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Topic de Jour


Hedge fund issues took the media by storm this week and were certainly a factor in unstable markets and atypical sector divergences. For the week, the Dow declined 2% and the S&P500 fell 1.5%. Economically sensitive issues were being liquidated. The Transports were hit for 3.5% and the Morgan Stanley Cyclical index 4%. The Morgan Stanley Consumer index declined 1% and the Utilities dropped 2.5%. The small cap Russell 2000 declined 2%, with the S&P400 Mid-cap index down less than 2%. Technology stocks lurched higher. The NASDAQ100 gained 1%, the Morgan Stanley High Tech index 2%, and the Semiconductors 3%. The Street.com Internet Index was about unchanged, while the NASDAQ Telecommunications index added 1%. The Biotechs also gained 1%. The financial stocks were mixed, with the Broker/Dealers down fractionally and the Banks declining 1%. With bullion down $5.80, the HUI gold index was hammered for 9%.

Two-year Treasury yields ended the week down 13 basis points to 3.59%. Five-year government yields also dropped 13 basis points, ending the week at 3.82%. The 10-year Treasury yield sank 12 basis points to 4.14%. Long-bond yields dropped 14 basis points to 4.48%. The spread between 2 and 30-year government yields declined to 89. Benchmark Fannie Mae MBS yields were down an unimpressive 9 basis points. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note widened 3 basis points to 38, and the spread on Freddie's 5% 2014 note widened 3 basis points to 36. The 10-year dollar swap spread rose 3 to 47. The corporate bond market remains highly unsettled, with auto bonds (and CDS) continuing to perform poorly. Junk bond spreads widened again this week. The implied yield on 3-month December Eurodollars dropped 12.5 basis points to 3.885%.

Corporate issuance jumped to $15.7 billion. Investment grade issuers included Citigroup $3.5 billion, GE Capital $3.0 billion, Berkshire Hathaway $1.5 billion, AIG $500 million, Talisman Energy $500 million, PepsiAmericas $500 million, St. Paul Traveler $440 million, El Paso Electric $400 million, Progress Emergy $300 million, Nationwide Health $250 million, Nationwide Life $200 million, Bre Properties $150 million, and Odyssey Holdings $125 million.

Junk bond funds saw outflows of $404 million, the 13th consecutive week of negative flows (from AMG). Junk issuers included Alliance One $415 million, and GSI Group $110 million.

Convert issuers included Dov Pharmaceutical $80 million.

Foreign dollar debt issuers included European Investment Bank $3 billion, Philippines $3 billion, Brazil $1.5 billion, Depfa Bank $1.25 billion, Petro-Canada $600 million, and Uruguay $300 million.

Japanese 10-year JGB yields rose 5.5 basis points to 1.275%. Emerging debt markets continue to hold their own. For the week, Brazilian benchmark dollar bond yields rose 14 basis points to 8.19%. Mexican govt. yields ended the week up 2.5 basis points to 5.775%. Russian 10-year dollar Eurobond yields rose 5 basis points to 6.04%.

Freddie Mac posted 30-year fixed mortgage rates gained 2 basis points to 5.77% and were down 57 basis points from one year ago. Fifteen-year fixed mortgage rates added 2 basis points to 5.33%. One-year adjustable rates rose one basis point to 4.23%. The Mortgage Bankers Association Purchase Applications Index jumped 9% to a new record high. Purchase applications were flat compared to one year ago, with dollar volume up almost 8%. Refi applications rose almost 10%. The average new Purchase mortgage increased to $240,700. The average ARM increased to $339,500. The percentage of ARMs jumped to 35.3% of total applications.

Broad money supply (M3) declined $14.5 billion to $9.59 Trillion (week of May 2). Year-to-date, M3 has expanded at a 3.6% rate, with M3-less Money Funds growing at 5.7% pace. For the week, Currency added $0.4 billion. Demand & Checkable Deposits dropped $9.9 billion. Savings Deposits gained $5.5 billion. Small Denominated Deposits rose $4.0 billion. Retail Money Fund deposits declined $1.0 billion, and Institutional Money Fund deposits fell $1.3 billion. Large Denominated Deposits dropped $8.7 billion. For the week, Repurchase Agreements declined $1.6 billion, and Eurodollar deposits decreased $1.9 billion.

Bank Credit expanded $9.6 billion last week, increasing the year-to-date expansion to $324 billion, or 13.9% annualized. Securities Credit is up $117 billion, or 17.7% annualized, year-to-date. Loans & Leases have expanded at a 12.2% pace so far during 2005. For the week, Securities jumped $17.1 billion. Commercial & Industrial (C&I) loans declined $4.0 billion. Real Estate loans rose $3.4 billion. Real Estate loans have expanded at a 14.6% rate during the first 18 weeks of 2005 to $2.667 Trillion. Real Estate loans are up $302 billion, or 12.7%, over the past 52 weeks. For the week, consumer loans dropped $7.9 billion, while Securities loans added $2.6 billion. Other loans dipped $1.6 billion.

Total Commercial Paper jumped $13.1 billion last week ($68.4bn in 6 wks) to $1.498 Trillion. Total CP has expanded at a blistering 16.3% rate y-t-d (up 12.2% over the past 52 weeks). Financial CP surged $12.4 billion last week to $1.349 Trillion, with a y-t-d gain of $84 billion (13.8% ann.). Non-financial CP added $0.7 billion to $148.7 billion (up 30.3% in 52 wks).

Fed Foreign Holdings of Treasury, Agency Debt increased $0.4 billion to $1.40 Trillion for the week ended May 11. "Custody" holdings are up $63.6 billion, or 13.8% annualized, year-to-date (up $207bn, or 17.3%, over 52 weeks). Federal Reserve Credit declined $3.2 billion to $783.3 billion. Fed Credit has declined 2.5% annualized y-t-d (up $41.9bn, or 5.7%, over 52 weeks).

ABS issuance was a solid $13 billion (from JPMorgan). Year-to-date issuance of $233 billion is 14% ahead of comparable 2004. At $150 billion, y-t-d home equity ABS issuance is 24% above the year ago level.

Currency Watch:

The dollar index jumped 1.7%. On the downside, the Iceland krona sank 3.3%, the South African rand 3.3%, the Polish zloty 2.5%, and the New Zealand dollar 2.5%.

Commodities Watch:

May 13 - Bloomberg (Peter McGill): "At Belgium's biggest railway station, 770 of 800 steel luggage carts have vanished. In Pittsburgh, 400 parking meters were plucked from roadsides, and in Shanghai, manhole covers are disappearing from the streets. From London to Kolkata, India, scavengers are plundering anything that contains iron, steel or copper, costing local governments and companies millions of dollars. Prices in the $85 billion global scrap market have tripled since 2003 as China has sucked in recycled metal from around the world. 'There is an almost insatiable global demand for scrap, mainly to feed China's steel mills and its booming economy,' says Rick Wilcox, director general of the British Metals Recycling Association..."

June crude oil sank $2.29 to $48.62. For the week, the CRB fell 2.2%, reducing y-t-d gains to 3.5%. The Goldman Sachs Commodities index declined 1.7%, with 2005 gains at 11.9%.

China Watch:

May 12 - Bloomberg (Samuel Shen and Nerys Avery): "China said it will impose new taxes and restrictions on real estate transactions to curb speculation that's caused what the government calls a property price bubble. Home buyers who sell within two years of purchase will have to pay a tax on the sale price starting June 1..."

May 8 - Bloomberg (Allen T. Cheng): "Chinese consumers spent an estimated 240 billion yuan ($29 billion) during the Labor Day holiday week that ended yesterday, a 17 percent increase from a year earlier, the semi-official China News Service reported... Restaurants had a 20 percent increase in revenue..."

May 13 - Bloomberg (Nerys Avery): "China's trade surplus widened in the first four months of this year as companies in Asia's second-largest economy shipped more clothes, electronics and steel overseas, and state investment curbs cooled demand for imports. The surplus totaled $21.2 billion, compared with a deficit of about $11 billion a year earlier..."

May 13 - Bloomberg (Koh Chin Ling): "China's exports rose 34 percent to $218.1 billion in the first four months from a year earlier, driven by sales of textiles and electronics to the U.S., Europe and Japan... Imports rose 13 percent in the same period to $196.9 billion..."

May 12 - AP: "Sales of passenger vehicles in China hit a record monthly high of 285,360 in April as buyers plunged back into the market, according to figures from the China Automobile Manufacturers Association... The April figure for total passenger vehicle sales, which included cars, multipurpose vehicles and sport utility vehicles, was up 15.7 percent over April 2004..."

May 13 - Bloomberg (Nerys Avery): "China's money supply growth in April stayed within the central bank's 15 percent target for a 10th straight month after banks were ordered to limit lending to industries including real estate, steel and cement. M2, which includes cash and all deposits, expanded 14.1 percent from a year earlier to 26.7 trillion yuan ($3.3 trillion)..."

May 13 - Bloomberg (Nerys Avery and Philip Lagerkranser): "China's producer prices rose in April at the fastest pace in three months as fuel costs surged, boosting chances the government will tighten investment restrictions to keep inflation in check. Producer prices in the world's seventh-largest economy rose 5.8 percent from a year earlier after climbing 5.6 percent in March..."

Asia Boom Watch:

May 12 - Bloomberg (Cherian Thomas): "India's industry grew faster than expected in March as rising incomes and the cheapest credit in 32 years boosted sales at companies... Production at factories, utilities and mines rose 7.2 percent from a year earlier compared with revised growth of 5.1 percent in February..."

May 13 - Bloomberg (Anand Krishnamoorthy): "India's automobile sales rose 20 percent in April because of higher motorcycle sales."

May 9 - Bloomberg (Theresa Tang and George Hsu): "Taiwan's export growth accelerated in April as electronics makers in China and Japan bought more parts from the island, boosting sales for companies including Asustek Computer Inc. Overseas sales rose 11.2 percent from a year earlier to $15.65 billion after climbing 6.9 percent in March..."

May 10 - Bloomberg (Naila Firdausi): "Indonesia's automobile sales rose 29 percent in April to 51,251 units from a year earlier... Sales of vans, sedans and trucks grew 36 percent in the first four months of this year to 195,214..."

May 13 - Bloomberg (Jason Folkmanis): "Vietnamese exports to the U.S. rose 37 percent in the first quarter, led by garments and surging shipments of footwear, furniture and crude oil."

Global Reflation Watch:

May 12 - Bloomberg (Brian Swint): "The German economy, Europe's largest, expanded at the fastest pace since 2001 in the first quarter, rebounding from a contraction. Growth is forecast to slow the rest of the year. Gross domestic product, the value of all goods and services, increased 1 percent from the fourth quarter, when it shrank 0.1 percent..."

May 13 - Bloomberg (Jacob Greber): "Swiss retail sales in March had the biggest increase in three years as shoppers boosted spending on clothing, food and health-care products. Sales surged 7.6 percent from a year earlier..."

May 12 - Bloomberg (Halia Pavliva): "Russia's central bank added $600 million to its foreign currency and gold reserves in the week ending May 6, increasing its reserves to a record $144.7 billion as the price of oil remained high. The reserves rose from $144.1 billion as of April 29..."

May 12 - Bloomberg (Kathleen Chu): "Tokyo office vacancies fell in April to their lowest level in three years as more companies looked to expand and combine office space... The vacancy rate for office space declined to 5.15 percent from 5.5 percent in March in Tokyo's five main business districts..."

May 12 - Bloomberg (Victoria Batchelor): "Australia unexpectedly added jobs in April and the unemployment rate held at a 28-year low, adding to evidence consumer spending will support growth in the Asia-Pacific region's fifth-biggest economy. The economy added 6,900 positions, the eighth monthly gain..."

Latin America Watch:

May 12 - Bloomberg (Patrick Harrington): "Mexico's industrial output in March fell for the first time in 17 months led by a slump in auto production. Industrial output, which includes manufacturing, construction, mining and utilities, fell 4.7 percent in March after rising 2 percent in February..."

May 12 - Bloomberg (Carlos Caminada): "Brazilian retail sales rose in March at their strongest pace in three months, suggesting South America's biggest economy may be slowing less than expected. Retail, supermarket and grocery store sales, as measured by units sold, rose 8.6 percent in March from the year-earlier period after rising 1.3 percent in February..."

May 11 - Bloomberg (Charles Penty): "Brazil's annual inflation rate in April rose at its fastest pace in 17 months as a drought in the south of the country drove up grain prices and medicine costs jumped. Inflation, as measured by the government's IPCA index, increased to 8.07 percent in the year through April, quickening from 7.54 percent in the 12 months through March..."

May 11 - Bloomberg (Eliana Raszewski): "Argentina's vehicle sales will rise in 2005 to the highest level in six years because an economic recovery in its third year has made people more confident about taking loans, said Ted Cannis, president of Ford Argentina SA and head of the country's automaker association."

May 9 - Bloomberg (Alex Emery): "Peru's tax collection in April reached its highest monthly level in a decade as an economic expansion and rising commodity prices boosted corporate earnings. Tax revenue (was)... up 47.6 percent from a year earlier... An 81.8 percent jump in income tax, largely from mining, hydrocarbon and electricity companies, spurred tax income..."

Dollar Consternation Watch:

May 11 - Dow Jones (Michael S. Derby): "With less than a year to retirement, the bloom continues to come off the Greenspan rose. A new survey released by the Gallup Poll News Service says that confidence in Federal Reserve Chairman Alan Greenspan is at its lowest ebb since 2001."

Bubble Economy Watch:

May 12 - Bloomberg (Vivien Lou Chen): "Container shipments through the Port of Long Beach, the second-busiest U.S. seaport behind Los Angeles, rose 22 percent in April because of increasing U.S. demand for Asian imports, port officials said. The total number of 20-foot containers going in and out of the port rose to 538,501 from 441,061 a year earlier..."

Mortgage Finance Bubble Watch:

May 12 - Florida Association of Realtors: "Sales of single-family existing homes in Florida continued to climb during the first three months of this year, while heavy demand pushed up the statewide median sales price. Statewide, resales activity increased 7 percent in the first quarter of 2005... Overall, a total of 57,699 homes changed hands during January, February and March, compared to 53,971 homes sold a year ago... The median sales price once again topped $200,000, rising 27 percent to $207,000 in the first quarter... In 2000, the first-quarter statewide median sales price was $109,600, which is an increase of about 88.9 percent over the five-year period."

May 13 - Bloomberg (Bob Kuzbyt): "The median price of a single-family house in the northern New Jersey, New York and Connecticut area rose 18 percent in the first quarter from a year earlier, the Star-Ledger of Newark, New Jersey, reported today. The median price reached $435,200..."

From Countrywide Financial: "Average daily mortgage loan application activity in April climbed to $2.6 billion, up 9 percent over last month and was 26 percent greater than April 2004. The mortgage loan pipeline climbed to $66 billion...its highest level since July 2003, driven in part by a declined in the 10-year US Treasury yield since March 31." Countrywide's Total Pipeline was up 20% from April 2004. Purchase funding volumes were up 22% from one year ago to $16.9 billion, Home equity 57% to $3.5 billion, and subprime 6% to $2.9 billion. ARM volumes were up 24% from April 2004 to $19.6 billion, comprising 57% of total fundings. Bank Assets were up almost $5 billion for the month to $56.0 billion, with a one year gain of 125%.

The Topic De Jour:

May 12 - Breakingviews.com (Mike Monnelly): "Put hedge funds and derivatives together and you get an explosion. That, at least, has been the fear ever since Long-Term Capital Management nearly blew up spectacularly in 1998. The turmoil in the credit derivatives market in the past few days following the junking of General Motors is seemingly validating the prophets of doom. Not only have hedge funds and investment banks suddenly racked up large losses in a complex credit derivatives trade. Confidence in the underlying credit market has been undermined and contagion effects are spreading into adjacent markets. If investors now redeem money from hedge funds, forcing them into further selling, this shake-out could get much worse. The complex trade, known to the cognoscenti as a 'correlation trade', had become the darling of the hedge fund and investment banking communities. So much so that there are now fears that lots of players could get burnt if everybody heads for the exit simultaneously. Equally, there is no solidarity among hedge funds. Some are already positioning themselves to make money out of their colleagues' distress."

Hedge funds have become the topic de jour. Is there another LTCM out there waiting to implode? Such notions are generally dismissed out of hand. Conventional thinking has it that individual funds and their lenders have implemented controls on the amount of leverage used, as well as employing sophisticated safeguards and risk management systems. Certainly, there is considerable confidence all the way to the top of the Federal Reserve that today's major money center banks and Wall Street firms are keenly focused on risk management and have the most sophisticated risk monitoring systems ever available. There is a perception that great strides have been made since LTCM. The financial system is resilient; the economy is resilient; bullishness is resilient; the markets indicate otherwise.

I have no insight as to individual fund leveraging or vulnerability. However, from a systemic risk point of view we can make some important inferences. Investment (not positions) in hedge funds has almost tripled since LTCM, with total global derivative positions outstanding up a similar amount. The leveraged speculating community became the marginal buyer/price setter in most markets, surely including equities, corporate debt, MBS, CDS, and junk. And there are aspects of hedge fund investing that encourage atypical risk-taking and aggressive trading across markets. I would argue that the key issue is not individual fund vulnerability - although there are surely many funds suffering these days. The most important issue is systemic fragility.

I relentlessly write about market speculative blow-offs. The dynamics involved are as fascinating as they are nebulous and analytically challenging. But from our study of market history we do appreciate that it takes years (decades?) for major systemic bubbles to flourish and to create the backdrop for the final climax of excess. Such spectacular market developments require a protracted inflationary period to engender market psychology susceptible to an (aberrational) manic convulsion. It takes, as well, years for the financial system infrastructure to expand and evolve to the point of being capable of furnishing the necessary onslaught of finance, both for leveraged speculation and spending throughout the real economy. And, importantly, it takes survival through a series of mini (appearing that way only in hindsight) bursting bubbles, downturns and "close calls." Bubbles that permeate the entire Credit system are uncommon, and can only be nurtured by repeated intervention and safeguarding by the monetary authorities ("moral hazard").

While I have no way of knowing if there is another LTCM-like hedge fund collapse that risks the "seizing up" of the markets, I do understand very clearly that the LTCM and other system bailouts by the Fed have played a seminal role in nurturing today's precarious Credit Bubble Blow-off. When we these days analyze and ponder the heightened stress enveloping the leveraged speculator community, it is most important to think in terms of the ramifications for speculative dynamics - more specifically its influence on Credit system blow off dynamics. Are we witnessing a bout of speculator tumult at The Fringe that will be resolved over time, or is this a much more serious breach at The Core that will mark the beginning of the end?

We have witnessed over this long boom cycle the transformation of much of Credit creation into marketable securities and instruments. The old boring and benign bank loan was supplanted by new tantalizing trading instruments. The bank loan officer was displaced by the aggressive mortgage broker, the determined investment banker and the enterprising hedge fund manager. The nature of the entire Credit system evolved to support the emergence of a historic speculative Bubble, accommodated by the easiest monetary environment in history. And today, with the newfound media focus on hedge funds, it is imperative to put things in proper context. The massive inflation of the leveraged speculating community over the past few years was a critical facet of the blow off phase of this historic Credit Bubble. And 2004's wild speculation in Credit default swaps - GM and Ford in particular - was indicative of the manic terminal phase of hedge fund/proprietary trading excess.

The blowup of the huge GM/Ford risk speculation was the pin that pierced the leveraged speculator Bubble (as much as I expected it to be higher interest rates). The dominos now fall and a whole series of bets go awry. Speculative markets, by their very nature, operate akin to cartels. And as long as price inflation is maintained by sufficient new liquidity flows into the cartel, there is a comfortable semblance of control and stability. But when prices abruptly falter and losses mount, the resulting shock of angst and uncertainty spur dog-eat-dog de-cartelization, liquidation, deleveraging and risk aversion.

It sure appears to me that we have entered "dog-eat-dog." The stock market environment has turned brutal. Interest rates have been wildly volatile and dropped when many were positioned for them to rise. Oil and commodities spiked higher, and many have dropped significantly of late. Currency markets have been unsettled and treacherous, with the dollar bears now getting squeezed. This week, a lot of hopes were dashed as the coveted and crowded "reflation trade" came unglued. And spread trades are looking less certain.

There is no doubt at this point that the leveraged speculators are losing money and will have to pare back risk. What's more, soon redemptions will commence which will only add additional pressure to liquidate. In the meantime, there will be intense pressure to fight for gains anyway and anywhere possible, certainly including jumping on the other side of crowded trades and pouncing mercilessly on the impaired. Such post-blow off dynamics will only exacerbate already volatile conditions in all markets. And, at some point, when it becomes clearer that this new environment offers especially high risk and little in the way of returns, volatility will not be the major problem.

A few weeks back I referred to these developments as the piercing of the Speculative Bubble in Risk. In the past, I have used my favorite flood insurance analogy to illuminate some of the financial and economic dynamics that arise from a speculative bubble in writing market "insurance." Well, there is a very important aspect of a speculative Bubble in Credit insurance that is not captured in our hypothetical flood insurance example: writing and trading flood insurance do not impact the weather - they don't increase the probabilities for extreme rainfall.

The most dangerous aspect of all the speculating in market and Credit risk - certainly including the proliferation of "risk models" - is that they do directly increase the potential for market collapses and devastating system Credit events (where various types of supposedly uncorrelated Credit risk become one). The 2003/2004 risk mania greatly increased Credit Availability, marketplace liquidity, leveraged speculation and risk taking generally. Underlying market structures were weakened, as companies borrowed more while minimally capitalized speculators shouldered greater risk. Speculative leveraging inflated asset prices throughout the economy and spending patterns were distorted. The downside of the cycle will see reduced Credit Availability, faltering liquidity, risk aversion, faltering asset markets and rather dramatically different spending habits.

While it would be tempting this evening to conjecture as to what hedge fund trades are going sour and what firms could suffer, I want to stick with a topic near and dear to my analytical heart: why must booms end and, more specifically, why did the "roaring twenties" end in disaster? The analysis seems to become clearer in my mind every week.

After years of an inflationary boom, two distinct and powerful interacting forces emerge. There is a massive Financial Sphere, having ballooned through a combination of self-reinforcing Credit excess and speculator leveraging. Because of the financing of asset markets and the rise of speculator leveraging, the Financial Sphere must "inflate or die." And there is the Economic Sphere, having taken on Bubble Dynamics due to finance-induced asset inflation, over- and distorted consumption, and mal-investment. The boom is doomed specifically because of unsustainable Bubble dynamics within the Financial Sphere. Leveraged speculation eventually reaches a degree of manic excess ("blow-off"), destabilizing the system with extreme asset inflation, speculative position growth that is unstable and unsustainable, and resulting unwieldy marketplace liquidity. It is not necessary to dwell on the catalyst for the piercing of the financial Bubble, but only that at some point asset prices will inevitably reverse, speculators will (panic) sell, and deleveraging will commence.

The key - The Momentous Dilemma - is that the Bubble Economic Sphere had become absolutely dependent on unending massive ("blow off") system Credit and liquidity creation - the finance necessary to sustain the inflated asset prices that had come to dominate spending and investing decisions. Was the 1929 stock market crash discounting the coming Great Depression? No, it had nothing to do with "discounting," but was instead the seminal development for the collapse of the speculative Bubble - and the commanding source of system liquidity - in the Financial Sphere. The highly distorted Bubble Economy was immediately starved for liquidity and there no bringing back the destroyed speculators or the ravaged Financial Sphere.

I have been thinking a lot about the late-twenties financial and economic environment lately. I thought I would share a few excerpts I ponder from The Memoirs of Herbert Hoover - 1929 to 1941 that capture the essence of Bubble dynamics.

"The 'New Era' economic philosophy was due for a jolt." (page 15)

"One trouble with every inflationary creation of credit is that it acts like a delayed time bomb. There is an interval of indefinite and sometimes considerable length between the injection of the stimulant and the resulting speculation. Likewise, there is an interval of a similarly indefinite length of time between the injection of the remedial serum and the lowering of the speculative fever. Once the fever gets under way it generates its own toxics." (page 11)

"Nor was our financial system weakness solely in the banks. Throughout the whole business of providing capital for our economic life there ran a pollution - the habit of making money by manipulation and promotion of securities. And that promotion too often disregarded the merits of the goods it sold. In addition, the financial world, instead of providing merely the lubricants of commerce and industry, had often set itself up to milk the system. Worse still, instead of being financial advisers to commerce and industry, the financiers had, in many ways, set themselves up to dictate the management of it." (page 23)

"The credit system in all its phases should be merely a lubricant to the systems of production and distribution. It is not its function to control these systems. That it should be so badly organized, that the volume of currency and credit, whether long or short term, should expand and shrink irrespective of the needs of production and distribution; that it should be the particular creature of emotional fear or optimism; that it should dominate and not be subordinate to production and distribution - all this is intolerable if we are to maintain our civilization." (page 25/26)

"It was difficult for the public to believe that such griefs and tragedies lay hidden in so obscure a process as credit inflation when forced on an already optimistic people." (page 14)

The bottom line is that I cannot look at today's financial environment and rant about system illiquidity. But I can look to the U.S. Bubble economy and warn that the Financial Sphere is going to have an increasingly onerous task in both providing sufficient finance and intermediating risk. And lower mortgage rates and higher home prices might very well sustain the Credit Bubble blow off for a little while longer. Yet prolonging the Mortgage Finance Bubble is terrible news. Nothing imparts greater distortions or liquidity dependency upon the Economic Sphere than mortgage excesses. And, in the end, it is the risk of today and tomorrow's home loans (inflated prices, stretched buyers, and ill-conceived mortgage terms) that will prove the most damaging to the system. All eyes on mortgage spreads. The Mortgage Credit Bubble makes the GM risk Bubble look awful teeny-weeny.

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