There appeared to be some position squaring prior to yearend, but U.S. stocks were generally little changed. For the week, the Dow and S&P500 posted slight declines. The Transports lost 1%, reducing 2004 gains to 23%. The Utilities were marginally positive for the week. The Morgan Stanley Cyclical index declined 1.5%, while the Morgan Stanley Consumer index was about unchanged. The S&P Homebuilding index jumped 8% this week, increasing year-to-date gains to a blistering 26% (2-year gain of 165%). The highflying small caps gave up a bit of ground this week, with the Russell 2000 declining 1.5%. The S&P400 Mid-cap index declined less than 1%. The NASDAQ100 was down about 0.5%, and the Morgan Stanley High Tech index dropped 2%. The Semiconductors sank 5%. The Street.com Internet Index was slightly negative, and the NASDAQ Telecommunications index was slightly positive. The Biotechs added 1%, increasing 2004 gains to 9%. The financial stocks were mixed. The Broker/Dealers gained 1% to a new all-time high, increasing 2004 gains to 13%. With gold sinking $434.20, the HUI gold index dropped 6%.

Treasuries more than held there own. For the week, 2-year Treasury yields added one basis point to 2.93%. At the same time, five-year Treasury rates dropped 8 basis points to 3.52%. Ten-year Treasury yields declined 10 basis points to 4.15%. Long-bond yields ended the week at 4.82%, down 11 basis points for the week. Benchmark Fannie Mae MBS yields declined 8 basis points. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note narrowed one basis point to 38, and the spread on Freddie's 5% 2014 note narrowed one basis point to 33. The 10-year dollar swap spread declined 1.75 to 39.25. Corporate bonds were mixed, but generally lagged Treasuries. Auto and junk bonds noticeably underperformed. The implied yield on 3-month March Eurodollars rose 2.5 basis points to 2.85%.

This week's investment grade issuers included HSBC $5.5 billion, Credit Suisse $3.5 billion, Cox Communications $3.0 billion, GE Capital $2.0 billion, Wellpoint $1.6 billion, Texas Genco $1.125 billion, JPMorgan Chase $850 million, CNA Financial $550 million, CVS $520 million, Amvescap $500 million, Dana Corp $450 million, Nationwide Mutual $400 million, Pricoa Global $400 million, FGIC $325 million, Met Life $300 million, Kroger $300 million, KB Home $300 million, DR Horton $300 million, Consumer Energy $225 million, Burlington Northern $200 million, Twin Reefs $200 million, Stone Energy $200 million, Scientific Games $200 million, Phoenix Life $175 million, Southern Cal Edison $150 million, Southern Cal Gas $100 million, Pacific Century $100 million, and SI Corp $80 million.

December 10 - Bloomberg (David Russell): "Texas Genco Holdings Inc. was among companies that sold $22.2 billion of bonds and notes in the U.S. this week, pushing sales of junk bonds to a yearly record... Sales of high-yield, high risk notes has reached $152.6 billion for the year, exceeding the $150.7 billion record set in 2003, according to Bloomberg data."

Junk bond funds saw outflows of $167 million (from AMG). Issuers included CDRV Investors $480 million, Community Health $300 million, Simmons $288 million, Pep Boys $200 million, Virgin River Casino $190 million, Carrols Corp $180 million, Hubday Mining $175 million, Duane Reade $160 million, Aventine Renewable Resources $160 million, Alliance Imaging $150 million, Douglas Dynamics $150 million, Ryerson Tull $150 million, and IDI Acquisition $80 million.

Convert issuers included CMS Energy $250 million, Seacor Holdings $200 million, H-Lines Finance $160 million, Euronet Worldwide $125 million, and Dress Barn $100 million.

Foreign dollar debt issuance included Republic of Hungary $100 million.

Japanese 10-year JGB yields dropped 6 basis points to 1.38%. Brazilian benchmark bond yields declined 19 basis points to 8.02%. Mexican govt. yields ended the week at 5.28%, down 12 basis points for the week. Russian 10-year dollar Eurobond yields were unchanged at 5.89%.

Freddie Mac posted 30-year fixed mortgage rates dropped 10 basis points this week to 5.71%. Fifteen-year fixed mortgage rates were 9 basis points lower at 5.14%. One-year adjustable-rate mortgages could be had at 4.15%, down 4 basis points to the lowest level in five weeks. The Mortgage Bankers Association Purchase application index jumped 6.6% for the week. Purchase applications were up about 24% from one year ago, with dollar volume up 37%. Refi applications gained 1.1% during the week. The average new Purchase mortgage increased to $228.000, and the average ARM rose to $309,000. ARMs jumped back up to 34.5% of total applications.

Broad money supply (M3) increased $15.8 billion (week of November 29). Year-to-date (48 weeks), broad money is up $480 billion, or 5.9% annualized. For the week, Currency dipped $0.2 billion. Demand & Checkable Deposits jumped $19.9 billion. Savings Deposits sank $20.1 billion, with a year-to-date gain of $333.8 billion (11.4% annualized). Small Denominated Deposits added $0.6 billion. Retail Money Fund deposits were unchanged, while Institutional Money Fund deposits added $1.6 billion. Large Denominated Deposits gained $14.7 billion. Repurchase Agreements increased $1.1 billion, while Eurodollar deposits dipped $2.0 billion.

Bank Credit rose $7.5 billion (up $79.5bn in 5 weeks!) for the week of December 1 to $6.79 Trillion. Bank Credit has expanded $517.1 billion during the first 48 weeks of the year, or 8.9% annualized. For the week, Securities holdings rose $7.5 billion, while Loans & Leases were unchanged. Commercial & Industrial loans dipped $1.8 billion, while Real Estate loans gained $3.1 billion. Real Estate loans are up $290 billion y-t-d, or 14.1% annualized. Consumer loans declined $1.1 billion last week, while Securities loans jumped $8.1 billion (up $22.3bn in two weeks). Other loans declined $8.2 billion. Elsewhere, Total Commercial Paper dipped $0.4 billion to $1.392 Trillion. Financial CP added $0.6 billion to $1.260 Trillion, expanding at a 9.1% rate thus far this year. Non-financial CP declined $1.0 billion (up 24.3% annualized y-t-d) to $132.7 billion. Year-to-date, Total CP is up $123.9 billion, or 10.4% annualized.

Fed Foreign "Custody" Holdings of Treasury, Agency Debt rose another $6.6 billion to $1.329 Trillion. Year-to-date, Custody Holdings are up $262.5 billion, or 26.1% annualized. Federal Reserve Credit dipped $1.4 billion for the week to $784.1 billion, with y-t-d gains of $37.6 billion (5.3% annualized).

This week's ABS issuance rose to about $14 billion ($11 billion of home equity), from JPMorgan. Total year-to-date issuance of $605 billion is 37% ahead of comparable 2003. 2004 home equity ABS issuance of $396 billion is running 82% ahead of last year's record pace.

Currency Watch:

The dollar index recovered for a 2% gain this week. The Australian dollar lost almost 3%, the South Korean won and Indian rupee 2.5%, and the Swedish krona, New Zealand dollar, and Canadian dollar declined 2%. Latin American currencies generally performed well.

Commodities Watch:

December 9 - Bloomberg (Rob Delaney): "China's oil imports between January and November rose 35 percent to 110.6 million metric tons from a year earlier, the official Xinhua News Agency said. The country's full-year oil imports are expected to rise to 120 million tons..."

December 9 - Bloomberg (Shobhana Chandra): "Procter & Gamble Co. raised prices on some types of Folgers coffees by 14 percent, the first increase in two years, following a jump of as much as 50 percent in the price of raw beans in the past year."

January Crude Oil dropped another $1.83 this week to $40.71. The Goldman Sachs Commodities index declined 2% for the week, reducing year-to-date gains to 16.2%. The CRB index sank 2.7%, with 2004 gains down to 8.4%.

China Watch:

December 9 - Bloomberg (Philip Lagerkranser and Nerys Avery): "China's exports grew at their fastest pace in five months in November as demand for Chinese-made clothes, toys and electronic components rose in Europe, the U.S. and Japan. Overseas sales rose 46 percent from a year earlier to $60.9 billion..."

December 8 - Bloomberg (Janet Ong): "China 's foreign-exchange reserves at the end of October exceeded $540 billion, Dow Jones newswires reported, citing an unidentified central bank official. Hard currency reserves in October alone rose by least $25.2 billion from the previous month, the report said. The growth rate is faster than the $18.3 billion gain in September, it said."

December 9 - Bloomberg (Nerys Avery): "China's exports of technology products rose 49 percent to $18.8 billion in November and imports rose 35 percent to $15 billion, the International Business Daily reported... The country's trade surplus for the month in technology products reached a record... In the first 11 months of the year, exports of technology products rose 52 percent to $147 billion, accounting for 28 percent of total exports."

December 9 - Bloomberg (Nerys Avery): "China's industrial production grew at the slowest pace in 18 months in November as the government ordered banks to restrict lending in industries including steel and autos to cool the world's fastest-growing major economy. Production rose 14.8 percent from a year earlier..."

Asia Inflationary Boom Watch:

December 10 - Bloomberg (Cherian Thomas): "India's industrial production grew at its fastest pace in almost seven years in October as cheap loans and rising rural incomes boosted spending during the Hindu festival season. Production at factories, utilities and mines rose 10.1 percent, more than the revised 8.8 percent it grew in September..."

December 7 - Bloomberg (Theresa Tang): "Taiwan's exports rose in November at their slowest pace in 14 months as high crude-oil costs left companies and consumers in the world's biggest economies with less to spend on computers, flat-panel displays and cell phones. Shipments increased 12.5 percent from a year earlier to $15.5 billion after climbing 17.5 percent in October..."

December 10 - Bloomberg (In-soo Nam): "The value of South Korean energy imports rose 29 percent to a record $44.4 billion in the first 11 months after the prices of oil and coal rose to all-time highs... Imports of crude oil rose 29 percent to $27.1 billion, while coal imports gained 76 percent to $4 billion..."

December 9 - Bloomberg (Seyoon Kim): "South Korea's exports will probably total $255 billion this year, rising nearly a third from the previous year, Finance Minister Lee Hun Jai said. Asia's third-largest economy will probably post a trade surplus of about $28 billion this year..."

December 8 - Bloomberg (Kate Mayberry): "Malaysia's foreign-exchange reserves rose to a record in the last two weeks of November as exporters brought home earnings from abroad, overseas investors bought Malaysian stocks and foreign direct investment increased. Reserves rose 3.3 percent to $63 billion on Nov. 30 from the previous two weeks..."

December 8 - Bloomberg (Arijit Ghosh and Nanthaphol Rattanaphanish): "Thailand 's November tax revenue rose 36 percent, boosted by collections from consumers and businesses, the government said."

December 8 - Bloomberg (Jun Ebias): "Philippine government debt rose 15 percent in August from a year ago as the nation borrowed to help plug this year's estimated 198 billion peso ($3.5 billion) budget deficit."

December 9 - Bloomberg (Aloysius Unditu): "Indonesia's budget deficit may widen by more than the government's target this year as higher global oil prices cause spending on fuel subsidies to rise, the country's finance minister said."

Global Reflation Watch:

December 6 - Market News International: "Eurozone monetary policy is now 'extremely expansive,' and while there have been no signs thus far of major second-round inflation effects resulting from high oil prices, the ECB remains vigilant and is keeping a close eye on the 'worrisome rise' in inflation expectations, ECB Governing Council member and Bundesbank President Axel Weber said...Weber warned of the 'great danger' that second-round inflation effects could emerge, stressing that the ECB 'will do everything to prevent' that from happening."

December 9 - Bloomberg (Duncan Hooper): "U.K. home starts in fiscal 2004 jumped to the most in at least 13 years, the government said, as it seeks to address an undersupply of properties that has inflated prices."

December 9 - Bloomberg (Brian Swint): "German exports, which account for almost a third of Europe's largest economy, increased for a third month in four in October as global demand helped companies cope with higher oil prices and a stronger euro. Sales abroad... increased 1.2 percent from September..."

December 9 - Bloomberg (Maria Ermakova): "Russia 's foreign currency and gold reserves rose for the 15th-straight week to a record $121.6 billion, exceeding the country's total foreign debt. The central bank said the reserves rose $4.5 billion in the week ending Dec. 3..."

December 10 - Bloomberg (Kevin Carmichael): "Canadian industrial companies operated at 85.7 percent of capacity in the third quarter, the highest level since 1988, as chemical makers and sawmills made record use of their plants."

December 8 - Bloomberg (Greg Quinn): "Canadian housing starts unexpectedly
rose 5.9 percent to an annual pace of 238,200 units in November, leaving them poised to reach a 17-year high in 2004, the federal government's housing agency said."

December 10 - Bloomberg (Adriana Arai): "Mexico's central bank unexpectedly raised interest rates for a ninth time this year after a report yesterday showed consumer prices rose in November at their fastest pace in almost three years."

December 7 - Bloomberg (Helen Murphy): "Colombia 's exports rose 39.5 percent September, boosted by high prices for commodities such as oil, coal and nickel."

December 7 - Bloomberg (Fergus Maguire): "Australian merchandise exports to Japan have risen 25 percent in the first nine months of this year, Trade Minister Mark Vaile said. Agricultural and mineral commodities had underpinned the export performance, Vaile said. 'Australia now supplies 91 percent of Japan 's imported beef...'"

December 9 - Bloomberg (Victoria Batchelor): "Australia added jobs in November for a third straight month and the unemployment rate fell to a 28-year low, suggesting the fifth-largest economy in the Asia-Pacific region may rebound from its slowest growth in almost four years. Employment gained 24,500 last month, the Australian Bureau of Statistics said in Sydney today. The jobless rate fell to 5.2 percent, the lowest since February 1977..."

December 9 - Bloomberg (Mike Cohen): "South Africa's annual retail sales rose 11.7 percent in September, the highest in more than five years, as the lowest interest rates in 23 years continued to fuel consumer spending."

Dollar Consternation Watch:

December 7 - Bloomberg (James G. Neuger): "European Central Bank President Jean-Claude Trichet joined European finance ministers in urging the U.S. to halt the decline of the dollar, warning that the currency's slide risks derailing global growth. Making a rare appearance at a news conference after meeting with the finance ministers, Trichet said the U.S., Europe and Asia have to do their 'homework' to reverse the euro's record-setting run against the dollar."

Bubble Economy Watch:

Up 0.5% during November, Producer Prices have increased at a 5.3% rate so far this year. The PPI has not posted a y-o-y increase above 5% since 1991. November Import Prices were also up more than expected, with y-o-y prices rising 9.5%.

December 7 - Bloomberg (Alex Tanzi): "U.S. spending on Visa brand cards rose last week compared with the same week last year, according to VISA. In the week ending Dec. 5 purchases with Visa debit and credit cards rose 19.3 percent to $26.131 billion compared with the same week last year."

December 8 - The Wall Street Journal (Timothy Aeppel): "The rising cost and complexity of getting goods delivered is adding to the profit pressures faced by U.S. manufacturers and may indicate deeper structural problems in global supply lines. Logistics has been a growing challenge since American companies sought to cut costs by shifting more production to countries where manufacturing was cheaper. The surge in global trade in recent years has added to strains and charges for all forms of transport. As a result, some manufacturers are developing costly buffer stocks - which can mean setting up days' or weeks' worth of extra components -- to avoid shutting down production lines and failing to make timely deliveries."

December 9 - The Wall Street Journal (Greg Ip): "Purchasing managers see accelerating costs next year, a potential source of higher inflation, a regular survey by a trade group found. The semi-annual survey of manufacturing purchasing managers found that 69% expect the prices they pay to rise over the next year, compared with 56% who expected that a year ago, and the 50% two years ago. On average, purchasing managers expect a 4.4% increase in prices over the coming year, compared with 1% a year ago and 1.8% two years ago..."

Mortgage Finance Bubble Watch:

December 10 - Market News (Gary Rosenberger): "Major residential builders are
reporting another strong month in November, characterized in some cases by record backlogs that generate a momentum they expect will carry them easily through 2005... Luxury residential builder Toll Brothers Inc....reported a stellar fourth quarter with no signs of slowing beyond that period. 'As (rap star) Biggy Small said, 'It's all good,'" chimed Frederick Cooper, vice president of finance. 'Did you see our earnings report? Did you see our stock price?'"

December 9 - Bloomberg (Kathleen M. Howley): "U.S. mortgage foreclosures fell to a four-year low in the third quarter as a recovering economy made it easier for people to make their monthly home-loan payments. The percentage of homeowners in foreclosure fell to 1.14 from 1.16 in the three months through June, the lowest since the third quarter of 2000, according to a report released by Mortgage Bankers Association..."

Countrywide posted another impressive month of lending volume. Total Fundings increased to $31.4 billion, up 41% from November 2003 and bringing year-to-date fundings to an amazing $328 billion. The Total Pipeline of $50.6 billion was up 30% from one year ago. Purchase Fundings were up 54% from November 2003 to $15.2 billion. Non-purchase (Refis) fundings were up 13% for the month to $16.2 billion (up 31% from Nov. '03). ARM fundings of $16.4 billion were 52% of total funding volume (up 93% from one year ago). Home Equity Fundings ($3.1bn) were up 89% from one year ago and Subprime fundings ($3.5bn) were up 70%. At $38.8 billion, Bank Assets were up 119% from 12 months ago.

December 9 - Reuters: "Too many house-rich Americans are borrowing money against their homes to play the stock market, brokerages regulator NASD warned... In an alert to brokers who may be encouraging the trend, the NASD reminded Wall Street that it had a responsibility to steer investors away from unsuitable financial strategies. 'Many homeowners have become wealthier - at least on paper - because of escalating home values. And more of them than ever before are tapping into their increased home equity to purchase securities,' said NASD Vice Chairwoman Mary Schapiro... About 11% of gains from mortgage refinancings were plowed into the stock market and other financial investments in 2001 through mid-2002, up from less than 2% in 1998 through mid-1999, a recent Federal Reserve study showed."

Q3 2004 Z.1 "Flow of Funds"

It's that time of the quarter again! The Fed's third quarter "flow of funds" and Credit report was released yesterday. It once again did not disappoint. Before I do my usual grind through of all the mind-numbing detail, I will make one general comment: History's Greatest Credit Bubble runs unabated, although the scope of the Credit Inflation is more clearly illustrated by going back some years. Since the beginning of 1997 (31 quarters), Total Credit Market Debt has ballooned 80%, Total Mortgage Debt 109%, GSE Assets 193%, "Fed Funds and Repos" 128%, Securities Broker/Dealer Assets 177%, oustanding MBS 107%, ABS 217%, Rest of World holdings of U.S. Financial Assets 122%, Household Assets 60%, and Total Bank Assets 78% (and, of course, there is some "double-counting").

Household Mortgage Debt, the focal point of the Credit Bubble blow-off, expanded at an 11.3% annualized rate during the quarter, up from the second quarter's 9.8%. Total Corporate Debt expanded at a 5.1% rate, up from the third quarter's 3.6% and the strongest rate of growth in five quarters. State & Local governments increased borrowing at a 14.2% rate, and one has to go all the way back to 1985 for stronger annual growth. The Domestic Financial Sector increased Credit market borrowings at a 6% rate (down from Q2's 7.8%), although this slower growth largely can be explained by the rapid expansion of deposit and other bank liabilities.

Total Non-Federal Debt expanded at an 8.0% rate, up from the second quarter's 6.2%. Federal Government borrowings increased at a 4.9% rate, down sharply from the second quarter's 10.7% rate. Total - Federal and Non-federal - non-financial debt expanded at a 7.4% rate, up from the second quarter's 7.0%. For the first nine months of the year, Federal debt has expanded at a 9.4% rate, Total Household debt at 10.1% rate, State & Local Government debt at a 9.4% pace, and Total Corporate (including financial) borrowings at a 4.5% rate.

In nominal dollars, Total Non-Financial Debt increased $479.7 billion during the quarter, second only to last year's second quarter ($538.7bn). Total Credit Market Debt increased $676.4 billion (7.7% ann.), or at an annual pace of $2.71 Trillion (23% of GDP). Total Non-financial Debt increased to 199% of GDP, with Total Debt at 303%.

The Mortgage Finance Bubble certainly runs untethered. Total Mortgage Borrowings expanded at a 12.4% rate during the quarter to $10.1 Trillion. The $305 billion increase was an all-time quarterly record, and compares to the second quarter's $247.8 billion and the comparable 2003's $270.4 billion. Total Mortgage Debt has increased $1.025 Trillion during the past year, or 11.3%, and $1.931 Trillion, or 24%, over the past two years - and now debt growth is accelerating in true blow-off fashion. In just seven years, Total Mortgage Debt has increased $4.95 Trillion, or 96%. Total Mortgage Debt has increased to 87% of GDP, up from 64% to begin 1998 and 68% to commence the new millennium.

During the quarter, Household Mortgage Debt increased a record $251.6 billion (to $7.77TN), which compares to the second quarter's increase of $196.2 billion and last year's third quarter increase of $212.7 billion. For comparison, Household Mortgage Debt increased $241.8 billion during the entire year 1997. We now surpass this amount in one quarter. Household Mortgage Debt expanded at a 12.2% rate during the first nine months of the year.

Total "structured finance" (GSE, MBS, and ABS) expanded at a 6.8% rate during the quarter to $9.0 Trillion. This was up from the first quarter's 2.6% and the second quarter's 6.1%. GSE borrowings increased at a 6.7% rate to $2.89 Trillion. This was the strongest growth in a year. With variable-rate and "jumbo" mortgages taking a large chunk of mortgage lending these days, (GSE) outstanding MBS increased at an only 2.3% rate, to $3.54 Trillion. Leading the "structured finance" charge, however, was ABS. Outstanding Asset-backed Securities expanded at a 13.3% annualized rate to $2.57 Trillion. ABS is up 9.8% over the past year. Since the beginning of 1998, GSE Assets have increased 163%, MBS 94%, and ABS 160%. Total "structured finance" is up 130% in 27 quarters.

Financial Sector "Debt" expanded at the slowest pace in some time during the third quarter (6.0%), a figure actually distorted by the ongoing surge in bank deposit and other liabilities (not included as financial sector "debt."). Year-to-date, Financial borrowings have increased $537 billion, or 6.5% annualized. Of this amount, about $100 billion has been borrowed by Banks and Savings Institutions. Yet over this period Total Bank Assets have increased $563 billion, or 9.6%. This is 17% above total 2003 Bank Financial Asset expansion and already surpasses the previous record for full year growth (2002's $500bn). Bank Loans expanded at a 10% rate ($115.3bn) during the third quarter to $4.74 Trillion, with bank Mortgage Loans increasing at a 13.4% rate (up $81.4bn). Over the nine month period, Bank Loans have expanded at a 9.5% rate, with Mortgages increasing at a 15.5% pace. At the same time, Government Securities holdings increased at a 5.4% rate, while Corporate Bonds (including ABS) expanded at a 13% rate. Over two years, Bank Assets were up 16.9%, Total Loans 16.2%, Mortgage loans 28%, Corporate bonds 44%, and Government Securities 9%.

On the Bank Liability side, Miscellaneous liabilities expanded at a 14.7% rate ($58.6bn) during the third quarter (perhaps one factor in the divergence between heightened Credit creation and the lagging monetary aggregates). Total Deposits increased at a 7.0% rate, "fed funds & repos" declined at a 1% pace, and Credit Market borrowings increased at a 7.6% pace. During the first three quarters, Total Deposits increased at an 11% rate, "fed funds & repo" at a 12.4% pace, and Credit Market borrowings at a 12.6% rate of growth. And over two years, Deposits were up 16%, "repos" 27%, and Credit market borrowings 23%. It is, as well, worth repeating that Bank Assets have inflated 78% in less than 8 years (since the end of 1996). The Banks may have been a little slow to join the Credit Bubble Party, but they are today certainly making up for lost time.

The size of foreign U.S. Financial Asset purchases (the "recycling" of current account deficits and other financial flows) is becoming unfathomable. The Rest of World (ROW) increased holdings of U.S. Financial Assets at a seasonally-adjusted annualized (SAA) $1.111 Trillion pace during the third quarter. Year-to-date, U.S. Financial Asset holdings have increased $1.1 Trillion, or at a 13.9% pace, to $8.925 Trillion (foreign U.S. liabilities increased $425bn SAA to $4.4TN). Holdings began 1997 at about $4.0 Trillion.

By category, ROW Treasury holdings increased at a $204 billion SAA pace during the third quarter, U.S. Corporate Bonds $371 billion, Agencies $165 billion, Security "Repo" $201 billion, and Foreign Direct Investment $100 billion. Year-to-date, total Treasury holdings have increased at a 28% rate to $1.86 Trillion, total Agencies 20% rate to $761 billion, and Corporate Bonds (including ABS) 18% pace to $1.7 Trillion. In just nine months, Total "Official" (foreign central bank) Holdings have increased $315 billion, or at a 40% rate, to $1.37 Trillion. Simply Astonishing! Interestingly, Security "Repo" has increased at a 39% rate y-t-d to $600 billion. Over the same period, Foreign Direct Investment (FDI) has increased at a 7% rate to $1.62 Trillion. In what will go down in history as one of the "great" Bubble support operations, "Official" holdings were up $532 billion, or 63%, over the past two years.

The Household (including Non-profits) Balance Sheet also provides a treasure trove of insight into the current Bubble environment. And for bearish analysis that rests on the premise that the American consumer is "tapped out" it is worth noting that Household Assets increased $805 billion during the quarter. This is the eighth consecutive quarterly increase in asset values, whereby Assets have increased a noteworthy $9.85 Trillion (21%) to a record $57.0 Trillion. And with Household Liabilities up "only" $259 billion during the third quarter (10.3% rate), Net Worth jumped $546 billion to a record $46.7 Trillion. And although Assets (up 20.9%) and Liabilities (up 20.4%) have increased approximately the same percentages, Household (including Non-profits) Net Worth is up $8.1 Trillion, or 21%, over the past two years.

Since the beginning of 1997, Household Liabilities have surged 89% to $10.3 Trillion, while Assets have inflated 60% (to $57TN). The seductive magic of Asset Inflation and Bubbles has witnessed Net Worth inflate an astonishing $16.5 Trillion, or 55%. There should be no mystery behind the boom in consumption, especially luxury goods and virtually everything at the "upper end."

Examining the (market value) Household Balance Sheet by category, Real Estate increased a record $834 billion during the third quarter - a rate of 19.5% - to $18.0 Trillion. This fully explains the entire increase in Household Assets for the period. This was up from the second quarter's $512 billion growth and was 32% ahead of the previous record increase (Q4 2003). Real Estate Assets were up 14.7% ($2.3TN) from one year ago and 22.4% ($5.97TN) over two years. Since the beginning of 1997, Household Real Estate assets have increased $8.88 Trillion, or 97% (which, not coincidently, is the 7-year percentage increase in residential mortgage debt). And while Household holdings of Financial Assets were down slightly ($72bn) for the quarter, they were up 20.4% ($6.0TN) over two years to $35.3 Trillion. For the quarter, Deposits increased $57.6 billion (to $5.5TN) and Agencies $10.2 billion (to $435bn), while Credit Market Instruments actually declined $35.7 billion (to $2.05TN). There was little change in Equity values. I don't believe it is possible to overstate the commanding role that the Mortgage Finance Bubble (and resulting Real Estate Inflation) is having on the U.S. Bubble Economy - not to mention and global financial market liquidity.

Examining other groups within the expansive U.S. financial sector, Security Broker/Dealer Assets expanded at a 20% rate (up $83bn) during the quarter to $1.77 Trillion. Holdings of Credit Market Instruments surged $121.6 billion over three months to a record $455.8 billion (speculating, positions to hedge derivatives or both?). Total Assets were up 13% ($205bn) from one year ago and 24% ($346bn) over two years. On the Liability side, Security "repo" (net) increased $74.8 billion to $479 billion. Since the beginning of 1997, Broker/Dealer assets have inflated 177%.

"Federal Funds and Security Repurchase Agreements" expanded at a 20% rate during the quarter to a record $1.676 Trillion. "Repos" have expanded at a 12.6% rate so far this year, with two-year gains of 24.4%. Since the beginning of 1997, Fed Funds and Repos are up 128%. It is worth noting that both the Banks ($1.06TN) and Broker/Dealers ($479bn) "repo" position is "net," meaning sector repo assets have been matched against repo liabilities. The total primary dealer repo, as posted by the New York Fed, is approximately $3.1 Trillion. The largest holders of "repos" (excluding banks and brokers) are now Rest of World at about $600 billion, followed by Money Market Funds at $256 billion.

REIT Assets increased $38.9 billion during the quarter (90% annualized!) to $212 billion. REIT Assets are up 65% from one year ago. Finance Companies expanded assets at a 3.3% rate during the quarter, although two-year growth remains robust at 19%. Credit Unions increased assets at a 3.5% rate during the quarter, with two-year growth of 17.4%. Savings Institutions expanded at a 7.4% rate and 21% over two years. Money Market Fund assets declined at a 9.6% rate during the third quarter and were down 9.3% from one year ago (down 11.8% over two years).

Each quarter I am struck by how conspicuously the entire Credit Bubble is illuminated in the Federal Reserve's own data. And for me to tonight assert that the Mortgage Finance Bubble and Real Estate Inflation-driven U.S. system is acutely vulnerable to higher interest rates is to appoint myself Master of the Obvious (or, perhaps, Oblivious). There remains a precarious self-sustaining circularity of low short-term borrowing costs, enormous mortgage Credit excesses, overly abundant marketplace liquidity, and financial and real estate asset inflation. I see no reason to back away from my view that this runaway Credit inflation is debasing our financial system, economy and currency. In fact, it's only worsening.