis-induce collapse in Treasury and MBS yields would at least spur refinancings and home buying. Yet such benefits will surely underwhelm in this post-housing mania environment.

At the same time, we must recognize that corporate and mortgage Credit have been playing a significantly lesser role compared to previous recoveries/expansions. While conditions have tightened in corporate Credit, they have loosened further for the U.S. Treasury. For now, however, I don't expect lower Treasury yields to engender much benefit to the U.S. economy. Federal spending levels are already incredibly inflated and additional stimulus measures are not yet in the offing. So the flight to Treasuries should not greatly benefit general financial conditions. So far, the abrupt collapse in Treasury yields and dollar rally have hurt the leveraged players (carry trades and such) and fostered general market instability.

Bank lending has been stagnant for two years. The economic recovery was instead fueled by a dramatic government-induced loosening of conditions throughout the financial markets. The massive financial bailout, zero interest rates, and a Trillion-plus Federal Reserve monetization were all instrumental in the reflating of U.S. and global securities markets. I have argued that this reflation was an especially risky proposition.

Central to the bearish thesis has been the dynamic where global risk markets were inflated with unsustainable market-based financial flows. The nature of such flows creates inherent fragility, and we'll work to gauge ramifications from faltering markets and another round of painful losses. Going forward, I expect rising investor/speculator angst to have a major deleterious impact on general financial conditions in this age of securitized finance.

Admittedly, it is not easy to explain how the dots from Greece are connected rather directly to the U.S. economy. They are affixed through global financial conditions - our New Age financial infrastructure of market-based Credit; gigantic risk markets where asset prices play prominently in confidence and spending; the massive pool of performance-chasing speculative finance; and market perceptions that are too often dictated by government policy actions. In this extraordinary age of marketable finance and activist central bank inflationism, the securities markets and market perceptions have become (too) critically important.

When confidence is running high, financial conditions run loose. The marginal borrower - Greece, a highly-leveraged U.S. corporation, or perhaps a private-equity fund - enjoys easy Credit Availability. The tendency of things is for finance to expand, asset prices to inflate and economic "output" to increase. And they all feed merrily on themselves. But - in this unstable financial world - the Credit noose begins a rapid tightening the moment confidence is shaken. And the inevitable reversal of financial flows and attendant speculator deleveraging ensures vicious contagion effects, acute fragility, and destabilizing crises of confidence.

One can say that reflations fueled by marketable-based finance are prone to be dynamic and powerful. Unfortunately, once unleashed, these forces are just as powerful on the downside as during expansionary periods. Payback time comes when greed turns to fear and bull falls victim to bear. Finance proves fickle and unreliable. I fear U.S. financial and economic recoveries were built upon inflated expectations and unjustified confidence. Fleeting confidence now creates myriad risks associated with unmet expectations, disappointment and disillusionment.