U.S. stocks ended the year on a sour note. For the week, the Dow dropped 1.5% and the S&P500 fell 1.6%. Declines were seen across the board. The Transports declined 1.7%, and the Utilities slipped 1.4%. The Morgan Stanley Cyclical index dipped 1%, and the Morgan Stanley Consumer index declined 1.3%. The small cap Russell 2000 dropped 2%, and the S&P400 Mid-cap index declined 1.4%. The NASDAQ100 fell 2.3%, and the Morgan Stanley High Tech index shed 2.1%. The Semiconductors dropped 2.6%, reducing 2005 gains to 10.7%. The Street.com Internet Index and NASDAQ Telecommunications index declined about 2%. The Biotechs lost 1%. The Banks fell almost 2%, and the Broker/Dealers declined 1.3%. With Bullion jumping $14.20, the HUI gold index rose 2.2%.

For the week, two-year Treasury yields rose 3 basis points to 4.40%. Five-year government yields gained 3.5 basis points to 4.35%. Bellwether 10-year Treasury yields increased 2 basis points for the week to 4.39%. Long-bond yields dipped one basis point to 4.54%. The spread between 2 and 10-year government yields ended the year at negative one basis point after beginning the year at 117. Benchmark Fannie Mae MBS yields were unchanged at 5.75%, this week slightly lagging Treasuries. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note was about unchanged at 38, and the spread on Freddie's 5% 2014 note was unchanged at 39. The 10-year dollar swap spread increased 0.25 to 55. Junk bond spreads widened 5 basis points or so. The implied yield on 3-month December '06 Eurodollars rose 3 basis points to 4.795%.

December 29 - Financial Times (Richard Beales): "Junk-rated US companies borrowed a record $295bn in the loan market this year, trumping 2004's volume, itself a high. Meanwhile, issuance of high-yield bonds dipped 26 per cent this year compared with last year. The contrast partly reflects a transfer of some financing activity to the so-called leveraged loan market from the high-yield bond market, which experienced several rocky patches this year - notably during the turmoil sparked by the rating downgrades of General Motors... Steven Miller, managing director at Standard & Poor's Leveraged Commentary & Data, says that heavy issuance of collateralised loan obligations - loan portfolios repackaged and sold in slices bearing different levels of credit risk - underpinned demand for loans. That in turn was fuelled by investor appetite for CLO instruments, which offer extra yield compared with direct investments in similarly-rated loans."

Japanese 10-year JGB yields fell 7.5 basis points this week to 1.47%. Emerging debt and equity markets finished an historic year contently. Brazil's benchmark dollar bond yields dropped 8 basis points to 6.89%. Brazil's Bovespa equity index was unchanged, with 2005 gains of 27.7%. The Mexican Bolsa was also unchanged this week, with 2005 gains of 37.8%. Mexican govt. yields declined 2 basis points to 5.31%. Russian 10-year dollar Eurobond yields dipped 2 basis points to 6.46%. The Russian RTS equity index was unchanged, with a 2005 surge of 83.3%.

Freddie Mac posted 30-year fixed mortgage rates declined 4 basis points to 6.22%, a nine-week low but up 41 basis points from one year ago. Fifteen-year fixed mortgage rates dipped 3 basis points to 5.76%, yet were up 53 basis points in a year. One-year adjustable rates fell 7 basis points to 5.15%, an increase of 96 basis points from one year ago. The Mortgage Bankers Association Purchase Applications Index declined 4.5% last week. Holiday-week Purchase Applications jumped 14.6% from one year ago, with dollar volume up 18.7%. Refi applications sank 11.2%. The average new Purchase mortgage slipped to $236,300, while the average ARM increased to $354,600. The percentage of ARMs was little changed at 32.5% of total applications.

Broad money supply (M3) surged $35.7 billion (week of December 19) to a record $10.184 Trillion. Over the past 31 weeks, M3 has inflated $558 billion, or 9.7% annualized. Year-to-date, M3 has expanded at a 7.6% rate, with M3-less Money Funds growing at an 8.5% pace. For the week, Currency increased $2.1 billion. Demand & Checkable Deposits gained $3.8 billion. Savings Deposits rose $12.3 billion. Small Denominated Deposits increased $1.9 billion. Retail Money Fund deposits added $0.2 billion, and Institutional Money Fund deposits increased $1.2 billion. Large Denominated Deposits slipped $3.7 billion. Year-to-date, Large Deposits are up $264 billion, or 25.0% annualized. For the week, Repurchase Agreements jumped $17.5 billion, while Eurodollar deposits added $0.5 billion.

Bank Credit jumped $26.8 billion last week to a record $7.494 Trillion. Year-to-date (51 weeks), Bank Credit has inflated $729.7 billion, or 11.0% annualized. Securities Credit added $2.6 billion during the week, with a year-to-date gain of $131.3 billion (7.0% ann.). Loans & Leases have expanded at a 12.9% pace during 2005, with Commercial & Industrial (C&I) Loans up an annualized 15.3%. For the week, C&I loans rose $5.9 billion, and Real Estate loans added $1.0 billion. Real Estate loans have expanded at a 14.4% rate during the first 51 weeks of 2005 to $2.899 Trillion. For the week, Consumer loans slipped $3.3 billion, while Securities loans jumped $18.7 billion. Other loans declined $1.8 billion.

Total Commercial Paper declined $5.0 billion last week to $1.649 Trillion. Total CP expanded $235 billion this year, growth of 16.6%. For comparison, Total CP expanded $145 billion during 2004. Following the previous week's surge, financial CP fell $6.2 billion to $1.508 Trillion, with a 2005 gain of $223.9 billion, or 17.4%. Non-financial CP added $1.2 billion to $140.9 billion, expanding 8.8% this year.

December 29 - Financial Times: "The US asset-backed securities market celebrated its 20th year by issuing more than a trillion dollars worth of bonds for the first time and developing a new liquid market in derivatives based on ABS instruments. That was 2005. In 2006 the fast-growing market will be entering a new era as issuers and investors face the implementation of rigorous new standards aimed at improving disclosure... The first ABS instruments were issued in 1985, when issuance totalled just $1.2bn. In 2004, ABS issuance overtook traditional corporate bonds for the first time, and November saw issuance for this year break the $1,000bn mark."

Bloomberg tallied 2005 Asset-backed Securities (ABS) issuance at $956 billion, up 30% from 2004.

Fed Foreign Holdings of Treasury, Agency Debt increased $4.8 billion to $1.519 Trillion for the week ended December 28. "Custody" holdings were up $183.3 billion for the year, or 13.7%. Federal Reserve Credit jumped $9.2 billion to $826.4 billion. Fed Credit expanded 4.5% during 2005.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $540 billion, or 15.4%, over the past 12 months to a record $4.046 Trillion.

December 29 - Bloomberg (Todd Prince): "Russia's foreign currency and gold reserves, the world's sixth biggest, rose to a record $174 billion as of Dec. 23 as revenue from oil exports surged. The reserves, which have climbed more than 40 percent from a year ago, increased by $2.7 billion in the week..."

Currency Watch:

The dollar index added 0.5% this week, increasing 2005 gains to 13% (largest gain since 1997). On the upside for the year, Brazil's real jumped 13.7%, the Uruguay peso 9.8%, the Chilean peso 8.5%, the Egyptian pound 7.0%, Philippine peso 5.9%, Mexican peso 4.8%, Canadian dollar 3.4%, Colombian peso 3.0%, and the China renminbi 2.6%. On the downside, the Zimbabwe dollar fell 93%, the Swedish krona 16%, Hungarian forint 15.0%, Swiss franc 13.2%, Danish krone 12.9%, Japanese yen 12.8%, Estonian kroon 12.6%, and the euro 12.6%.

Commodities Watch:

February crude oil jumped $2.61 to $61.04. February Unleaded Gasoline surged 10.3% this week, while February Natural Gas sank 9.5%. For the week, the CRB index added 1.7%, with impressive 2005 gains of 16.9%. The Goldman Sachs Commodities index increased 1.4%, with a stunning 2005 rise of 39.1%. There were some huge commodities winners this year. Crude surged 41%, natural gas 58%, copper 45%, zinc 50%, silver 30%, sugar 62%, gold 18%, cotton 21%, aluminum 16%, soybeans 10% and wheat 10%. Coffee gained 3%, corn 4%, live cattle 3% and lead 4%, while cocoa slipped 3%, nickel fell 13% and hogs sank 15%.

China Watch:

December 28 - Bloomberg (Koh Chin Ling): "China, the world's biggest wheat and rice producer, said overseas sales of farm goods may reach a record $26.5 billion this year after new incentives encouraged exporters to ship more products such as corn. Growth in agricultural exports, worth $23.4 billion in 2004 and $16 billion five years ago, have made China the world's fifth-largest farm-goods supplier..."

December 29 - Bloomberg (Joshua Fellman): "Hong Kong's exports grew by more than a 10th for a fourth straight month in November as the city's port handled more Chinese-made computers and electronics en route to markets such as Europe and Japan. Overseas sales rose 11.5 percent from a year earlier to HK$200.4 billion ($25.9 billion)..."

Asia Boom Watch:

December 27 - Bloomberg (Mayumi Otsuma): "Japan's consumer prices rose last month for the first time in two years, gains the central bank says need to be sustained before changing its policy of keeping interest rates at almost zero to beat deflation. Core prices rose 0.1 percent from a year earlier, the first increase since October 2003, and only the second in seven years..."

December 27 - Financial Times (Khozem Merchant): "Indian companies are ending 2005 with a flurry of overseas deals, capping a trend of the past year that saw a record $10bn worth of mergers and acquisitions involving Indian assets and a 52 per cent rise over the number of deals completed in 2004, according to a survey by KPMG. About 40 per cent of the transactions by number - totalling $2.83bn in value - involved foreign companies expanding into India, according to the KPMG data."

December 27 - Bloomberg (Netty Ismail and Sumit Sharma): "When Merrill Lynch & Co. decided to spend $30 million on bricks, mortar and bankers in 1995 taking Indian companies public, there were hardly any new shares to sell in the world's largest democracy and second-most-populous nation. A decade later, Merrill is making more than twice that initial investment and earning more annually than any of its competitors.... India, considered an also-ran among Asia's capital markets as recently as 1998, is now the fastest growing for selling new stocks and bonds."

December 29 - Bloomberg (Seyoon Kim): "South Korea's industrial production posted its biggest increase in more than six years in November, boosted by record exports and an increase in consumer spending. Factory output gained a seasonally adjusted 5 percent from October... Industrial output climbed 12.2 percent in November from a year earlier, following an 8.2 percent increase in October..."

December 29 - Bloomberg (Anuchit Nguyen): "Thailand's jobless rate fell to the lowest in almost five years in November as farms, manufacturers and hotels increased hiring, the government said. The unemployment rate fell to 1.2 percent..."

December 27 - Bloomberg (Shamim Adam): "Singapore's factory production unexpectedly rose in November from the month before, the longest string of gains in more than a year... From a year earlier, output rose 22.4 percent in November."

Unbalanced Global Economy Watch:

December 28 - CFO Magazine (Stephen Taub): "It looks like 2005 is the hottest year for mergers and acquisitions since 2000, the peak of the stock-market boom. According to a preliminary report by Dealogic released on December 21, just prior to the traditionally quiet holiday week, global M&A volume increased 38 percent, to $2.9 trillion, compared with $2.1 trillion in 2004. In the fourth quarter alone, reported Dealogic, volume topped $783.4 billion, making it the largest quarter of the year and the fourth-largest on record."

December 27 - Reuters (Alistair MacDonald and Mark Meadows): "European companies raised $213 billion in equity and equity linked markets this year, the highest tally since the technology boom of 2000, with bankers and investors cautiously hopeful of similar levels next year. Emerging markets, private equity funds and companies needing to finance mergers and acquisitions were the primary drivers behind the 14 percent increase over 2004, figures from financial data provider Dealogic showed."

December 27 - Bloomberg (Halia Pavliva): "Russian President Vladimir Putin signed the 2006 budget, increasing spending 26 percent as oil prices continue to rise and boost revenue."

December 28 - Bloomberg (Harry Papachristou): "Greek mortgage lending growth accelerated to a two-year high in October as Greeks rushed to take out home loans before property taxes rise next year. Mortgage loans to households climbed 27 percent to 40 billion euros ($47.6 billion), the Bank of Greece said..."

December 29 - Bloomberg (Tracy Withers): "New Zealand consumers borrowed 15.2 percent more in November for housing and consumption than a year earlier, according to figures from the Reserve Bank."

Latin America Watch:

December 29 - Bloomberg (Peter Wilson): "Venezuela's economy grew 9.4 percent in 2005 as President Hugo Chavez boosted government spending and increased subsidies for the South American country's poor."

Bubble Economy Watch:

December 26 - BusinessWeek (Roben Farzad): "While workaday traders and portfolio managers were struggling to generate returns in 2005, one corner of Wall Street was thriving: mergers and acquisitions. When the books close on the year, U.S. M&A activity likely will have touched $1 trillion, up from $824 billion in 2004, according to Thomson Financial. Many signs point to an acceleration in deals in 2006. The hottest sectors, according to market watchers: finance, technology, and energy. Plus anywhere cash-rich private-equity funds care to dabble. Record inflows into private-equity funds are giving them plenty of ammunition..."

December 28 - Marketwatch: "Companies planned to shell out record amounts to buy their own shares and other public companies in 2005, which could be a positive sign for stocks next year, TrimTabs Investment Research said... The Santa Rosa, Calif.-based liquidity tracker reported that 1,012 U.S. public companies announced $456 billion in stock buybacks this year, breaking the previous record set in 2004 when 728 companies said they would repurchase $312 billion worth of their own stock. Additionally, TrimTabs reported cash takeovers of public companies amounting to $277 billion were announced in 2005, another annual record."

December 27 - The Wall Street Journal (Stephanie Kang): "After a few slumping weeks in early December, consumers came back to stores in the last days before Christmas to deliver a solid, if not spectacular, holiday season... Holiday spending climbed 8.7% ahead of last year, according to SpendingPulse, a retail-sales data service from MasterCard International's MasterCard Advisors unit. Demand for flat-panel television sets, MP3 players and digital cameras helped spur gains, as did sales of home furnishings."

December 27 - Dow Jones (Lavonne Kuykendall): "Holiday shoppers spent $30.1 billion online this year, a 30% increase from last year, and accounted for more than one quarter of all holiday shopping dollars spent, according to a survey of Internet users..."

"Project Energy" Watch:

December 28 - AP: "So many people crush the banks to get on board an initial public offering that the police have to be called out. Some Saudis disappear from work during trading hours, and teachers bring their laptops to class to trade stocks. Saudis have stock market mania, and the obsession is as close to gambling as one can get in a kingdom that bans it. Five years ago, about 50,000 Saudis had dealings with the stock market. Today, there are more than 2 million active investors in a country of 26 million people. 'For some people, it's an addiction that's almost akin to the addiction to the casinos of Las Vegas,' said Prince Mohammed Al-Faisal, a businessman. The index went up by 85 percent in 2004, closing at 8200 at year's end. This year, it has grown by more than 100 percent."

Mortgage Finance Bubble Watch:

"The median price of an existing home in California in November increased 16.2 percent and sales decreased 11.2 percent compared with the same period a year ago, the California Association of Realtors (C.A.R.) reported... "The California housing market continues to experience year-over-year double-digit price appreciation, which is consistent with our expectation that the statewide median for 2005 will increase by 16 percent over last year," said C.A.R. President Vince Malta. Closed escrow sales of existing, single-family detached homes in California totaled 579,560 in November at a seasonally adjusted annualized rate... Statewide home resale activity decreased 11.2 percent from...November 2004... C.A.R.'s Unsold Inventory Index for existing, single-family detached homes in November 2005 was 3.9 months, compared with 2.8 months for the same period a year ago." Median single-family prices were up $76,420 (16.2%) over the past year and $163,939 (24%) over two years. Median condo prices were up $56,370 (14.9%) over one year and $133,930 over two years. It is worth noting the marked slowdown in sales activity in some of the more expensive markets. The Monterey Region posted a 23% y-o-y decline in November sales, Northern California declined 25.9% y-o-y and Santa Barbara County declined 23.6%.

December 29 - "The pace of Florida's housing market eased somewhat in November -- traditionally a slower month for home sales -- with statewide sales of existing single-family homes totaling 17,219 for a 1 percent increase over last year...according to the Florida Association of Realtors... The statewide median sales price rose 31 percent in November to $250,500; a year ago, it was $191,300. In November 2000, the statewide median sales price was $117,900, which is an increase of about 112 percent over the five-year period."

2005 Wrap-Up:

The Dow ended the year down 0.6%, with the S&P500 up 3.0%. Ten-year Treasury yields rose only 14 basis points over the past year, with benchmark 30-year mortgage rates up about 40 basis points. U.S. and global growth was solid - not too hot, not too cold. Core inflation was sanguine. It is, then, tempting to view the year as relatively uneventful and benign. It was anything but.

The story of 2005 is one of an unrelenting and expansive U.S.-based Credit Bubble and the Prolific Global Liquidity Glut. The inflationary benefits to the U.S. economy and markets notably waned, especially relative to others. Coming into the year, a dollar crisis and/or spike in U.S. market yields appeared leading candidates to finally force a reining in of excesses and the commencement of long-overdue adjustment. The global leveraged speculating community seemed poised to disappoint. There was palpable vulnerability with respect to the Mortgage Finance Bubble. But financial crisis was not in the cards, not with the Fed's pre-ordained interest rates and a financial sector determined to expand U.S. Credit at unprecedented levels. At the same time, global central bankers remained acquiescent to rampant asset inflation and leveraged speculation, and very much still content to balloon their balance sheets with American securities.

Rather than one of tightening financial conditions and the risk of dislocation, the financial backdrop developed into only greater - manifestly unprecedented - accommodation. The emboldened and now firmly Global Wall Street Finance Liquidity Machine was left to its own devices, and the results were spectacular. Unparalleled global Credit inflation provided a powerful allure of easy profits for speculators, dealmakers, lenders, investors and businesses the world over. Credit and speculative excess ran to new extremes and enveloped markets across the globe.

Here at home, Non-Financial Debt growth rose at the strongest rate since the mid-1980s. Total U.S. mortgage debt (TMD) growth may have reached $1.4 Trillion during 2005. This would be an increase of almost $200 billion from 2004's record increase of $1.214 Trillion - the first year growth exceeded $1 Trillion. For perspective, TMD expanded $500 billion during 2000, $660 billion during 2001, $820 billion during 2002, and $990 billion during 2003. TMD growth averaged $271 billion annually during the nineties. Bank Real Estate loans increased $358 billion this year, compared to an annual average of $214 billion during the first five years of the decade. Collateralized Mortgage Obligation (CMO) issuance was up 23% from 2004 to $1.011 Trillion (from Bloomberg). Mortgages fueled record ABS issuance. Meanwhile, the 2006 lending limit on Fannie and Freddie's conventional mortgages was increased $57,350 to $417,000.

The year will see new records set for both new and existing home sales. Home price inflation accelerated during much of the year, with Household Net Worth likely expanding by about 10% ($4.5 Trillion) to a record $52 Trillion. Personal Income increased 5.2% (Nov. '04- Nov. '05), and Personal Spending jumped 5.8%. Monthly Trade Deficits rapidly approached $70 billion, while annual Current Account Deficits will soon surpass $800 billion. The growth in "Rest of World" holdings of U.S. Credit Market Instruments increased to about $800 billion this year, after averaging $450 billion during the first five years of the decade ($166bn avg. during the '90s). The World is absolutely awash in dollar balances.

From Thursday's Financial Times (James Politi and Lina Saigol): "Companies around the world signed [M&A] deals worth $2,900bn in 2005 - a 40 per cent increase over last year - boosting investment banks coffers while Goldman Sachs's dominance as the top adviser on mergers and takeovers was confirmed. A small jump in deal activity had been expected this year, but the extent of the recovery was a welcome surprise to many on Wall Street and in the City of London. Investment bankers, lawyers, consultants and other advisers are expecting to see a similar level of dealmaking - if not more - in 2006." From CFO.com (Stephen Taub): "In the fourth quarter alone, reported Dealogic, volume topped $783.4 billion, making it the largest quarter of the year and the fourth-largest on record. In the United States, volume topped $1.1 trillion in 2005, a 30 percent increase..."

Global private equity deals are said to have reached a record $494 billion (from Dealogic). From Wednesday's Financial Times (Peter Smith): "America may be the home of the leveraged buy-out but it is Europe that has become the world's most fertile hunting ground for private equity. The value of deals this year rose to a record of more than $180bn... Of Europe's top 10 LBOs, seven took place this year..." From Reuters (Alistair MacDonald and Mark Meadows): "European companies raised $213 billion in equity and equity linked markets this year, the highest tally since the technology boom of 2000..." "Japanese firms are on course to complete overseas deals worth more than double what they managed in 2004..." (from Scotsman.com). From the FT's Richard Beales: "Junk-rated US companies borrowed a record $295bn in the loan market this year." And from today's Washington Post (Ben White): "According to preliminary estimates, public companies bought back about $400 billion worth of their shares in 2005, shattering the previous record of $257 billion set last year."

Yet nowhere is the Global Liquidity Glut more conspicuous than with this year's global equities performance. Leading European equity indices enjoyed a stellar year. The major UK index (FTSE100) was up 16.7%, Germany (DAX) 27.1%, France (CAC40) 23.4%, Switzerland (Swiss Mkt) 33.2%, Spain (IBEX35) 18.2%, Italy (Milan MIB30) 13.3%, Netherlands 25.5%, Portugal (PSI) 17.2%, Ireland 18.8%, Sweden (OMX 30) 29.4%, Norway (OBX Stock) 35.5%, Finland (OMX Helsinki) 31.1%, Denmark (Copenhagen 20) 37.3%, Belgium (BEL20) 21.0%, Luxembourg 26.7%, and Iceland (ICEX15) 64.7%.

Gains were generally greater in Eastern Europe. Russia (RTS) surged 83.3%, Austria 50.8%, Hungary 41.0%, Poland (WSE WIG) 33.7%, Czech Republic 42.7%, Romania 50.9%, Ukraine 35.8%, Slovakia 26.4%, Estonia 48.0%, Latvia 63.5%, Lithuania 41.0%, Bulgaria 32.0%, Croatia (Zagreb) 27.2% and Greece 31.5%.

Liquidity indulged both Asian markets and economies, with the unrelenting Chinese economic boom and reinvigorated Japanese equities major 2005 developments. Japanese stocks generally enjoyed their strongest gains since 1986. The Nikkei 225 surged 40.2%, with the Topix up 43.5%. The Topix small cap index posted a 58.7% advance. South Korea's KOSPI index surged 54.0%, closing today at an all-time high. India's BSE surged 42.3%, ending the year at a record high. Indonesia (Composite) gained 16.2%, Singapore 13.6%, Philippines 15.0%, Vietnam 28.5%, Sri Lanka 27.6%, Thailand 6.8%, Taiwan 6.7%, and Hong Kong (Hang Seng) 4.5%. Malaysia (Composite) slipped 0.8% and Chinese equities continued their struggle. The Shanghai A index fell 8.2% and the Shanghai B sank 18%. Australia (All Ordinaries) gained 17.6% and New Zealand (NZX 50) 10.0%.

With Asian demand more than partially responsible for crude's 40% gain this year, the already rampant flow of liquidity to the Middle East turned into a gusher. Saudi Arabia's major equities index surged 104.1%, as a historic mania took hold. Kuwait (Global) rose 67.6%, United Arab Emirates 131.3%, Egypt (Hermes) 131.7%, Israel (Tel Aviv 25) 33.3%, Turkey (ISE 100) 59.3%, Bahrain (All Share) 23.8%, Qatar 70.2%, Jordan 92.9% and Oman 44.5%. Elsewhere, Pakistan gained 53.7%, Lebanon 106%, Cyprus 51.6%, Malta 62.3%, South Africa (Top 40) 44.1%, Morocco 19.8%, Tunisia 21.1% and Kenya 35.7%.

Closer to home, Canada's TSE Composite index jumped 21.9%. Liquidity gushed into Latin America as well. Mexico (Bolsa) surged 37.8%, Brazil (Bovespa) 27.7%, Argentina (Merval) 12.2%, Chile (Select) 9.35%, Peru (General) 29.4%, Colombia 118.9%, Costa Rica 28.4%, and Bermuda 21.1%. Venezuela fell 32.4%.

U.S. equities badly lagged the global boom. Our stocks clearly suffered from the heated competition from scores of hot asset markets overseas. Moreover, the U.S. services-based economy is relatively underexposed to companies and industries benefiting from the world-wide inflationary boom in energy and commodities. At the same time, we have some key industries - autos and airlines, to name two - that are on the losing end of newfound inflationary manifestations. The enormous American mortgage-lending and banking super-industries are also losing relative appeal in the unfolding environment. Additionally, U.S. equity valuations increasingly suffer from the nature of intransigent Credit Bubble financial excess. Not only does it today require higher interest-rates to impose necessary financial conditions tightening, Credit and asset Bubbles must inevitably pop. U.S. stocks may appear cheap relative to ballooning earnings, but certainly not on a risk-adjusted basis.

Ten-year Treasury yields ended the year at 4.39%, a one basis point inversion from the two-year's 4.40%. With all the attention the so-called "inversion" is receiving, I'll make a few brief comments. First off all, 10-year yields remain above the current 4.25% overnight "Fed funds" borrowing rate. Three-month T-bills still yields remain slightly below 4%. It is also worth noting that "repo" (short-term securities funding) rates these days consistently trade below Fed funds, often significantly. More importantly, we today operate in a Global Wall Street/Securities Finance and massive Global Leveraged Speculating Community environment. Traditional pricing signals provided by the shape and steepness of the yield curve cannot be expected to operate in today's most atypical environment.

The Marginal Buyers of Treasury and Agency securities these days are foreign central banks deluged with dollar liquidity (and insignificant funding costs). There is also the key issue of global leveraged players tapping inexpensive funding sources, such as borrowing in yen, euros and francs. It would be quite illuminating to know the scope of liquidity created in the process of borrowing cheaply in Japan to leverage in higher-yielding U.S. and emerging debt securities. A fortune could have been (and likely was) made borrowing in Japan to purchase, say, Brazilian bonds. The Brazilian real rose better than 30% against the yen, while Brazil's long-term bonds posted double-digit returns. It would, as well, be fascinating to know the size of short positions in Japanese government bonds used as a cheap funding source for securities speculation across the globe. There is certainly no inversion between 10-year U.S. yields and overseas borrowing costs. Surely, today's 2/10 Treasury "inversion" is symptomatic of the Global Liquidity Glut, providing little in the way of relevance for economic analysis.

As for economic analysis, the fourth quarter provided further evidence that Europe and Japan are emerging from their respective malaise. Concurrently, perceptions hardened that the U.S. housing market was softening. The risk of over-heating and the necessity for problematic Fed tightenings have apparently abated. Energy prices are generally thought to have peaked. But this sanguine view downplays Global Liquidity Glut dynamics. The global monetary system has completely lost its bearings, and such a circumstance is not known for sanguine outcomes. The unbalanced global economy is more energized today than it was one year ago, while financial conditions are more accommodative. It is conventional wisdom that U.S. markets and the economy are now several years into a post-Bubble recovery. The past year has provided convincing evidence that the protracted U.S. Bubble has become only more unwieldy and global in stature.