For the week, the S&P500 surged 5.1% (down 3.3% y-t-d), and the Dow gained 5.0% (down 2.2% y-t-d). The Banks rose 8.9% (up 15.6%), and the Broker/Dealers gained 5.1% (down 12.2%). The Morgan Stanley Cyclicals rallied 6.6% (down 1.3%), and the Transports rose 5.5% (up 1.5%). The Morgan Stanley Consumer index increased 4.5% (down 1.2%), and the Utilities jumped 5.5% (down 4.1%). The S&P 400 Mid-Caps rallied 5.1% (up 1.8%), and the small cap Russell 2000 gained 4.8% (up 0.6%). The Nasdaq100 rose 4.8% (down 2.4%), and the Morgan Stanley High Tech index jumped 5.0% (down 6.2%). The Semiconductors ended the week 5.6% higher (down 2.4%). The InteractiveWeek Internet index surged 5.9% (down 0.4%). The Biotechs increased 3.0%, boosting 2010 gains to 10.1%. Although bullion was little changed, the HUI gold index rallied 2.1% (up 7.6%).

One-month Treasury bill rates ended the week at 16 bps and three-month bills closed at 15 bps. Two-year government yields added one basis point to 0.60%. Five-year T-note yields added 2 bps to 1.78%. Ten-year yields rose 8 bps to 3.06%. Long bond yields jumped 10 bps to 4.04%. Benchmark Fannie MBS yields declined 3 bps to 3.72%. The spread between 10-year Treasury yields and benchmark MBS yields narrowed 11 bps to 66 bps. Agency 10-yr debt spreads narrowed about one basis point to 29.5 bps. The implied yield on December 2010 eurodollar futures dropped 10.5 bps to 0.63%. The 10-year dollar swap spread declined 3 to 5.25. The 30-year swap spread declined 2 to negative 20.25. Corporate bond spreads were mixed. An index of investment grade spreads narrowed 12 to 110 bps, and an index of junk bond spreads narrowed 2 to 681 bps

Debt issuance picked up. Investment grade issuers included Time Warner $3.0bn, Danfin Funding $960 million, Duke Energy $500 million, Florida Gas Transmission $850 million, Plains All American Pipeline $400 million, New York Life $400 million, Kroger $300 million, and Hillenbrand $150 million.

Junk issuers included Fidelity National $1.1bn, CKE Restaurants $600 million, and Postmedia Network $275 million.

I saw no converts issued.

International dollar debt sales included Credit Suisse $2.0bn, Poland $1.5bn, Croatia $1.25bn, Royal Bank of Canada $1.0bn, International Bank of Reconstruction & Development $1.0bn, Corp Andina de Fomento $600 million, Lafarge $550 million, KHFC $500 million, ICICI Bank $500 million and Banco Mercantile $200 million.

U.K. 10-year gilt yields declined 2 bps to 3.33%, while German bund yields rose 5 bps to 2.63%. Greek 10-year bond yields rose 6 bps to 10.27%, and 10-year Portuguese yields added one basis point to 5.37%. The German DAX equities index jumped 4.0% (up 1.8% y-t-d). Japanese 10-year "JGB" yields rose 6 bps to 1.15%. The Nikkei 225 recovered 4.1% (down 9.1%). Emerging markets were strong. For the week, Brazil's Bovespa equities index gained 3.2% (down 7.5%), and Mexico's Bolsa gained 2.0% (down 0.4%). Russia's RTS equities index increased 3.6% (down 5.5%). India's Sensex equities index gained 2.1% (up 2.1%). China's Shanghai Exchange rallied 3.7% (down 24.6%). Brazil's benchmark dollar bond yields fell 13 bps to 4.54%, and Mexico's benchmark bond yields dropped 16 bps to 4.44%.

Freddie Mac 30-year fixed mortgage rates dipped one basis point last week to 4.57% (down 63bps y-o-y). Fifteen-year fixed rates rose 3 bps to 4.07% (down 62bps y-o-y). One-year ARMs fell 5 bps to 3.75% (down 107bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down one basis point to 5.49% (down 88bps y-o-y).

Federal Reserve Credit declined $1.7bn last week to $2.315 TN. Fed Credit was up $94.7bn y-t-d (8.2% annualized) and $337bn, or 17.0%, from a year ago. Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 7/7) increased $2.8bn to a record $3.100 TN. "Custody holdings" have increased $145bn y-t-d (9.5% annualized), with a one-year rise of $314bn, or 11.3%.

M2 (narrow) "money" supply rose $11.9bn to $8.624 TN (week of 6/28). Narrow "money" has increased $112bn y-t-d, or 2.6% annualized. Over the past year, M2 grew 2.2%. For the week, Currency added $1.0bn, and Demand & Checkable Deposits jumped $19.0bn. Savings Deposits dipped $2.7bn, and Small Denominated Deposits declined $3.0bn. Retail Money Fund assets slipped $2.3bn.

Total Money Market Fund assets (from Invest Co Inst) jumped $17.5bn to $2.830 TN. In the first 27 weeks of the year, money fund assets dropped $464bn, with a one-year decline of $838bn, or 22.9%.

Total Commercial Paper outstanding declined $7bn to $1.091 TN. CP has declined $78bn, or 13.0% annualized, year-to-date, and was down $45bn from a year ago (4.0%).

International reserve assets (excluding gold) - as tallied by Bloomberg's Alex Tanzi - were up $1.617 TN y-o-y, or 23.7%, to a record $8.434 TN.

Global Credit Market Watch:

July 9 - Bloomberg (Sonja Cheung): "Bond sales in Europe jumped this week to the most in almost four months as indicators signaled the economic recovery is on track, opening a 'window of opportunity' for borrowers."

July 6 - Bloomberg (Katrina Nicholas): "The cost of insuring sovereign debt against default climbed 30% on average last quarter amid Europe's escalating fiscal crisis, according to CMA DataVision. Credit-default swaps on 93% of the 70 governments tracked by CMA rose, with Greece temporarily overtaking Venezuela as the country with the world's highest bond risk..."

July 7 - Financial Times (Brooke Masters, Megan Murphy and Francesco Guerrera): "Global investment banking earnings are expected to drop sharply for the second quarter after brutally tough market conditions saw trading commissions dry up and the market for takeovers and initial public offerings freeze. Analysts are predicting that many European banks will see a drop of 50% year on year in sales, trading and advisory revenues... In the US, the boom in trading commissions that powered earnings in the past year also appears to have ground to a halt."

July 6 - Bloomberg (Bryan Keogh): "Bonds sold by real-estate companies are performing the worst compared with the rest of the market since March 2009 on concern the slowing economic recovery will cause more defaults. Yield premiums of bonds sold by real-estate investment trusts, shopping-mall owners and office landlords widened 9 bps... more than those on other debt in June, and continued to rise this month..."

Global Government Finance Bubble Watch:

July 8 - Bloomberg (Sandrine Rastello): "The International Monetary Fund urged European Union policy makers to take further 'decisive' steps to combat a sovereign-debt crisis that it said poses a threat to the world financial system. 'Recent global stability gains are threatened by a confluence of sovereign and banking risks in the euro area that, without continued and concert attention, could spill over to other regions,' the IMF said... The fund urged policy makers to reduce budget deficits, formulate plans to wind down or recapitalize weak banks, and make 'fully operational' a rescue fund to backstop the euro. It also said the European Central Bank should step up purchases of government debt on the secondary market."

Currency Watch:

July 8 - Bloomberg (Yasuhiko Seki): "China bought a net 735.2 billion yen ($8.3bn) of Japanese bonds in May, doubling purchases for this year as it heads for the biggest annual increase since at least 2005."

The dollar index declined 0.6% to 83.95 (up 7.7% y-t-d). For the week on the upside, the Australian dollar increased 4.3%, the New Zealand dollar 3.3%, the Canadian dollar 2.8%, the South Korean won 2.8%, the Mexican peso 2.5%, the South African rand 1.8%, the Swedish krona 1.7%, the Norwegian krone 1.1%, the Brazilian real 0.1%, the Singapore dollar 0.8%, the Taiwanese dollar 0.6%, the Euro 0.6% and the Swiss franc 0.5%. For the week on the downside, the Japanese yen declined 1.0% and the British pound 0.9%.

Commodities Watch:

July 7 - Bloomberg (Alan Crawford and Tony Czuczka): "Gold demand in China, the world's second-largest consumer, gained in the first half... Shanghai Gold Exchange said. The total volume of gold traded on the exchange jumped 59% in the first six months from a year earlier to the equivalent of 3,174.5 metric tons..."

The CRB index gained 2.4% (down 8.0% y-t-d). The Goldman Sachs Commodities Index (GSCI) rallied 4.3% (down 4.5% y-t-d). Spot Gold was unchanged at $1,211 (up 10.4% y-t-d). Silver gained 2.4% to $18.145 (up 7.7% y-t-d). August Crude jumped $4.23 to $76.37 (down 4% y-t-d). August Gasoline surged 4.8% (up 1% y-t-d), while August Natural Gas declined 5.6% (down 21% y-t-d). September Copper jumped 5.2% (down 8% y-t-d). September Wheat jumped 7.0% (down 1% y-t-d), and September Corn increased 3.0% (down 8% y-t-d).

China Watch:

July 8 - Bloomberg: "China's central bank said it will stick to a moderately loose monetary policy as economic growth becomes better balanced between consumption, investment and exports. Money and loan growth was 'reasonable' in the first six months and liquidity in the banking system 'basically appropriate,' the central bank said... The central bank dropped a reference in the previous statement, in March, to the management of loan and credit growth being an 'arduous task.'"

July 7 - Bloomberg: "Chinese banks' $60 billion fund-raising spree will ensure that the 'lending party' fueling the nation's investment and growth continues, according to Victor Shih, a professor at Northwestern University. 'The recapitalization of the banks, once it's finished, will allow them to stock up on ammunition,' Shih said... China's five largest state-controlled commercial banks plan to raise as much as $54.5 billion, including Agricultural Bank of China this week selling $19.2 billion or more of shares in an initial public offering."

July 9 - Bloomberg (Kelvin Wong): "Chinese developers rose after the Oriental Morning Post reported some Shanghai-based commercial banks have resumed providing loans for third-home purchases and have eased lending policies for second-home purchases. The Se Shang's Property Index...rose as much as 3.5% today."

July 6 - Bloomberg: "China's home prices are set to fall as much as 20% in a 'healthy' correction, said Michael Klibaner, head of China research at Jones Lang LaSalle Inc. China's property boom is 'cash-driven' rather than 'leverage-fuelled,' which means there's only a low chance of the type of forced selling that exacerbated the U.S. housing market collapse, he said... That view contrasts with Harvard University's Kenneth Rogoff's prediction yesterday of a 'collapse' in China's property market that will hit the nation's banking system. Property prices in 70 Chinese cities rose 12.4% in May, the second-fastest pace on record, heightening concern a bubble is forming in the nation's housing market."

July 8 - Bloomberg): "China's current-account surplus will shrink for a second year in 2010 as domestic demand plays a greater role in driving the nation's economic growth, according to the State Administration of Foreign Exchange. The gap... amounted to 6.1% of China's gross domestic product last year, down from 9.6% in 2008..."

July 5 - Bloomberg: "China's passenger-car sales growth slowed in June as inflation accelerated, reducing consumers' spending power in the world's largest auto market. Sales of cars, sport-utility vehicles and multipurpose vehicles rose 10.9% from a year earlier to 839,228 last month... That compares with 34% growth in April and 25% in May..."

July 5 - Bloomberg (Sophie Leung and Marco Lui): "Hong Kong's home sales fell to the lowest level in 14 months in June, as the city's government tried to rein in rising prices with rules on new home sales."

India Watch:

July 5 - Bloomberg (Unni Krishnan): "Growth in India's services industry including software and telecommunications accelerated to a two-year high in June, maintaining pressure on the central bank to raise interest rates and curb inflation."

Asia Bubble Watch:

July 9 - Bloomberg (Eunkyung Seo and William Sim): "The Bank of Korea raised its benchmark interest rate for the first time since the global crisis, joining counterparts across Asia in removing monetary stimulus as the region leads world growth... The won neared a two-week high as South Korea joined India, Malaysia and Taiwan in lifting rates in recent weeks..."

July 9 - Bloomberg (Shamim Adam): "Singapore may overtake China as Asia's fastest-growing economy this year, increasing the attractiveness of the city state's stocks and putting pressure on policy makers to check inflation with a stronger currency."

Latin America Watch:

July 8 - Bloomberg (Matthew Bristow): "The International Monetary Fund raised its forecasts for Brazil's and Mexico's economic growth this year while noting that Latin American economies 'face some risk of overheating.'"

July 6 - Bloomberg (Tal Barak Harif and Arnaldo Galvao): "Brazil's bid to wean itself off floating-rate debt, a legacy of 1990s hyperinflation, is faltering as the central bank boosts benchmark borrowing costs from a record low. The percentage of the government's 1.59 trillion reais ($894 billion) of debt that was issued at yields tied to the overnight lending rate, known as Selic, climbed to 33.6% in May from a record low of 30.7% in 2007..."

Unbalanced Global Economy Watch:

July 8 - Bloomberg (Sandrine Rastello): "The International Monetary Fund raised its forecast for global growth this year, reflecting a stronger-than-expected first half... The world economy will expand 4.6% in 2010, the biggest gain since 2007, compared with an April projection of 4.2%..."

July 9 - Bloomberg (Greg Quinn): "Canada's job creation was almost five times more than economists expected in June, led by retailers and other service companies, and the economy has now recovered almost all of the job losses seen since 2008... The jobless rate fell to 7.9%..."

July 5 - Bloomberg (Simone Meier): "European retail sales rose in May as households in Germany, France and Spain stepped up spending. Sales in the 16-nation euro area rose 0.2% from April..."

July 8 - Bloomberg (Christian Vits): "German industrial production rose more than economists forecast in May as the global recovery fueled demand for goods from Europe's largest economy. Production increased 2.6% from April, when it gained a revised 1.2%... From a year earlier, production advanced 12.4%... German factory orders jumped in March and April and exports surged 9.2% in May."

July 8 - Bloomberg (Alan Crawford and Tony Czuczka): "Hamburg, the port city that sends 1 million tons of goods to foreign markets each week, has a reply to those who say Germany's economy is too reliant on exports. 'Nonsense,' said Frank Horch, the city's Chamber of Commerce president... 'You cannot say Germany has to stop exports, it makes no sense. Germany was born out of this.'"

July 5 - Bloomberg (Johan Carlstrom): "Sweden's government raised its growth forecast for this year after exports from the Nordic economy recovered... Gross domestic product will expand 3.3% this year instead of 2.5% as predicted on April 15..."

July 5 - Bloomberg (Paul Abelsky): "Russia had capital inflow of $4.5 billion in the second quarter, the central bank said..."

July 8 - Bloomberg (Daniel Petrie and Melissa Long): "Australia's jobless rate fell below Japan's for the first time since Australia's monthly employment series started in 1978, as China's demand for raw materials drives economic growth in the South Pacific nation."

U.S. Bubble Economy Watch:

July 9 - Bloomberg (Darrell Preston): "Two-thirds of U.S. states saw budget deficits widen this year as tax revenue fell to 2005 levels while demand for services grew...BMO Capital Markets analyst Justin Hoogendoorn said. The growing budget pressure underscores the 'lagging nature' of municipal finance, said Hoogendoorn, managing director with BMO's fixed-income group... 'States will need to continue to trim expenses and raise taxes,' Hoogendoorn said... 'We remain comfortable that states will ultimately take appropriate action.'"

Central Bank Watch:

July 8 - Washington Post (Neil Irwin): "Federal Reserve officials, increasingly concerned over signs the economic recovery is faltering, are considering new steps to bolster growth. With Congress tied in political knots over whether to take further action to boost the economy, Fed leaders are weighing modest steps that could offer more support for economic activity... They are still resistant to calls to pull out their big guns -- massive infusions of cash, such as those undertaken during the depths of the financial crisis -- but would reconsider if conditions worsen... After months of focusing on how to exit from extreme efforts to support the economy, they are looking at tools that might strengthen growth."

July 8 - Bloomberg (Svenja O'Donnell): "Bank of England Governor Mervyn King's commitment to keep up stimulus for the economy during the deepest public spending cuts in half a century is under attack. King may... face renewed dissent by Andrew Sentance, who... sounded the alarm on inflation and made the first push in almost two years to raise the benchmark interest rate from a record low."

GSE Watch:

July 8 - Bloomberg (Lorraine Woellert and Rich Miller): "As the White House pushed for a Wall Street overhaul this year, Republicans hammered Democrats for ignoring two of the biggest problems in American finance: Fannie Mae and Freddie Mac. The government-backed mortgage giants have cost taxpayers $145 billion and counting... The political struggle could be long and bitter. Some Republicans in Congress contend that killing Fannie and Freddie is the only wise course."

Real Estate Watch:

July 6 - Bloomberg (Hui-yong Yu): "Office vacancies in the U.S. rose to the highest level since 1993 in the second quarter as the sluggish economic recovery damps demand from corporate tenants, Reis Inc. said in a report. The vacancy rate climbed to 17.4% from 16% a year earlier and 17.3% in the first quarter... Effective rents... fell 5.7% from a year earlier and 0.9% from the previous three months..."

Fiscal Watch:

July 6 - Bloomberg (Tony Capaccio): "U.S. spending on weapons through 2016 likely will grow faster than the overall defense budget, which will have annual increases of only about 1% above inflation, according to Pentagon Comptroller Robert Hale. Our goal would be to get forces and modernization to grow by 2 or 3%,' Hale said..."

New York Watch:

July 8 - Bloomberg (Michael Quint): "New York Governor David Paterson delivered 6,709 vetoes -- a stack of paper 31 inches high -- to absent lawmakers, trimming $805.3 million of spending that still doesn't close the state's $9.2 billion deficit. With its Senate adjourned, the nation's third-biggest state by population has a spending plan without enough revenue to pay for it."

Illinois Watch:

July 6 - New York Times (Michael Powell): "Even by the standards of this deficit-ridden state, Illinois's comptroller, Daniel W. Hynes, faces an ugly balance sheet. Precisely how ugly becomes clear when he beckons you into his office to examine his daily briefing memo. He picks the papers off his desk and points to a figure in red: $5.01 billion. 'This is what the state owes right now to schools, rehabilitation centers, child care, the state university -- and it's getting worse every single day,' he says... 'This is not some esoteric budget issue; we are not paying bills for absolutely essential services,' he says. 'That is obscene.' For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state's bills and refuses to take the painful steps -- cuts and tax increases -- to close a deficit of at least $12 billion, equal to nearly half the state's budget."

Muni Watch:

July 6 - Bloomberg (Dakin Campbell): "Citigroup Inc., State Street Corp. and U.S. Bancorp are among U.S. banks whose municipal bond holdings have reached a 25-year high just as state budget deficits swell to $140 billion... Commercial lenders added more than $84 billion to their holdings since 2003, according to the Federal Reserve, pushing total investments to $216.2 billion at the end of the first quarter. Bank regulators and ratings companies are ramping up scrutiny of banks most at risk... 'There is a huge untold problem here,' said Walter J. Mix III, a former commissioner of the California Department of Financial Institutions... 'The economics lead to the conclusion that there will be downward pressure on these bonds.'"

July 9 - Bloomberg (Dunstan McNichol): "States may face increased retirement-fund deficits and pressure to stop skipping pension contributions under proposals being reviewed by the Governmental Accounting Standards Board... The changes mean estimated investment income likely will be reduced from current assumptions and unfunded liabilities will increase, Moody's...said... Estimates of the gap between the value of U.S. public-pension plans and the amount needed to cover promised benefits range from $500 billion to $3 trillion."

July 8 - Bloomberg (Brendan A. McGrail and Esme E. Deprez): "Scheduled weekly Build America Bond sales fell to the lowest this year as the yield premium demanded by investors in the taxable debt reached a record high. Investors sought 2 percentage points in extra yield for the federally subsidized securities... The so-called spread over 30-year U.S. Treasuries has widened 37% since touching a 2010 low of 1.42 percentage points on May 6..."

Speculator Watch:

July 8 - Bloomberg (Saijel Kishan and Katherine Burton): "Hedge-fund managers, Wall Street's best compensated and supposedly smartest investors, are dazed and confused. Reeling from the worst second-quarter performance in a decade, hedge funds have scaled back trading as they struggle to figure out where markets are headed amid sometimes vicious crosscurrents in stock, commodities and other markets, according to brokers and managers. 'There's a degree of being frozen in the headlights, of not knowing what sectors to emphasize, of what securities to emphasize," said Tim Ghriskey, chief investment officer of Solaris Asset Management... Hedge fund managers, who oversee $1.67 trillion in assets, are reluctant to put money to work as they are buffeted by a wide range of often conflicting political and economic forces... 'People are in cash for the most part and nobody's really taking out any big bets,' said Blaze Tankersley, chief market strategist at Bay Crest Partners... 'Nobody wants to take risk in either direction. It's a weird time in the market.' ...Hedge funds account for 20% of the equities volume in the U.S... 'This is much more than a summer lull," said Sam Hocking, global head of prime brokerage sales at BNP Paribas... 'Given the uncertainty out there, many hedge funds have felt it wise to pull back and take risk off the table.' Credit Suisse says its hedge-fund clients have cut their borrowing, or gross leverage, to about 2.5 times assets in June compared with 2.8 times assets in March... 'It's all about capital preservation at the moment," said Amit Shabi... partner at Bernheim Dreyfus & Co...'The losses of 2008 are still fresh in investor's memories and so managers should be cautious.'"

July 8 - Bloomberg (Katherine Burton): "John Paulson, the billionaire who has been betting on a U.S. economic recovery, lost 6.9% in June in his Advantage Plus hedge fund to bring his first-half decline to 8.8%, investors said."

A Scenario

My macro thesis holds that the Greek debt crisis provided the catalyst for the piercing of the "global government finance Bubble." This Bubble's "terminal phases of excess" was unleashed by global policymakers through their unprecedented fiscal and monetary response to the 2008 collapsing of the U.S. mortgage/Wall Street finance Bubble. I have noted parallels between the Greek crisis and the initial breakdown of the market for subprime mortgages back in 2007.

More than a year passed before the subprime crisis had seriously affected the core of the U.S. Credit system. It would not be surprising if the global government debt crisis similarly evolves over months, with ebbs and flows in markets - and marketplace sentiment. To be sure, today's backdrop creates extraordinary uncertainty and analytical challenges.

It is worth noting that a semblance of stability has returned to European debt markets. The Euro traded this week at a two-month high versus the dollar. The cost of Greek Credit default swap (5-yr CDS) protection declined 59 bps this week to 841 bps, now 285 bps below last month's peak of 1,126 bps. Portugal CDS ended the week at 265 bps, down 23 bps for the week and almost 200 bps below the May high. Spain CDS ended the week at 213 bps and Italy at 171 bps, high by historical standards but not indicative of acute systemic crisis.

It's been a couple of dismal months for global risk markets. The "world" was positioned for ongoing reflationary dynamics, confident that policymakers had things well under control. Prior to Greece, perceptions held that global policies ensured liquid markets and an inflationary bias among most classes of risk assets. Greece's crisis shattered this Bubble perception. The hedge funds and global speculating community were caught on the wrong side of trades across the spectrum of global markets. Markets have been stumbling through a difficult period of de-risking and de-leveraging.

Commodities caught a bid this week. Crude jumped $4.23. Copper surged 5.2% and nickel rose 3.0%. The Goldman Sachs Commodities Index rallied 4.3%. The commodity currencies also posted strong gains. The Australian dollar surged 4.3%, the Canadian dollar 2.8%, the New Zealand dollar 3.3%, and the South African rand 1.8%. The Morgan Stanley Cyclical index rallied 6.6% this week.

Recently, market tumult has emboldened those anticipating global deflation. At the end of the day, this view may prove correct. The jury is definitely still out. The dollar lost some ground this week, and I would posit that a great deal depends on the future course of our currency. Over the past few months, a surging dollar placed acute pressure on commodities prices - and was likely a critical impetus for the unwind of myriad "carry trades" (borrowing/shorting in low-yielding currencies, such as the dollar, to speculate in higher-returning assets) and other leveraged speculations. De-leveraging created pockets of acute liquidity shortages.

Perceptions of a fundamentally weak dollar have for some time provided great support to global reflation dynamics. For years now, our massive Current Account Deficits have been a major source of inflationary finance for global markets and economies. Moreover, ongoing dollar devaluation and an extended period of extraordinarily low rates also encouraged enormous speculative flows from the dollar out to global risk assets (debt, equities, commodities, and capital investment). Trade and "hot money" flows combined to help finance historic booms in China, Brazil, India, Asia and the emerging markets more generally.

The Greek crisis has reshaped the financial world. I'm just not convinced that it has altered what evolved a few years back into an unrelenting - and self-reinforcing - flood of finance from the "Core" (U.S. Credit system) out to the "Periphery." Over the past couple of months, we've witnessed important changes in market risk perceptions, which incited speculator de-leveraging and pressured global markets. There was a bout of enormous demand for dollars. But have global dynamics revamped the powerful "Core" to "Periphery" Monetary Process?

The rally in the dollar and Treasurys - in the face of European currency and debt market tumult - nurtured a consensus view that the U.S. once again enjoys a "King Dollar" safe haven status. This implies that a deepening global crisis would entail (nineties-style) robust flows to the dollar and our securities markets, possibly reversing the "Core" to "Periphery" dynamic. Such a development would support the global deflation thesis.

A differing view holds that the dollar and Treasury rallies were more technically driven in the (speculative, leveraged and complex) marketplace, rather than indicating a fundamental change in market perceptions regarding dollar soundness and U.S. creditworthiness. Especially in the case of the dollar, a short squeeze was likely a powerful market dynamic. It is worth noting that during the 2008 crisis the dollar index rallied from a low of about 71 to almost 90 - on its way back to about 75 by the end 2009. The dollar closed today at about 84, down from the June high of 88.7.

I have offered the theory that the dollar and Treasurys benefited from the market perception that the U.S. enjoyed a post-Greece competitive advantage in reflationary policymaking. While the markets were imposing harsh discipline on Greece - and increasingly on Portugal, Spain and all of Europe - our Treasury gladly borrowed for several months at a few basis points and for 10 years at less than 3%. I do believe the dollar and U.S. marketable debt have benefited from market faith that Washington's unending capacity to borrow, spend and monetize will continue to support our market and economic recoveries.

So, what's it going to be? Does the dollar win or lose from the unfolding environment? Safe haven - or does the world's newfound keen focus on structural debt issues put our currency, markets and economy at heightened risk?

Back in 2007, I found it ironic that the eruption of the subprime crisis was a catalyst for big rallies in agency debt and MBS. As the great mortgage finance Bubble burst, the market flocked to fundamentally vulnerable mortgage-related debt instruments. These securities, with their implicit or explicit federal guarantees, enjoyed safe haven status. On the surface, much of the debt marketplace benefited, which seemed to suggest the underlying Credit foundation was sound. Today, the Treasury, agency debt and MBS marketplaces lend support to the view that the U.S. is immune to global debt fears. However, I would caution that, similar to 2007, dynamics below the market's surface are creating systemic fissures.

U.S. junk and municipal debt markets were notable for lagging during this week's rally in global risk assets. In particular, the cost of protecting against defaults by some of our largest states remained stubbornly high. The cost of California (310bps) and Illinois (332bps) CDS are significantly above the levels for Portugal (265bps) and Spain (213bps). If I am correct that market focus is shifting from European to U.S. structural debt issues, I would expect our expansive municipal debt markets to become a key analytical focal point. And the loss of Credit Availability for our marginal state and corporate borrowers would be a blow both to the U.S. recovery and the perception of the dollar as safe haven.

But what would a weakening dollar do for global reflationary forces? Will the market reverse course and begin repricing commodities higher? Would expectations for the emerging markets improve? It is worth mentioning how well emerging debt markets have performed throughout this debt crisis. Brazil dollar bond yields ended today at 4.54% and Mexico at 4.44%, just off of record low yields. At this point, the emerging markets generally appear to have retained their robust inflationary biases.

And what about China and Asia? If (and perhaps it's a big "if") global markets stabilize, I don't think it will take much for sentiment to shift to a more constructive stance on near-term Chinese economic prospects. Weak global markets - and the Chinese authorities' move to somewhat rein in mortgage lending excesses - has engendered talk of real estate collapses and bursting Bubbles. I'm content to stick with my view that the current "terminal phase" of Chinese Bubble excess can be expected to - as they tend to do - surprise both on duration and scope of excesses. Moreover, the global crisis may prove an impetus for Beijing erring on the side of further stimulus and Bubble accommodation.

There is, indeed, another bearish scenario possibility outside of deflationary collapse. At least in the short-term, festering U.S. debt problems and a vulnerable dollar could create a backdrop conducive to a surprising counteroffensive from (thought dead and buried) global reflationary forces. Stranger things have happened.