Markets are not well-anchored. A volatile week saw the Dow close about unchanged, while the S&P500 declined 0.8%. The Transports fell 1%, while the Utilities were hammered for 4.6%. The Morgan Stanley Cyclical index dropped 2%. The Morgan Stanley Consumer index was about unchanged. The broader market was under heavy selling pressure. Despite today's rally, the small cap Russell 2000 and S&P400 Mid-cap indices were both down 1.7%. The NASDAQ100 dipped 0.7%, with the Morgan Stanley High Tech index down 1.1%. The Semiconductors sank 4%, and the NASDAQ Telecommunications index dropped 3.2%. The Street.com Internet index dipped 0.2%. The Biotechs mustered a gain of 0.4%. Financial stocks were mixed. The Broker/Dealers were smacked for a 4% loss, while the Banks were slightly positive. With bullion down $4.95, the HUI gold index dropped 5.5%.

Treasuries remain under pressure. For the week, two-year Treasury yields rose 8 basis points to 4.25%. Five-year government yields jumped 11 basis points to 4.34%. Bellwether 10-year yields rose 13 basis points for the week to 4.48%, a six-month high. Long-bond yields surged 14 basis points to 4.70%. The spread between 2 and 10-year government yields increased 6 to 24 bps. Benchmark Fannie Mae MBS yields jumped 14 basis points to the highest level since the March yield spike. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note widened 2 to 32, and the spread on Freddie's 5% 2014 note widened 2 to 32. The 10-year dollar swap spread increased 2.0 to 48.25, the high since August 2004. Corporate bonds were on the defensive, with junk bond spreads widening moderately. The implied yield on 3-month December Eurodollars rose 3.5 basis points to 4.425%. December '06 Eurodollar yields jumped 10 basis points to 4.715%.

Investment grade corporate issuance rose somewhat to about $8.5 billion. Issuers included World Savings $1.5 billion, International Lease Finance $350 million, Columbus Southern Power $250 million, and Anheuser Busch $100 million.

Junk bond funds saw outflows jump to $406 million (from AMG). Issuers included Hilcorp Energy $175 million and Doane Pet Care $150 million.

Foreign dollar debt issuers included Santander $2.0 billion, Poland $1.1 billion, European Investment Bank $1.0 billion, BskyB Finance $1.1 billion, and Jamaica $250 million.

Japanese 10-year JGB yields increased 5.5 basis points this week to 1.565%, nearing 2-year highs. Emerging debt and equity markets were generally under pressure. Brazil's benchmark dollar bond yields jumped 35 basis points to 7.93%. Brazil's Bovespa equity index, however, gained almost 2% (up 13.6% y-t-d). The Mexican Bolsa dropped 3.6% (up 15.3% y-t-d). Mexican govt. yields surged 25 basis points to 5.81%. Russian 10-year dollar Eurobond yields jumped 21 basis points to 6.48%. The Russian RTS equity index fell 4% this week (up 48.4% y-t-d).

Freddie Mac posted 30-year fixed mortgage rates rose 5 basis points to 6.03%, the first time above 6% since the week of April 1. Thirty-year fixed rates were up 29 basis points from one year ago. Fifteen-year fixed mortgage rates increased 8 basis points to 5.62%, a high since July 2004. One-year adjustable rates jumped 8 basis points to 4.85%, up 39 basis points in four weeks (high since May 2002). One-year ARM rates were up 84 basis points from the year ago level. The Mortgage Bankers Association Purchase Applications Index dipped 0.9%. Purchase Applications were up 7.4% from one year ago, with dollar volume up 18.5%. Refi applications fell 4.9% during the week. The average new Purchase mortgage increased to $245,900, while the average ARM declined to $358,900. The percentage of ARMs slipped slightly to 29.5% of total applications.

Broad money supply (M3) surged $41.7 billion, surpassing $10 Trillion (week of October 3) for the first time. M3 has now doubled in less than nine years, after reaching $5 Trillion during the first week of 1997. Over the past 20 weeks, M3 has surged $410 billion, or 11.1% annualized. Year-to-date, M3 has expanded at a 7.6% rate, with M3-less Money Funds expanding at an 8.6% pace. For the week, Currency dipped $0.1 billion. Demand & Checkable Deposits jumped $23.3 billion. Savings Deposits declined $3.5 billion. Small Denominated Deposits added $1.5 billion. Retail Money Fund deposits increased $2.5 billion (8 straight gains), while Institutional Money Fund deposits gained $0.6 billion. Large Denominated Deposits rose $8.6 billion. Year-to-date, Large Deposits are up $241 billion, or 29% annualized. For the week, Repurchase Agreements jumped $11.1 billion, while Eurodollar deposits declined $2.3 billion.

Bank Credit declined $16.2 billion last week. Year-to-date, Bank Credit has inflated $627.7 billion, or 12.1% annualized (up 10.5% from a year earlier). Securities Credit fell $10.7 billion during the week, with a year-to-date gain of $159 billion (10.7% ann.). Loans & Leases have expanded at a 12.9% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 17.4%. For the week, C&I loans increased $2.2 billion, and Real Estate loans jumped $13.1 billion. Real Estate loans have expanded at a 14.9% rate during the first 40 weeks of 2005 to $2.832 Trillion. Real Estate loans were up $357 billion, or 14.4%, over the past 52 weeks. For the week, Consumer loans declined $11.7 billion, and Securities loans fell $3.8 billion. Other loans dropped $6.6 billion.

Total Commercial Paper gained $4.1 billion last week to $1.614 Trillion. Total CP has expanded $200.2 billion y-t-d, a rate of 18.0% (up 19.4% over the past 52 weeks). Financial CP dipped $0.4 billion last week to $1.468 Trillion, with a y-t-d gain of $184.1 billion, or 18.2% annualized (up 20.5% from a year earlier). Non-financial CP increased $4.5 billion to $145.6 billion (up 15.8% ann. y-t-d and 9.7% over 52 wks).

Fed Foreign Holdings of Treasury, Agency Debt gained $3.29 billion to $1.467 Trillion for the week ended October 12. "Custody" holdings are up $131.3 billion y-t-d, or 12.5% annualized (up $179bn, or 13.9%, over 52 weeks). Federal Reserve Credit expanded $1.19 billion to $801.4 billion. Fed Credit has expanded 1.7% annualized y-t-d (up $32.6bn, or 4.2%, over 52 weeks).

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $594.5 billion, or 17.6%, over the past 12 months to $3.977 Trillion.

October 14- MarketNews: " China's foreign exchange reserves rose to US$769 bln at the end of September, up from the end-June level of US$711 bln, the central bank said... Forex reserves growth accelerated in the third quarter, rising US$58.0 bln compared to the US$51.9 bln rise in the second quarter. For the first nine months of the year, foreign exchange reserves increased by US$159.1 bln...For September alone, foreign exchange reserves grew by US$15.8 bln..."

Currency Watch:

The dollar index posted a slight gain for the week. On the upside, the Iceland krona rose 0.9%, the Norwegian krone 0.8%, and the British pound 0.7%. On the downside, the Chilean peso fell 1.5%, the Swedish krona 1.24%, and the Argentine peso 1.2%.

Commodities Watch:

Platinum this week traded to a 25-year high. November crude oil added 89 cents to $62.63. November unleaded gasoline fell 3% this week, while November Natural Gas was little changed. For the week, the CRB added 0.7%, increasing y-t-d gains to 15.4%. The Goldman Sachs Commodities index increased 0.5%, with 2005 gains rising to 43.6%.

China Watch:

October 10 - UPI: "China's top central banker says Beijing must find ways to encourage domestic consumption as a way to cut the nation's trade surplus. Zhou Xiaochuan, governor of the People's Bank of China, said the nation's ballooning trade surplus...is causing more and more friction with trading partners. Zhou said the best way to reduce the growing trade surplus was to boost consumption by Chinese..."

October 14- XFN: "Gross domestic product is expected to grow about 9.4% this year but may slow to 8.9% in 2006, the Chinese Academy of Social Sciences said in its regular autumn report on China's economy..."

October 13 - Market News: "Chinese M2, the broader measure of money supply, rose 17.9% year-on-year at the end of September... That compared with a year-on-year growth of 17.3% recorded at the end of August and a 15% growth target set by the central bank..."

October 12 - China Knowledge: "Chinas foreign trade for the first three quarters of the year reached US$1.02 trillion, 23.7% higher than the same period in 2004... During the same period, China's exports reached US$546.4 billion, 31.3% higher than 2004, while imports reached US$478.1 billion, 16% higher than 2004."

October 11 - Bloomberg (Wing-Gar Cheng): "China's crude oil imports rose 4.8 percent in September from a year ago as lower international prices boosted the nation's purchases to meet rising fuel demand... Oil imports in the first nine months rose 4 percent to 93.96 million tons..."

October 10 - Bloomberg (Wing-Gar Cheng): "China's crude oil import bill may rise 29 percent this year because of higher global prices and increasing fuel demand in the world's fastest-growing major economy, figures from the commerce ministry indicate."

Asia Boom Watch:

October 12 - Bloomberg (Lily Nonomiya and Mayumi Otsuma): "Japan's economy is recovering as exports rebound and profits rise, the central bank and government said, signaling the nation may be headed for the longest period of expansion in eight years. 'Investment has continued to increase against the background of high corporate profit and a modest improvement in business sentiment,' the bank said in its monthly report... The bank forecast an end to seven years of falling prices by the end of this year."

October 11 - Bloomberg (Lindsay Whipp): "Japanese machinery orders rose more than expected in August...adding to signs the world's second-largest economy will expand for a fourth quarter... Private machinery orders, excluding shipping and utilities, rose a seasonally adjusted 8.2 percent...the most since October 2000, after falling 4.3 percent in July..."

October 14- Bloomberg (Anand Krishnamoorthy): "Hyundai Motor Co....led gains in India's car sales in September, which were spurred by tax breaks and discounts. Local sales of passenger cars in September rose 9.8 percent from a year earlier..."

October 11 - Bloomberg (Yu-huay Sun): "Taiwan's energy consumption rose for a fourth month in August because of increased demand from technology companies...Energy use rose 5.8 percent from a year earlier to the equivalent of 9.83 million kiloliters (61.8 million barrels) of oil in August... Manufacturers and other industrial companies accounted for 56 percent of consumption."

October 11 - Bloomberg (Beth Jinks): "Bangkok Bank Pcl, Thailand's largest lender by assets, today raised its deposit and lending rates for the second time since the central bank increased its benchmark rate to a five-year high last month. Bangkok Bank increased its lending rate by a quarter percentage point to a minimum 6.25 percent..."

October 13 - Bloomberg (Ian C. Sayson and Chia-Peck Wong): "The Philippines' mining industry may draw $2.5 billion of foreign investment in the next two years as companies such as Anglo American Plc look for supplies to meet rising demand in China."

Unbalanced Global Economy Watch:

October 11 - American Banker (Will Wade): "Purchase volume on Visa International commercial cards jumped 27%, to $255 billion worldwide, in the 12 months ended June 30... 'While it took 10 years for Visa and our members to reach $100 billion , and three years to achieve $200 billion, we're rapidly on our way to accomplishing the global $300 billion milestone in commercial volume in just over a year,' Aliza Know, a senior VP for commercial solutions..."

October 12 - Dow Jones: "The progress made by the euro zone's housing and mortgage markets in 2004 was 'remarkable,' the European Mortgage Federation said...Annik Lambert, general designate of the EMF, commented on the strength of mortgage lending growth during 2004. 'The prolonged upsurge in mortgage lending throughout Europe continues to show the importance of mortgage credit as a means to achieving home ownership." According to data from the EMF the mortgage market in the euro zone grew by 9.7% in 2004. This was above the 7.4% increase reported during 2003..."

October 13 - Bloomberg (Laura Humble): "Surging investment in real estate over the past decade has led to a bubble that threatens to send the world economy into recession, economist Roger Bootle said. House prices and the economy enjoy a 'symbiotic' relationship,' Bootle, economic adviser to accountants Deloitte & Touche LLP and a former adviser to the U.K. Treasury, said... 'Like the earlier bubble in shares, the extent of overvaluation is different in different countries, but this is a global phenomenon... In the end, this bubble may be more serious than the primary bubble in shares. When it bursts, the world will tremble.'"

October 11 - Bloomberg (Brian Swint): "Wholesale prices in Germany, Europe's largest economy, increased the most in 15 years in September as oil prices held close to a record. Goods from chemicals to tobacco were 1.7 percent more expensive than in August..."

October 12 - Bloomberg (Brian Swint): "Inflation in Germany, Europe's largest economy, accelerated at the fastest pace in more than four years in September after the cost of oil rose to a record. The annual rate rose to 2.5 percent after increasing to 1.9 percent in August..."

October 11 - Bloomberg (Laura Humble): "Britain's goods trade deficit unexpectedly widened to a record in August on higher imports of consumer goods, aircraft and oil, adding to signs of a slowdown in Europe's second-largest economy. The deficit expanded to 5.6 billion pounds ($9.8 billion) from a revised 5.5 billion pounds in July..."

October 11 - Bloomberg (Laura Humble): "U.K. retail sales fell for a sixth month in September, the British Retail Consortium said, a sign that a slowdown in consumer spending may be worsening. Sales in stores open at least a year fell 0.8 percent from September last year..."

October 11 - Bloomberg (Tasneem Brogger): "The Danish economy in the second quarter accelerated at the fastest annual pace in 10 years as exports and consumer spending soared. The Danish economy grew 1.6 percent from the first quarter and an annual 4.3 percent..."

October 10 - Bloomberg (Tasneem Brogger): "Danish annual inflation in September accelerated to 2.4 percent, the highest in two and a half years, as rising fuel prices pushed up transport and heating costs."

October 14- Bloomberg (Ben Sills): "Inflation in Spain, Europe's fifth-largest economy, accelerated at the fastest pace in two years in September as rising energy costs boosted consumer prices. The annual inflation rate rose to 3.8 percent after 3.3 percent in August..."

October 14- Bloomberg (Trygve Meyer): "The Norwegian government raised its forecast for the nation's economic growth for a second time this year because of increased investments and consumer spending. The mainland economy, which excludes oil and shipping output, will expand 3.7 percent this year..."

October 10 - Bloomberg (Mark Bentley): "Turkey's industrial output rose a more-than-expected 8.3 percent in August from the same period last year after exports and sales of durable goods in Turkey such as refrigerators increased."

October 11 - Bloomberg (Alexandre Deslongchamps): "Canadian housing starts rose a more-than-expected 12 percent in September, led by a surge in construction of multiple-family homes, the federal government's housing agency said."

October 10 - Bloomberg (Gavin Evans): "New Zealand house prices rose 14.9 percent in September from a year earlier, bettering the increase in August..."

Latin America Watch:

October 13 - Bloomberg (Guillermo Parra-Bernal and Elzio Barreto): "Brazil's credit rating was raised by Moody's...which said a surge in exports and a reduction in debt denominated in foreign currencies will make it easier for the country to make bond payments. Brazil, the biggest debtor among developing nations with more than $400 billion of debt, had its rating raised one level to Ba3, three levels below investment grade..."

October 14- Bloomberg (Guillermo Parra-Bernal): "Brazilian retail sales climbed in August at the fastest pace in eight months, led by a recovery in sales of foods and beverages and surging demand for home appliances and furniture. Retail, supermarket and grocery store sales, as measured by units sold, rose 6.47 percent in August from a year earlier..."

October 14- Bloomberg (Guillermo Parra-Bernal): "Peru's annual economic growth expanded in August at the fastest pace since 1998, propelled by a surge in investment and rising construction and manufacturing. Growth in the 12 months through August rose to 5.96 percent..."

October 13- Bloomberg (Andrea Jaramillo): "Colombia's imports rose 33 percent in August, led by electronic appliances and vehicles."

Bubble Economy Watch:

Bloomberg informs us that "U.S. consumer prices rose last month by the most in 25 years..." The 4.7% y-o-y CPI increase was the strongest rate of inflation since 1991. September Retail Sales were up 7.1% from September 2004, with Sales Ex-autos up a robust 10.6%

October 14 - Associated Press: " More than 48 million Americans will get a 4.1 percent increase in their monthly Social Security checks next year, the largest increase in more than a decade... The cost of living adjustment, or COLA, was announced Friday by the Social Security Administration. It will be the biggest increase since a 5.4 percent gain in 1991. The increase last January was 2.7 percent."

The $59 billion August Trade Deficit was just shy of an all-time record. Good Imports were up 12% from a year earlier to a record $140.51 billion. Also at a record, Good Exports were up 13% to $76.67 billion. Import Prices surged 2.3% during September, "their biggest gain since 1990," according to Bloomberg. Import Prices were up 9.9% from one year ago, a degree of inflation that is hard to ignore when an economy is importing $140 billion of foreign goods every month.

October 10 - Bloomberg (Kristen Hallam): "U.S. companies will pay an average 9.9 percent more for workers' health insurance next year, almost doubling the average employee cost of five years ago, according to a survey by Hewitt Associates..."

Speculator Watch:

October 14 Bloomberg (Matthew R. Miller): "New hedge funds quadrupled in Asia this year as U.S. firms, led by Citadel Investment Group LLC and Tremont Capital Management Inc., took a bigger share of the region's $85 billion market. Sixty hedge funds were started during the first nine months of 2005, mostly in Hong Kong, according to data compiled by Eurekahedge, a Singapore-based research firm. That's up from 15 in 2004. Hedge fund assets in the region have doubled since 2003."

October 12 - Bloomberg (Nandini Sukumar): "The Financial Services Authority, the U.K.'s securities watchdog, is probing the syndicated-loan market to see whether some hedge funds are using confidential information to trade illegally. 'This falls within the area the FSA is looking at and includes syndicated loans and credit portfolios,' FSA spokesman David Cliffe said...'We are looking more widely into the industry and we are concerned about the misuse of confidential information.'"

"Project Energy" Watch:

October 11 - MSNBC: "Calling it the largest order for hybrid buses in history, DaimlerChrysler said Tuesday it is selling 500 diesel-electric buses to New York City's transport services, with deliveries to begin next year. DaimlerChrysler said that compared to standard diesel buses, the hybrids will "provide significantly better fuel economy while greatly reducing emissions."

Mortgage Finance Bubble Watch:

October 8 - Washington Post (Kirstin Downey): "A dramatic transformation is underway in the Washington area as hundreds of new condominium projects move off the drawing boards and into people's lives. More than 47,000 new condominiums, in 322 separate projects, are coming onto the market in the next three years, according to real estate information firm Delta Associates. Many of those buildings promise to create new kinds of neighborhoods in areas that were not previously known as residential communities. At the end of September, there were 18,872 new condominium units for sale in the region, many that introduce new choices to long-established places, up from only 3,083 in the same month two years earlier."

September was one more booming month for Countrywide Financial. At $3.043 billion, Average Daily Application Volume was up 45% from September 2004. Mortgage Loan Fundings were up 59% from the year ago period to $49.3 billion. The Total Pipeline was down only slightly from August, at $76.8 billion. From the company: "For the third quarter, mortgage loan fundings were a record $146 billion, rising 59% over last year's third quarter. Year-to-date mortgage loan fundings were $358 billion." At 49% of Total Fundings during September, ARMs fell below 50% for the first time since May 2004. Home Equity Fundings were up 21% from one year ago, with Subprime up 4%. "Countrywide funded $9.9 billion in pay-option ARM loans and $8.8 billion in interest-only loans for the month..."

More Trials and Tribulations of Wall Street Finance:

I do not argue that Wall Street Finance is necessarily inherently corrupt. Instead, I propose that a highly energized, market-based Credit system offering enormous and easily attained financial reward openly invites abuse and corruption. What's more, the combination of Federal Reserve easy "money" policies and overly abundant marketplace liquidity virtually guarantees a gold rush mentality of wealth-seeking endeavors - legal, legitimate and otherwise (Why did Willie Sutton rob banks?).

This week's news of fraud and deception at futures powerhouse Refco should come as no major surprise. After all, the Wall Street Finance infrastructure that had coddled and financed the likes of Enron and Worldcom is these days more powerful and commanding than ever. Sure, there were some hefty fines to pay - but their relevance was readily diminished by a few years of historic windfall profits courtesy of the Fed's ultra-easy monetary accommodation. Those pushing the (risk or statutory) envelope were emboldened and windfall fortunes only more handily procured.

I contend that the defining feature of Wall Street Finance is the propagation of excess and self-reinforcing risk (excessive speculation, leveraging, asset inflation/Bubbles, unsound lending, and malfeasance). The past few years have witnessed a veritable (blow-off) explosion of derivative trading and securitizations, areas particularly ripe for abuse and fraud. Nonetheless, my view is in stark contrast to chairman Greenspan's and the consensus view that contemporary finance provides an unparalleled capacity to recognize and manage risk. For now, Mr. Greenspan's sanguine view receives ongoing support from the potent elixir of abundant marketplace liquidity and rising asset prices. There are indications, however, that the environment is in the process of changing. As Warren Buffett has commented, "You don't know who's swimming naked until the tide goes out."

With hedge fund returns lagging, recent revelations of improprieties (Bayou Group and Wood River) are likely the proverbial tip of the iceberg (there are, after all, 8,000 funds!). And to what extent market fluctuations (currencies, interest-rates, energy, oil, equities...) played a role in this week's collapse at Refco, only time will tell. We should expect the wrecking ball of destabilizing volatility across the spectrum of securities markets to continue to chip away at marketplace confidence and liquidity. In textbook fashion, the strength of U.S. equity markets has narrowed over time, and we see of late that the few favored groups have a proclivity for abrupt and major downturns. Clearly, the market environment is becoming increasingly challenging for the leveraged speculating community. There will be ongoing pressure to rein in risk, counterbalanced by the necessity of posting positive returns.

While the end-of-week focus was on Refco and inflation data, Delphi's bankruptcy was a decisive blow to the tottering auto sector. Auto and auto-related bonds were hit hard, while GM and Ford Credit default swap prices surged to levels not seen since last spring's marketplace tumult. Yet - and a curious departure from that period's market response - Treasury yields this week rose sharply instead of their typical precipitous decline at the first inkling of heightened systemic stress. It is very tempting to view this as a major marketplace development.

Confidence that the Fed would cut rates in the event of a bout of marketplace angst has for sometime underpinned not only the U.S. bond market but the stock and "risk" markets as well. A player speculating in the higher risk sectors (say, auto bonds, Credit default swaps, junk, emerging markets, homebuilding stocks, energy, etc.) could at least partially hedge market exposure with (leveraged?) holdings of Treasuries. And while the various risk markets have tended to become more highly correlated over time, faith has held strong that bond prices would spike concurrently with any turbulence that might encompass the "risk" markets. I would furthermore propose that the predictability of bond market rallies in response to tumult in the "risk" markets has played a major role in stabilizing leverage speculator performance. Diversification among various asset classes (large bond exposure?) has been a fundamental feature of relatively stable positive hedge fund returns and, hence, a crucial element fostering systemic leveraging. A less accommodative and predictable Treasury market would mark an important development with respect to speculator returns and, importantly, market and liquidity dynamics.

Returning to our ongoing question: Why can't booms last forever? Well, we can continue to focus on the strong inflationary bias that that has engulfed the global oil and energy sector. This development has now significantly altered the likely possibilities of Fed policy actions. The probability of a scenario of much higher rates has increased significantly, while the likelihood that the Fed would be quick to ease policy has largely diminished. And while market rates are adjusting to this new reality, I believe that market players have not yet adjusted risk portfolios to this much less hospitable backdrop. Keep in mind that up until recently the market perceived that the Fed was in the "eighth inning" and that cuts would like commence in earnest early next year.

There is a prominent dichotomy with respect to Wall Street Finance: unprecedented Credit and speculative excesses have fomented asset Bubbles, economic booms, myriad distortions and untold corruption, right along with an historic speculative Bubble in Credit insurance/protection. This is a huge systemic issue that I expect will become more of a factor in the unfolding environment. In the first place, I don't believe Credit is an insurable risk. Credit losses are not random, independent or quantifiable events, such as auto accidents, house fires, health issues or death. Credit, by its nature, is very cyclical and non-random.

The problem lies in the reality that the Credit insurance "business" will always appear extraordinarily profitable during the boom cycle (today in mortgages), with loses coming out of the woodwork on the downside (today in airlines and auto parts). Importantly, Credit insurance excesses incite greater lending, debt issuance and speculative excesses, fomenting problematic aged financial and economic Bubbles. Protracted Bubbles, then, guarantee commensurate down-cycles that prove devastating to the inflated Credit insurance marketplace. It's the nature of the beast.

Fed "reflationary policies" incited risk-taking behavior in the markets (including speculating in GM, Ford, Delphi and other auto-supplier Credit default swaps); Dallas Fed president Robert McTeer led the cheer for consumers to all "hold hands and buy SUVs;" and booming ABS and mortgage finance ensured that sufficient liquidity was created to ensure a global energy shock our system was ill-structured to handle. The inflationary backdrop (including energy, healthcare, and pension liabilities) has thus far largely destroyed the old-line U.S. airline and auto-parts industries. And while the prognosis for General Motors and other industrials is not encouraging, the changing environment has me peering further out into the future.

The rampant inflation in asset markets (homes and securities, in particular) has set the stage for Credit "insurance" disaster - including Credit default swaps, GSE guarantees, mortgage insurance, bond insurance, financial risk arbitrage and myriad federal guarantees. Perhaps even more than leveraging, this Credit Insurance Bubble is the System's Achilles heel. Inflated home prices, reckless lending and corruption are today sowing the seeds for enormous Credit losses throughout ABS, MBS and mortgage arena. But that is jumping ahead... a bit.

In some respects, the market environment has returned to where I thought it was earlier in the year. I believed that "risk markets" had reached a critical juncture in the early spring. Market rates were moving higher, stocks were in retreat and then near debacle struck in auto Credit default swaps. I expected the leveraged players would be forced to shed risk, ushering in the end of the Credit boom cycle. Well, I was wrong. I today believe I was wrong because of the liquidity-creating power of a final unanticipated (for me, at least) bond market rally and declining mortgage rates. What transpired was a classic final melee, replete with negligent mortgage lending, wild Wall Street excesses, a Credit default swap boom, an emerging market boom, and a Global Liquidity Glut sufficient for $70 crude. Those having hedged against higher rates were forced to unwind and dreams of a 3% 10-year yield filled giddy traders' imaginations. For good reason, events have unnerved the Fed, and I suspect it will be some time before they are again so eager to pander to an imperious Wall Street.

If I am correct, pieces are falling into place for the unavoidable adjustment to highly leveraged and speculative U.S. asset markets. I would expect stress in auto-related risk markets to be contagious. Higher market yields from this point are also problematic. The highly leveraged MBS marketplace is vulnerable to rising rates, wider Credit spreads and self-reinforcing hedging-related selling. The entire financial sector is vulnerable to the unfolding environment, and this reality should begin to manifest in widening sector Credit spreads. Further negative Refco revelations would likely push this process forward. Because of the complex nature of the expansive speculative Bubble, we are forced to analyze subtleties in various markets for indications of heightened risk aversion, de-leveraging and waning liquidity.

One would generally expect such speculative dynamics to ebb and flow depending on the prevailing sentiment of greed or fear. Yet this week Refco did remind us how prone fragile underpinnings are to sudden collapse. And, let there be no doubt, the shallow underpinnings of Wall Street Finance are - from here on out - highly susceptible to any slowdown in Credit expansion, any serious bout of risk aversion, or any meaningful move by the speculator community to de-leverage.