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Q1 2005 "Flow of Funds"


The performance of the U.S. stock market was mixed. For the week, the Dow gained about 0.5%, with the S&P500 posting a small advance. The Transports were hit for 3%, while the Utilities added 1%. The Morgan Stanley Cyclical and Morgan Stanley Consumer indices were slightly negative. The broader market rally carried on. The small cap Russell 2000 and S&P400 Mid-cap indices posted gains of less than 1%. At the same time, the technology rally stumbled. The NASDAQ100 declined 1.5%, and the Morgan Stanley High Tech and Semiconductor indices fell about 1%. The Street.com Internet Index declined 2.5%, and the NASDAQ Telecommunications index lost 1%. The Biotechs were down slightly. The Broker/Dealers gained 1%, and the Banks were about unchanged. With bullion up $4.60, the HUI gold index added 1%.

A little froth came off the bond market. For the week, two-year Treasury yields jumped 12 basis points to 3.69%. Five-year government yields rose 11 basis points, ending the week at 3.84%. The 10-year Treasury yield was 7 basis points higher for the week to 4.05%. Long-bond yields added 4 basis points to 4.32%. The spread between 2 and 30-year government yields dropped 8 to 63. Benchmark Fannie Mae MBS yields rose 5 basis points. The spreads (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note and Freddie's 5% 2014 note were unchanged at 31. The 10-year dollar swap spread declined 0.25 to 41.25. Corporate bonds performed well, with auto bond and CDS enjoying a solid week. Junk spreads narrowed marginally. The implied yield on 3-month December Eurodollars jumped 15.5 basis points to 3.965%.

It was another strong week of corporate issuance. Investment grade issuers included Exelon $1.7 billion, Comcast $1.5 billion, Caterpillar $800 million, Chesapeake Energy $600 million, LG Electronics $600 million, Prudential $550 million, Countrywide $500 million, Masco $500 million, MGM Mirage $500 million, Reed Elsevier $700 million, Marriot $350 million, Pacificorp $300 million, John Deere Capital $300 million, Keycorp $250 million, Diamond Offshore $250 million, Pepco $250 million, and TTX $100 million.

June 10 - Bloomberg (David Russell): "Qwest Communications International Inc. and DirecTV Group Inc. led companies that sold $4.3 billion of junk bonds this week, the most since February, after a two-week decline in borrowing costs induced companies to issue debt."

Junk bond fund inflows declined to $110 million (from AMG). Junk issuers included Qwest Communications $1.75 billion, Ford Motor Credit $1.5 billion, DirectTV $1.0 billion, Service Corp $300 million, Tekni-Plex $150 million and Sierra Pacific Resources $100 billion.

June 8 - Financial Times (Gillian Tett ): "The cost to investment grade companies of raising funds through the syndicated loan market is at its lowest for eight years in the US and Europe, data from Dealogic, a market research group show. This follows a striking fall in the cost of borrowing for these so-called investment grade companies in recent months, and offers further evidence of the high levels of liquidity that are still swirling around global banks and capital markets. Steven Victorin, a managing director at Citigroup, said: 'We are operating in an environment where there is an extraordinary amount of liquidity it is very competitive out there.' ...Dealogic's data suggest that in the second quarter of this year, US and European investment grade companies were on average paying 64 basis points and 54 basis points, respectively, over Libor to raise loans a rate last seen in 1997."

Foreign dollar debt issuers included CIE $200 million and Braskem SA $150 million.

Japanese 10-year JGB yields declined 2 basis points to 1.2135%. Emerging debt markets stumbled a bit. Brazilian benchmark dollar bond yields jumped 36 basis points to 7.88%. Mexican govt. yields ended the week up 7 basis points to 5.43%. Russian 10-year dollar Eurobond yields rose 6 basis points to 6.04%.

Freddie Mac posted 30-year fixed mortgage rates dropped 6 basis points to 5.56%, the lowest level since March 2004 and down 74 basis points from one year ago. Fifteen-year fixed mortgage rates declined 6 basis points to 5.14%. One-year adjustable rates fell 5 basis points to 4.21%. The Mortgage Bankers Association Purchase Applications Index rose 3.6%. Purchase applications were up 11% compared to one year ago, with dollar volume up almost 24%. Refi applications jumped 6.5%. The average new Purchase mortgage rose to $240,000. The average ARM surged to a record $351,100. The percentage of ARMs declined to 31.7% of total applications.

Broad money supply (M3) jumped $23.8 billion to $9.622 Trillion (week of May 30). Year-to-date, M3 has expanded at a 3.6% rate, with M3-less Money Funds growing at 5.3% pace. For the week, Currency added $1.3 billion. Demand & Checkable Deposits rose $19.8 billion. Savings Deposits dropped $26.6 billion. Small Denominated Deposits gained $3.9 billion. Retail Money Fund deposits dipped $1.1 billion, while Institutional Money Fund deposits rose $16.2 billion. Large Denominated Deposits jumped $16.1 billion. For the week, Repurchase Agreements declined $3.1 billion, and Eurodollar deposits dipped $2.8 billion.

Bank Credit jumped another $31.6 billion last week, increasing the year-to-date expansion to $419.8 billion, or 14.7% annualized. Securities Credit is up $156 billion, or 19.2% annualized, year-to-date. Loans & Leases have expanded at a 12.7% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 19.3%. For the week, Securities increased $12.3 billion. C&I loans dipped $0.9 billion. Real Estate loans rose $12.9 billion. Real Estate loans have expanded at a 13.4% rate during the first 22 weeks of 2005 to $2.69 Trillion. Real Estate loans are up $313 billion, or 13.2%, over the past 52 weeks. For the week, consumer loans declined $1.7 billion, while Securities loans increased $11.2 billion. Other loans dipped $2.2 billion.

Total Commercial Paper rose $8.9 billion last week to $1.517 Trillion. Total CP has expanded at a 16.5% rate y-t-d (up 12.9% over the past 52 weeks). Financial CP expanded $9.8 billion last week to $1.367 Trillion, with a y-t-d gain of $82.3 billion (14.5% ann.). Non-financial CP dipped $0.9 billion to $150.7 billion (up 37% ann. y-t-d and 22.9% over 52 wks).

ABS issuance surged to a record $30 billion, breaking the two-week old record of $23 billion by 30% (from JPMorgan). Year-to-date issuance of $320 billion is 27% ahead of comparable 2004. At $201 billion, y-t-d home equity ABS issuance is 32% above the year ago level.

Fed Foreign Holdings of Treasury, Agency Debt rose $5.3 billion to $1.432 Trillion for the week ended June 8. "Custody" holdings are up $95.9 billion, or 16.2% annualized, year-to-date (up $203.5bn, or 16.6%, over 52 weeks). Federal Reserve Credit dipped $2.5 billion to $790.0 billion. Fed Credit has declined 0.2% annualized y-t-d (up $43.6bn, or 5.8%, over 52 weeks).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $563.93 billion, or 17.5%, over the past 12 months to $3.778 Trillion. India's foreign reserves were up 18.4% over the past year to $134 billion. China's broad measure of money supply (M2) was up 14.6 percent from one year ago to 26.9 trillion yuan, or $3.3 Trillion.

Currency Watch:

The dollar index gained 1%. Curiously, despite the dollar's rise the commodity currencies generally performed well. The South African rand gained 1.5%, the New Zealand dollar 0.8%, and the Australian dollar 0.7%. The Iceland krona gained 1%. On the downside, the Brazilian real declined 2.0%, the Swedish krona 1.9%, the Swiss franc 1.33%, and the Euro 1%.

Commodities Watch:

June 8 - Bloomberg (Bunny Nooryani): "Statoil ASA, Norway's largest oil company, said a shortage of skilled workers in the oil and gas industry may hamper global development of petroleum fields in the next five years, as demand for energy rises. 'A shortage of competence is a far bigger hindrance to developing the oil and gas industry than the need for capital,' Statoil Chief Executive Helge Lund said..."

June 9 - Bloomberg (Maria Ermakova): "Russia will raise crude oil exports to China by 50 percent next year, Interfax reported, citing China National Petroleum Corp. President Chen Geng. Russia's oil exports to China will increase to 15 million tons in 2006 from 10 million tons planned this year..."

June 10 - Bloomberg (James Cordahi): "China's imports of iron ore, an ingredient in steelmaking, surged 34 percent in the first five months from a year earlier to 110 million metric tons..."

July crude oil slumped $1.49 to $53.54. For the week, the CRB declined %1.4, reducing y-t-d gains to 6.5%. The Goldman Sachs Commodities index slipped 0.5%, as the 2005 gain fell to 19.7%.

China Watch:

June 10 - XFN: "China's exports for the first five months rose 33.2% year-on-year to $276.4 bln and imports were up 13.7% to $246.38 bln, the Xinhua news agency said, citing customs figures."

June 10 - Bloomberg (Philip Lagerkranser): "China's producer prices rose in May at the quickest pace this year as rising demand in the world's fastest-growing major economy pushed fuel costs higher. The producer price index rose 5.9 percent from a year earlier..."

June 6 - XFN: "Retail sales will grow 12.5% in 2005, rising to 40% of GDP, the (Chinese) Ministry of Commerce forecast... It predicted that auto sales will rise 15% over last year, and sales of residential properties will rise 20%."

June 8 - XFN: "China's passenger car sales, including sedans, multiple-purpose vehicles and sport-utility vehicles, rose 24% year-on-year to 249,624 units in May, the Shanghai Daily reported."

June 7 - Bloomberg (Philip Lagerkranser): "Hong Kong's retail sales growth accelerated in April, beating economists' forecasts, as falling unemployment and rising wages made consumers more willing to spend. Sales gained 8.5 percent from a year earlier to HK$17 billion ($2.2 billion) after climbing a revised 6.2 percent in March..."

Asia Boom Watch:

June 8 - Bloomberg (John Stebbins): "Worldwide semiconductor sales are expected to rise 6 percent this year because of demand for personal computers and cellular telephones, a trade group said, revising its forecast for little to no change in sales."

June 10 - Bloomberg (Cherian Thomas and Kartik Goyal): "India's industrial production grew faster than expected in April as rising incomes and the cheapest credit in 32 years boosted sales... Production at factories, utilities and mines in April rose 8.8 percent..."

June 10 - Bloomberg (Anand Krishnamoorthy): "India's automobile sales rose 20 percent in May after Maruti Udyog Ltd., the nation's biggest carmaker, and other automakers boosted discounts to lure buyers in Asia's fourth-biggest automobile market...."

June 8 - Bloomberg (Debarati Roy and Matthew Craze): "Mittal Steel Co. may build a 300 billion-rupee ($6.9 billion) steel mill and iron-ore mine in India's Jharkhand state to tap new ore deposits amid a surge in raw material costs."

June 8 - Bloomberg (Seyoon Kim): "South Korean household debt posted its biggest increase in 19 months in May as consumers borrowed more to buy properties and stocks, a central bank report showed."

June 7 - Bloomberg (Theresa Tang and Yu-huay Sun): "Taiwan's exports grew in May at the slowest pace in two years as high oil costs damped overseas demand for the island's laptop computers, flat-panel displays and mobile phones. Shipments rose 4 percent from a year earlier to $16.3 billion..."

June 7 - Bloomberg (Stephanie Phang): "Malaysia's industrial production rose at a faster than expected pace in April as manufacturers boosted output to meet growing domestic demand. Production at factories, mines and utilities increased 6.8 percent from a year earlier, compared with revised growth of 5.8 percent in March..."

June 7 - Bloomberg (Kyunghee Park and Ron Madison): "Johor Port Bhd., Malaysia's second-biggest port operator, expects to handle 24 percent more containers this year, helped by an increase in global trade. 'We expect to do 1 million this year,' Johor Port Chairman Taufik Abdullah said in an interview today. The port handled 805,689 20-foot standard containers in 2004."

June 8 - Bloomberg (Anuchit Nguyen): "Thailand's tax revenue rose 23 percent
in May as higher corporate profits and rising employment helped boost collections."

June 6 - Bloomberg (Anuchit Nguyen): "Thailand's economy shrank for the first time in four years in the first quarter as a drought parched crops and tourists stayed away after the Dec. 26 tsunami. Gross domestic product fell a seasonally adjusted 0.6 percent from the fourth quarter..."

June 7 - Bloomberg (Francisco Alcuaz Jr. and Jun Ebias): "Philippine inflation stayed near a six-year high for the fourth month in May, increasing the chances of the central bank raising its key overnight rate again this year. The consumer price index rose 8.5 percent from a year earlier..."

Unbalanced Global Economy Watch:

June 6 - Bloomberg (Lily Nonomiya): "Japanese companies increased investment at a faster pace in the first quarter, suggesting the government will raise its estimate for growth in the world's second-largest economy. Capital spending rose 7.4 percent from a year earlier to a record 13.7 trillion yen ($130 billion), the Ministry of Finance said... That compares with growth of 3.5 percent in the previous three months."

June 10 - Bloomberg (Alexandre Deslongchamps): "Canadian employers added 35,400 workers in May, more than twice the expected gain, led by retailers and wholesalers. The unemployment rate remained at a four-year record-low of 6.8 percent."

June 9 - Bloomberg (Halia Pavliva): "Russia's trade surplus rose to $10.5 billion in April as exports outpaced imports because of the high price of oil, the country's major source of revenue, the central bank said... Exports rose 37.2 percent in April from the same month a year ago, to $20.2 billion, while imports increased 27 percent to $9.7 billion..."

June 9 - Bloomberg (Harry Papachristou): "Greek bank lending accelerated for a second month in April, the Bank of Greece said, as both business and household borrowing increased. Loans to households and businesses grew at an annual rate of 15.6 percent..."

June 9 - Bloomberg (Victoria Batchelor): "Australian employers unexpectedly added workers in May for a ninth month...Employment rose 14,000 last month, the Australian Bureau of Statistics said... The unemployment remained at a 28-year-low 5.1 percent."

Latin America Watch:

June 7 - Bloomberg (Guillermo Parra-Bernal): "Brazil's industrial production in April grew at the fastest pace in four months, the government said. Industrial output rose 6.3 percent from a year earlier, compared with growth of 1.7 percent in March..."

June 6 - Bloomberg (Heather Walsh): "Chile's economic growth accelerated in April after manufacturers boosted production at the fastest pace this year following a jump in orders. The economy grew 6.3 percent, compared with 5.1 percent in the 12 months to March..."

June 8 - Bloomberg (Eliana Raszewski and Daniel Helft): "Argentina is considering further measures to discourage speculators from investing in local capital markets, Economy Minister Roberto Lavagna said. 'Investments are welcome, but we are working to stop speculative capital inflows. We are not interested in them.' On May 26, Lavagna said Argentina would require investors to keep money in the country for at least 12 months. The measure aims to discourage capital inflows and curb a rise in the peso..."

June 7 - Bloomberg (Alex Kennedy): "Venezuelan vehicle sales jumped 54 percent in May on consumers' concern the country's quickening inflation will trigger a decline in purchasing power."

Dollar Consternation Watch:

June 8 - MarketNews: "It is 'quite irrational' to demand that developing nations shoulder the burden of adjustments needed to correct global economic imbalances, assistant governor of the People's Bank of China Ma Delun said... Further, it is 'unconstructive' for the International Monetary Fund to focus so much on achieving greater currency flexibility in some regions of the world when instability is due more to an oversupply of -- and fluctuations among -- major reserve currencies, chiefly the dollar, Ma said... In a hard-hitting address, Ma lashed out at the United States without identifying it by name, suggesting that US macroeconomic policy is in large part to blame for current problems. 'The diversification of international reserve currencies has been the source of instability of the international monetary system, while the economic policies of the issuing countries of the reserve currencies have been the origins of major contravention,' said Ma... 'The dominating reserve currency issuing country has the ability to run a chronic trade deficit with almost negligible cost of issuing money. This fact reveals the privilege and benefits enjoyed by the reserve currency issuing country, rather than an unfavorable trade status as [is] being complained.' Ma added: 'If the value of the reserve currency is unstable, all the other countries will be in a dilemma -- they will either import inflation and deflation, or bear the cost of exchange rate fluctuation. It is fair to say that since the reserve currency issuing countries have already enjoyed the privilege and benefit of issuing currencies in credit, they should shoulder the related responsibility of maintaining stable exchange rates among themselves. Over-fluctuation of exchange rates among reserve currencies are important sources of financial instability.' According to Ma, the IMF should therefore treat the surveillance of reserve currency issuing countries 'as its first priority, with an aim of maintaining stable exchange rates among these currencies.'"

Bubble Economy Watch:

June 9 - Bloomberg (James Cordahi): "Millionaires in the U.S. increased their number by 9.9 percent last year as the stock market rallied. Today, almost one in every 110 Americans has more than $1 million of shares, bonds and other financial assets, according to a report by Capgemini and Merrill Lynch & Co. When including those in Canada, their riches rose by 10.2 percent to $9.3 trillion..."

At $57.0 billion, April's Trade Deficit was up 18% from one year ago. Goods Imports were up 15% from April 2004 to $136.8 billion, with Goods Exports up 13% to $74.5 billion. May Import Prices were up 5.7% from one year ago.

June 7 - Washington Post (Albert B. Crenshaw): "Although the financial markets have been on the upswing recently from their post-boom low, many of the nation's private pension plans have been sinking deeper into the hole, according to new figures from the government's pension insurance agency. The 1,108 weakest pension plans -- those whose assets are at least $50 million below the value of the benefits they promise -- were short by an aggregate $353.7 billion at the end of last year, figures from the government's Pension Benefit Guaranty Corp. show. That was 27 percent more than the shortfall a year earlier, contrary to the hopes of many that funding would improve as the economy strengthens."

June 8 - Wall Street Journal (Sheila Muto): "Foreign and institutional investors are bidding up prices for office properties in the nation's biggest markets, paying more than private investors and real-estate investment trusts are willing to offer, a real-estate research firm says. Los Angeles, New York, San Francisco and Washington, D.C., are among the areas where foreign and institutional investors have been the most active in the past year. Competition for office properties has been fierce in those markets among all investors because of strong or improving leasing activity and rising rental rates."

June 9 - MarketNews (Gary Rosenberger): "Imports roared in April following their steep March drop, suggesting any narrowing of the trade gap was but a one-month blip prompted by Asian factory shutdowns during the Lunar New Year, say cargo and port officials... Oil-related imports rose in April, with total imports of crude oil and derivatives up 6.1% from a year ago in pure volume terms...April's import resurgence was accompanied by a sharp rise in exports, which should temper some of the near-certain widening."

California Bubble Watch:

June 3 - San Diego Unition-Tribune (Emmet Pierce): "The state's booming housing market has generated $1 trillion in increased home equity since 2000, triggering billions of dollars in consumer spending, the California Building Industry Association reported yesterday. In addition to strengthening the economy, the gain in home values makes it highly unlikely that widespread mortgage defaults will occur in the event of a sharp economic downturn, said Alan Nevin, the association's chief economist... Refinancing has enabled homeowners to buy goods and services 'they wouldn't have been able to afford otherwise,' he said."

June 5 - Bloomberg (Daniel Taub): "The cost of renting a home in Los Angeles or elsewhere in Southern California is rising because of growing demand from people unable to buy. Rental prices in Los Angeles rose 4.6 percent in the fourth quarter to an average $1,408 a month, spurred by a 20 percent increase in the price of previously owned homes, according to a report issued yesterday by the Los Angeles County Economic Development Corp."

Mortgage Finance Bubble Watch:

Countrywide enjoyed a big May. At $2.77 billion, average daily application volume was the highest in almost two years. Total Fundings were up 23% from one year ago to $39.0 billion. The company's Loan Pipeline was up 42% from May '04 to $70.5 billion. Purchase Fundings were up 36% from one year ago, with Home Equity up 61% and Subprime 9%. ARMs were 56% of total fundings. Bank Assets surged $5.5 billion during the month to $61.5 billion (up 140% y-o-y).

June 8 - National Association of Realtors: "Lower-than-expected mortgage interest rates will push home sales to a fifth consecutive record in 2005... David Lereah, NAR's chief economist, said long-term interest rates look very favorable. "Not only have mortgage interest rates declined, but an expected rise in the second half of the year will be slower than in earlier projections. As a result, we now expect to set records for both existing- and new-home sales this year.' Existing-home sales are forecast to rise 1.6 percent to a total of 6.89 million this year from a record 6.78 million in 2004, while new-home sales are seen to grow by 3.2 percent to 1.24 million in 2005. At the same time, housing starts are projected to increase 3.4 percent to just over 2.02 million units, the highest level since 1973. The national median existing-home price for all housing types is expected to rise 8.8 percent in 2005 to $201,500, while the typical new-home price should increase 5.7 percent to $233,600. NAR president Al Mansell...said a rapid growth in the number of mortgage products and loan options is helping buyers to overcome downpayment hurdles... The U.S. gross domestic product is expected to grow 3.5 percent in 2005, with the unemployment rate holding around 5.2 percent for the rest of the year. Inflation should remain modest with the Consumer Price Index rising 3.0 percent in 2005. Inflation-adjusted disposable personal income is seen to grow 3.3 percent in 2005..."

June 8 - American Banker: "Appraisals that inflate home values are becoming more common and threaten access to credit, according to a report released this week by the national Community Reinvestment Coalition. 'Problematic appraisal practices exist as a serious impediment to responsible lending, impede fair housing and equal access to credit, and place the American dream of homeownership and safety and soundness of the mortgage marketplace at risk...' Most of the blame lies with lenders who want inflated appraisals so they can make bigger loans with larger interest payments..."

Q1 2005 Z.1 "Flow of Funds:"

The Credit Bubble remains in a period of spectacular blow-off excess. First quarter Non-financial Debt increased at a 10.0% seasonally-adjusted annualized (SAA) rate. This was up from the fourth quarter's 8.2%. One must go all the way back to 1986 (when 10-year Treasury yields averaged 7.66%) for a year of stronger Non-financial Debt growth (11.9%). It is also worth noting that the first quarter growth rate was almost double the '90s 5.37% average annual rate. First quarter Non-Finance Debt expanded a record $2.411 Trillion SAA. This compares to 2004's $1.918 Trillion, 2003's $1.668 Trillion, 2002's $1.321 Trillion, 2001's $1.115 Trillion and 2000's $836 billion. During the decade of the nineties, Non-financial Debt expanded on average $700 billion annually. Blow-off Credit creation excess is now more than three times this pace.

The Credit system is certainly firing on all cylinders. Federal Government borrowings expanded 13.8% SAA, Households 9.3%, Corporate 7.5%, and State & Local 16.2%. Non-federal debt expanded 9.1% annualized, the strongest quarterly growth since Q2 2000. Non-financial Debt was up 8.9% y-o-y. The compares to the nineties average annual non-financial debt growth of 5.4%. For the quarter, Total Credit Market Debt (non-financial and financial) expanded at a 6.9% pace to $37.31 Trillion (306% of GDP).

Financial Sector Credit Market debt expansion slowed to a rate of 4.8%, as GSE asset growth turned negative. However, GSE stagnation was more than offset by a surge in Bank Credit expansion (bank asset growth predominantly financed by deposits, repos and other non-"Credit market" borrowings).

Bank Credit expanded an amazing $1.054 Trillion seasonally-adjusted annualized during the quarter to $7.0 Trillion. This was a growth rate of 13.4%. One has to go all the way back to inflationary 1978 (13.6%) to find a year of stronger Bank Credit expansion. Bank Credit expanded at an 11.6% rate during the past six months. This is up from 2004's blistering 9.2% increase and compares to the average annual 7.2% expansion during the five year period 2000-2004. Bank Credit expanded by an average 6.2% annually during the (supposedly "disinflationary") '90s and 8.5% during the (conspicuously inflationary) '80s. The first quarter's record nominal Bank Credit increase of $225.6 billion exceeds the $215 billion annual average growth during the decade of the '90s (and there has been no let up in bank Credit growth during the second quarter!).

Bank Loans expanded at a 9.5% rate during the quarter and were up 9.9% y-o-y. Bank Loan growth averaged 5.8% annually during the '90s. Bank Loans were up 17.5% during the most recent two-year period. Bank Mortgages expanded at a 14.5% rate during the quarter to $2.69 Trillion, with a 12-month gain of 15.4% and two-year rise of 28%. For comparison, Bank Mortgage loans expanded an annual average 6.9% during the '90s. Bank Mortgage holdings have increased $360 billion over the past year. This compares to the nineties annual average of $72.5 billion (2000-2004 average $220bn). Or, from a different angle, Bank Mortgage loans expanded $727 billion during the past 10 quarters, compared to an increase of $725 billion during the ten years of the nineties. Bank Credit has now doubled over a period of just less than 10 years.

On the Bank Liability side, Total Bank Deposits expanded at a 9.0% rate ($113bn) during the quarter to $5.14 Trillion. Deposits were up 10% over the past year and 19% over two years. Certainly helping to explain the subdued monetary aggregates, Federal Funds and Securities RP (repo) expanded at a 20% rate during the quarter ($49.3bn) to $1.02 Trillion. In addition, Credit Market Instrument liabilities grew at a 19.7% rate ($36.4bn) to $775.2 billion and were up 10.2% over one year and 23.5% over two years. Bank Bond borrowings were up 17% over the past year to $456.3 billion.

Security Broker/Dealer Assets expanded 21% annualized ($436bn SAA) to $1.941 Trillion. Broker/Dealer Assets have expanded at a 23% pace over the past nine months. Broker/Dealer Assets increased $555 billion ($277.5bn annually) over two years, or 40%. This compares to total asset growth during the nineties of $764 billion ($76.4bn annually). Assets have almost doubled (up 94%) since the beginning of 2000. Increasing $96 billion during the quarter, the Liability "repo" expanded to finance all of Broker/Dealer Asset growth. "Repo" Liabilities were up $247.4 billion over the past three quarters to $623 billion. Repo Liabilities were up 32% over the past year and 86% over two years. Miscellaneous Assets expanded $52.6 billion during the quarter to $1.047 Trillion.

Total Federal Funds and Security Repurchase Agreements (with bank and broker "repo" assets and liabilities netted) surged $137.4 billion - or 33% annualized - during the quarter to $1.788 Trillion. "Fed Funds and Repo" was up 10.5% y-o-y and 31.3% over two years. During the first quarter, REIT Assets expanded at a 21% pace to $258.7 billion. REIT assets began 2002 at $83.9 billion. REITs expanded 53% over the past year and 137% over two years. REIT holdings of Home Mortgage assets have more than doubled from one year ago to $103.7 billion. "Funding Corp" Assets expanded at a 17.5% rate to $1.286 Trillion (up 4.8% y-o-y). Finance Company Assets declined at an 8.8% rate to $1.424 Trillion. Credit Union Assets expanded at a 9.5% rate to $670 billion. Life Insurance Assets expanded at a 3.3% pace to $4.166 Trillion.

Asset-Backed Securities (ABS) ballooned a torrid $480.8 billion SAA during the quarter (17.2% rate) to $2.685 Trillion. For comparison, ABS grew $168.6 billion during 2000, $243.2 billion during 2001, $195 billion during 2002, $239.5 billion during 2003, and $309.2 billion during 2004. ABS was up 16.7% over the past year and 32% over the past nine quarters. It is interesting to note that (non-GSE) Mortgage holdings by ABS pools comprised 39% of ABS growth during 1999 and 47% during 2000 and 2001. During the first quarter (as well as full year 2004), the increase in Mortgage holdings was greater than the growth of outstanding ABS. Since the end of 2002, ("private-label") mortgages have increased from 42% to 61% of total ABS assets. The ABS market has ballooned 88% since the beginning of year 2000.

The explosion of non-Government Sponsored Enterprise securitizations is coming at the expense of GSE asset and MBS growth. During the first quarter, GSE Assets contracted at a 1.0% rate to $2.872 Trillion, reducing one-year growth to 2.6%. GSE MBS expanded at a 0.6% rate to $3.548 Trillion, with 12-month growth of 1.1%. Since the beginning of year 2000, GSE assets have expanded 67% and MBS 55%.

First quarter Total Mortgage Debt expanded at a $1.127 Trillion seasonally-adjusted annual pace to $10.774 Trillion. For Comparison, Total annual Mortgage Debt growth averaged $270 billion during the nineties. Household Mortgage Debt (HMD) expanded at a 9.1% rate during the quarter to $8.282 Trillion. HMD was up 13.1% over the past year, 28% over two years, and 103% over seven years. Commercial Mortgage Debt (CMD) expanded $213.4 billion SAA during the quarter to $1.742 Trillion (up 12% y-o-y). For comparison, CMD grew $111.0 billion during 2000, $114.7 billion during 2001, $102.8 billion during 2002, $129.7 billion during 2003 and $177.1 billion during 2004.

Rest of World (ROW) holdings of U.S. financial assets increased $1.170 Trillion SAA during the first quarter, compared to nineties average growth of $388 billion. Holdings increased 17% annualized during the quarter to $9.72 Trillion, down slightly from the fourth quarter's 20.2%. ROW holdings were up 13% over the past year and 27% over two years. Holdings of U.S. Credit Market Instruments expanded $848.6 billion SAA to $4.88 Trillion. This compares to 2000's increase of $241.9 billion, 2001's $305.3 billion, 2002's $422.8 billion, 2003's $538.2 billion, and 2004's $776.7 billion. Holdings of Treasuries increased at a $372.6 billion annual pace and Corporate Bonds (includes ABS) at a $281.6 billion pace. ROW Credit Market Instruments holdings were up 40% in two years. "Official" holdings expanded at a 7.3% pace to $1.46 Trillion (up 15.8% y-o-y). Foreign Direct Investment increased by an annualized $188 billion, which if it continues for the year would be the strongest FDI since 2000. "Other" ROW U.S. assets expanded at a $480 billion annualized pace.

Household Sector (including Non-profits) Assets increased $483.4 billion (3.3% annualized) during the quarter to $59.7 Trillion. The value of Household Financial Assets dipped $108.8 billion, or 1.2% annualized, to $36.5 Trillion. Meantime, Real Estate holdings surged $505.6 billion (11.4% ann.) to $19.25 Trillion. Real Estate holdings were up 26% over the past two years and 93% over seven years. And with Liabilities increasing $155 billion, Household Net Worth rose $327.9 billion (2.7% ann.) during the quarter to $48.8 Trillion. Net Worth was up $3.69 Trillion over the past year (8.2%) and $9.17 Trillion over two years (23%).

Credit inflation-enhanced GDP expanded 6.6% annualized during the first quarter to $12.19 Trillion. First quarter Personal Consumption Expenditures were up 6.0% from Q1 2005, with Durables up 4.8% to $1.02 Trillion, Non-durables up 7.5% to $2.49 Trillion, and Services up 5.5% to $5.03 Trillion. Gross Private Investment was up 14.6% to $2.08 Trillion, with Residential Investment up 13.6% to $709 billion. National Income was up 7.5% from Q1 2004, with Compensation of Employees up 7.4% to $6.967 Trillion. First quarter federal government expenditures were up 6.4% from Q1 2004, with State & Local spending up 5.7%.

To summarize the first quarter, Total Mortgage Debt ($1.127TN), Bank Credit ($1.276TN), and Rest of World Holdings of US Financial Assets ($1.170TN) each expanded at more than $1 Trillion annualized. This continuation of blow-off Credit and liquidity-creating excess goes a long way toward explaining the current extraordinary inflationary asset boom. The only conundrum is with respect to when and how this historic Bubble meets its fate.

There are indications that recent yield declines have stoked the Mortgage Credit Fire. And the attentive homeowner has surely been listening to Wall Street pundits. He can be forgiven for turning a tad giddy - watching his home price go up and up, and now believing that inflation and mortgage rates will remain low forever. If it's too good to be true... But for now, don't be surprised when he goes out and spends some of this housing and Credit inflation "wealth creation."

Chairman Greenspan famously sorts through reams of economic data during his morning bath. I often ponder how much time he spends soaking in the "flow of funds."

From Monday's International Monetary Conference in Beijing:

Question: "Could I ask you to elaborate on your best guess as what force does explain the phenomenon (of low global interest rates) and, in light of that, its likely durability, please?"

Alan Greenspan: "The problem I have is that there are a whole series of hypotheses all of which are credible. But clearly, while some of them can be concurrently functioning, it's also conceivable - I can conceive of hypotheses which are mutually contradictory. The reason we are having trouble fully understanding this process is that we've never run into anything like this before. This is the first time - despite a half-century of globalization - following World War II - that we have really begun to see the movement, of not only goods and services, but of capital and debt instruments, all sorts of exotic new types of financial innovations going across boarders and integrated worldwide. The behavior of the American interest-rate structure for the last fifty years, in the context of what we're looking at. So I do think that the most relevant likely reason why we are dealing with what we are dealing with are new forces at work in the international market, but their nature and their behavior is not something we are going to fully understand, if ever, certainly except in retrospect."

ECB President Jean-Claude Trichet: "It is really striking that we (have) the same forward indexed bond yields and it is a clear demonstration that we are living in a single world much more than before, because we did have this proximity before, but we have been living in that world for a long period of time. What is a little bit more striking is the most recent period of time where we could see further falling down of interest rates, which is very difficult to explain, I have to say. As we have all the reasons that Alan [Greenspan] has listed as possible explanations which were all non-totally significant, I would say perhaps, Alan, small streams make big rivers. And when you add up the purchases of Treasuries coming from a number of central banks, in particular in Asia, plus the pension funds, plus the insurance companies that are more involved in fixed-interest instruments, and when you add on the explosion, if I may, of the hedge funds and the chase for yield and so forth, perhaps all these together might explain what we have in front of us and which remains very, very challenging, I have to say, intellectually."

Later in the week from Mr. Trichet: "The ECB singles out money in its monetary analysis in recognition of the fact that monetary growth and inflation are correlated in the long term. However, the monetary analysis also contributes to assessing the extent to which excess creation of liquidity and over-extension of credit can be a driving force behind excessively valued assets. 'Detecting and understanding this link helps the ECB form an opinion on whether an observed movement in monetary aggregates and their counterparts might already reflect the inflating of an asset price bubble. It is then clear that a case by case analysis based on sound information on the monetary variables (mainly broad money and credit), on the counterparts of monetary aggregates (including the net external asset position of monetary and financial institutions) and on the related functioning of the asset market is indispensable."

Indispensable, indeed! Study your Z.1 report, Federal Reserve Governors - and get back to the basics of sound monetary management.

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