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Cheesecake Dependency

It was another extraordinarily unsettled week for U.S. and global financial markets. Japan's Nikkei dropped another 3%. The index sank to a 20-year low, ending the week down 79% from its 1989 peak. For the week, the Dow declined 2%. The S&P500 dipped 1%, the Transports were unchanged, and the Utilities added 1%. The Morgan Stanley Consumer index dropped 3% and the Morgan Stanley Cyclical index declined 4%. The broader market was under pressure, with the small cap Russell 2000 and S&P400 Mid-Cap indices declining about 2%. The technology sector was weak, with the NASDAQ100 and Morgan Stanley High Tech indices declining 2%. The Street.com Internet index dipped 1%, the NASDAQ Telecommunications index dropped 3%, and the Semiconductors sank 4%. The Biotechs ended the week largely unchanged. The Securities Broker/Dealer index dropped 4%, while the banks declined only 1%. Although bullion added 60 cents, the HUI Gold index dropped 5%.

"Melt-up" conditions continued throughout the Credit market. For the week, June Eurodollar yields sank 13.5 basis points to 1.115%. Two-year Treasury yields declined 11 basis points to 1.40%, and five-year yields dropped 10 basis points to 2.57%. The yield curve steepened this week, with 10-year Treasury yields dipping five basis points to 3.64%, while long-bond yields actually gained one basis point to 4.68%. Agency and benchmark mortgage-back prices shot higher, with yields generally sinking 10 or so basis points. Freddie Mac 30-year mortgage rates dropped another 12 basis points this week to the lowest level in at least 40 years. The benchmark 10-year dollar swap spread widened one to 43. Corporate spreads were mixed, with Ford spreads widening about 50 basis points. However, junk spreads generally narrowed. Commodity prices were resilient, with the CRB index ending the week about unchanged.

It was another big week of corporate debt issuance. Travelers sold $1.4 billion of notes, Bank of New York $400 million, and Hewlett-Packard $500 million. Target raised $500 million five-year notes at a yield of 3.375%. Gillett paid 2.875% to borrow for five years. Anheuser-Busch raised $200 million, News Corp. $500 million, Baxter International $600 million, and Fidelity National $250 million. Cendant sold $600 billion, Placer Dome $200 million Potash raised $250 million, Public Services of Colorado $250 million, and TXU Energy raised $1.25 billion in a private placement (up from $500 million!). The junk bond market is getting revved up. Fairpoint Communications tapped the junk bond market for $225 million (11.875% yield). Playboy Enterprises sold $115 of junk (786 over Treasuries), Radnor Holdings $135 million, Hollinger $120 million, and Hexcel $125 million. UTStarcom sold a $400 million convert. From Bloomberg: "Sales from more than 30 borrowers this week boosted year-to-date (corporate) issuance to more than $143 billion, 21 percent more than was sold in the same period last year." Bloomberg's y-t-d tally of total U.S. Domestic Debt issuance (including Agencies) stands at $397.3 billion, up 25% from the comparable 2002. The booming asset-backed security market saw $9 billion of new supply, with y-t-d issuance of $74.2 billion running 35% above last year's record. Liquidity abounds.

March 3 - Dow Jones (Stan Rosenberg): "With state budgets in disarray, and with interest rates continuing to hug bottom, state and local governments tapped the municipal bond market for cash at a faster clip in the first two months of 2003 than they did a year ago. Long-term borrowings in January and February tallied an unprecedented $52.3 billion, up 22.8% from $42.6 billion in the year-earlier period, a munibond trade publication, The Bond Buyer, reported Monday. The total crashed through the previous January-February high of $42.8 billion set in 1998 and itself was made up of two record levels, $25.5 billion in January and $26.8 billion in February."

March 7 -Bloomberg: "The Fidelity Investments research division Vestigo Associates last month recommended in a report that customers sell municipal bonds insured by MBIA Inc., citing the insurer's risk of losses on derivative transactions, the Bond Buyer reported."

With long-term debt being issued in enormous quantities, there is less pressure to create short-term "monetary" liabilities. Broad money supply (M3) increased $3.5 billion last week. Demand and Checkable Deposits declined $2.5 billion. Savings Deposits dropped $18.5 billion, while Retail Money Market deposits increased $4.6 billion. Repurchase Agreements jumped $12.1 billion and Eurodollar deposits increased $3.6 billion. Elsewhere, Commercial Paper was about unchanged during the week, with Non-financial issuance up $1.8 billion and Financial down $2.0 billion. Outstanding Financial sector CP is down $35.6 billion over the past five weeks. Total Bank Assets declined $4.1 billion, with Securities holdings jumping $14.2 billion (up $73 billion over four weeks). Loans and Leases increased $8.2 billion. Commercial and Industrial loans declined $2.3 billion. Real Estate loans added $5.4 billion, and Securities loans also increased $5.4 billion. Foreign Holdings (at the Fed) of U.S. Debt, Agencies increased another $9 billion last week, with five-week gains of almost $33 billion. Since late April (45 weeks), these Foreign Holdings have surged $152 billion, or 24% annualized. How would the beleaguered dollar have fared without this support?

It was not an encouraging week on the economic front. While the focus will be on the 308,000 jobs lost, there were other troubling aspects to today's employment report. February's 0.7% increase in Average Hourly Earnings was off the charts. And it's difficult to know what to make of the reported 302,000 job losses, other than economic weakness is broadening. "Eating and Drinking" establishments dropped 85,000 (seasonally-adjusted) jobs during the month, after gaining 82,000 in January and losing 66,000 in December. But there is no confusion about the continued hollowing of our nation's productive capacity, with 53,000 additional Manufacturing jobs lost during February. Total Goods Producing jobs declined 104,000. And while broad-based weakness saw Services lose 86,000 jobs, the stalwart Mortgage Banking sector added another 8,000 (48,000 in six months!). Health Services job creation slowed to 5,000 and the Government sector added 13,000.

The ISM Manufacturing index was reported at a weaker than expected 50.5 (down from 53.9). Employment declined almost five points to 42.8 and New Orders dropped 7.4 points to 52.3. However, Prices Paid jumped a notable eight points to 65.5, the strongest reading since July. Wednesday's ISM Non-manufacturing index declined about one-half point to 53.9. Yet, Prices Paid jumped 3.9 points to 60.9 (vs. year ago 48.8), the highest reading in 25 months. New Export Orders added 5.5 points to 58.5.

There were 34,238 bankruptcy filings last week, up 11% y-o-y. Year-to-date, filings are running 7.8% above last year's record. Stronger-than-expected filings impelled MasterCard to increase their estimate of first-quarter bankruptcies to 409,000 (up 7.8% y-o-y) from 393,600 (up 3.8%) y-o-y. In Mortgage Finance Bubble blow-off week 37, the Mortgage refi application index jumped 10% to the fourth-highest level on record. Refi applications have now surged about 75% from the December dip and are up 180% y-o-y. Purchase applications jumped almost 12% last week and were 3% above the year ago level. Non-mortgage Consumer Credit jumped $13.2 billion (expectations of a decline of $1 billion), a 9.2% annual pace. Moreover, December's $4.0 billion decline was revised to a gain of $2 billion. The Big Question remains unanswered: Why have unprecedented refinancings and the mortgage Credit explosion not led to at least some reduction in non-mortgage consumer Credit. Puzzling and not encouraging. And included with the Fed's Consumer borrowing report was January data for Terms of Credit - New Car Loans. Well, the average interest rate during January was 2.87%, for a term of 58.5 months, with 96% loan-to-value, for $26,443 financed. Reasonable? Is 2.87% sufficient when factoring in future Credit losses? Averaging almost five-year loans? An amount financed up almost 13% from last year's second quarter? With the average borrower facing a $500 monthly payment?

March 4 - American Banker (Laura Mandaro): "Joining several of its U.S. investment bank and asset management rivals, a unit of Switzerland's UBS AG has applied to the State of Utah for an industrial loan corporation license… the industrial loan charter would allow the Zurich company to accept federally insured deposits from its U.S. customers - a first for UBS. The filing…was made mostly on behalf of UBS PaineWebber, the company's U.S. broker dealer… In recent years, more investment banks and asset managers have sought banking powers using industrial loan corporation charters… Three states have such a charter, and several of Wall Street's largest investment firms have been drawn to Utah's. Morgan Stanley has one, and Goldman Sachs…applied for one in August. Merrill Lynch & Co. also has the Utah charter and is the state's largest bank by deposits ($55.9 billion!). The draw? An industrial loan charter grants companies most of the powers bestowed by a commercial bank charter, including the ability to accept federally insured deposits and make consumer loans. Its main restriction is a prohibition on accepting demand deposits if the corporation has assets of more than $100 million. But with the restriction comes a big benefit: The charter holder does not need to follow the Bank Holding Company Act and thus avoids supervision by the Federal Reserve Banks."

March 4 -Bloomberg: "Mortgage bonds backed by home loans that are almost all delinquent about tripled to $20 billion last year from $7 billion in 2001, according to Moody's Investors Service. The securities are stocked with so-called re-performing loans, or mortgages with late payments that lenders buy from the Government National Mortgage Association and then package as bonds for sale to investors. Mortgage delinquencies have risen to 4.86 percent as of the end of the third quarter from a low of 3.75 percent in 2000 as rising unemployment hurt the ability of borrowers to make payments. Investors who buy the securities are betting delinquencies will fall once the economy strengthens. The increase 'is directly correlated with a rise in delinquencies,' said…a senior mortgage analyst… Investors are also buying the securities because they typically carry higher yields to compensate for the risk of default, he said."

The data rather clearly illuminate a conspicuous residential construction boom. January residential construction spending was up 12.2% y-o-y and up almost 21% over two years. By category, single-family spending was up a noteworthy 16% y-o-y to an all-time record. And comparing to pre-Bubble levels, January single-family spending was 72% higher than January 1997 and up 83% from January 1996. Multi-family (two or more units) construction was up 3.1% y-o-y and 23.3% over two years. Comparing to pre-Bubble, January's spending was up 79% from January 1997 and 85% from January 1996. And while the residential sector booms, it is worth noting the post-Bubble performance of the Non-residential sector. Non-residential spending was down 15% y-o-y and 27% from two years ago. In fact, January Non-residential spending was 8% below the level from January 1997; with spending having sunk to levels all the way back to 1996. Providing ominous portents for today's single-family boom, Non-residential spending jumped 50% in five years, only to collapse all the way back to pre-boom levels. The Public Sector construction boom is demonstrating some resilience, with January spending up about 1% y-o-y and 12% for two years. Public Sector construction spending is up 56% over six years.

January Personal Income was up 0.3% for the month, with y-o-y gains of 4.2%. Boosted by lower tax payments, January Disposable Income was up 5.64% y-o-y. This is the fourth straight month of at least 4% y-o-y growth, in what at this point appears an acceleration after more than two years of declining growth. After surging 8% in 2000, Personal Income growth slowed to 3.3% during 2001 and 3.0% during 2002. Analyzing January data, Wage and Salary income was up 3.5% y-o-y. Manufacturing was up only 0.9%, while Services was up 5.3% and Government 4.7%. On the spending side, Personal Consumption Expenditures were up 4.8% y-o-y (8.22% over two years). Spending on Services was up 5.1% y-o-y (9.2% y-o-y).

Yesterday the Federal Reserve released its fourth-quarter 2002 Z.1 "flow of funds" report detailing U.S. financial flows. For us ardent Credit analysts, it did not disappoint. In the spirit of "You Are What You Eat" - An Economy Is How It's Financial Sector Lends - we are again afforded the opportunity to closely examine The Capricious Chef's fashionable dishes, along with the neurotic economy's diet and eating habits. Has the financial sector been offering a nourishing and balanced menu? Is the economy eating healthy and moderately, or does it more resemble a sad chronic binging and purging disorder? Are we being disciplined, watching our saturated fat and sugar intake while being mindful to eat our vegetables? Or is it more a case of skimping on our daily allowance of vitamins and minerals in favor of feasting on an overly abundant supply of Cheesecake? But can't we survive and prosper on generous servings of Cheesecake? It hasn't killed us yet.

Let's not loose sight of the reality of the situation: The Heart of the matter is the quality of financial sector assets. Is this vital organ healthy, properly regulating the flow of nutrients throughout a muscular and robust body? Absolutely not. Then is there a serious malady than demands immediate attention? Absolutely. Yet, a vocal "consensus" has lost focus on this issue of overriding importance, calling for only greater caloric intake for the atrophying system in any manner most-easily attained. Regrettably, there is general disdain for properly diagnosing the ailment and Absolute disregard for future consequences.

Total Credit Market Borrowings jumped a record $795 billion ($3.18 Trillion annualized!) during the fourth quarter, or 10.3% annualized, to $31.7 Trillion. This easily surpassed the previous record for total net borrowings of $707 billion established during the infamous fourth-quarter of 1998. This was also the strongest quarterly rate of total Credit growth since the first quarter of 1999 (10.9%). And one must go back to 1998 for the previous year with double-digit (10.3%) Total Credit Market Debt growth ($2.19 Trillion). For 2002, Total Credit Market Debt expanded a record $2.3 Trillion, or 7.9%. This compares to GDP growth of $363.4 billion, or 3.6%. Total Credit Market Debt has jumped 49% ($10.45 Trillion) over five years, while GDP has increased 26% ($2.14 Trillion). Since the beginning of 1998 the ratio of Total Credit Market Debt to GDP has increased from 256% to 303%.

During the fourth quarter, total (Federal and Non-fed, but excluding financial sector) debt increased at an annualized $1.563 Trillion, or 7.7%, to $20.7 Trillion. The Federal Government increased borrowings at a 5.5% rate to $3.64 Trillion. Household Mortgage borrowings expanded at a 13.7% annualized rate to $6.05 Trillion, with Total Household borrowings increasing at a 10.7% annualized rate. The Household sector has not experienced a year of double-digit debt growth since 1987. And we're now compounding on top of a base that has seen Household sector debt surge 52% in five years. During the quarter, State and Local Governments increased borrowings at a 14.1% annualized rate to $1.44 Trillion. Meanwhile, Corporate borrowings expanded at a 2.6% rate during the quarter to $4.9 Trillion. The Financial sector increased borrowings at an annualized rate of $1.1 Trillion, or 10.9%, to $10.32 Trillion. This was the strongest pace of financial sector expansion since 2000's fourth quarter.

For the year, Total Federal and Non-federal (excluding financial) debt expanded by 7.1%, (up from 2001's 6.2% and 2000's 4.9%) the strongest growth since 1989. Last year's $1.36 Trillion of net additional borrowings was 21% above the previous record set during 2001. 1998 was the first year Total Federal and Non-federal borrowings surpassed $1 Trillion. Last year saw Federal Government debt growth of 7.6%, the first expansion of borrowings since 1997 and the strongest growth rate since 1993. 2002's 12.4% Household Mortgage debt growth was the first double-digit expansion since 1989. The State and Local Government sector's 11.4% increase in debt was the first double-digit growth since 1987. At the same time, last year's 1.3% expansion in Corporate borrowings was the weakest performance since 1992. Could our deranged Credit system offer a less wholesome regimen?

Boom and Bust and dynamics are clearly illustrated by Corporate sector borrowing data. Corporate debt expanded by 5% ($126.3 bn) during 1994, accelerated to 8.5% ($227.1 bn) during 1995 and 6.3% ($183.1 bn) during 1996. Debt Bubble dynamics took hold, with compounding growth surging to 9.4% ($291.6 bn) during 1997, 12.1% ($408.6 bn) during 1998, and 10.0% ($378.5 bn) during 1999. 2000 saw growth slow to 9.1% ($380.4 bn), and then drop sharply to 5.5% ($253.5 bn). The rapid slowdown in debt growth culminated (as one should expect from a debt Bubble) in corporate debt market dislocation and 2002's meager 1.3% ($62.1bn) increase. Over a five-year period, the Corporate Debt Bubble saw borrowings surge 58%. A bursting Bubble brought corporate Credit market borrowings to a virtual standstill for much of last year, complete with acute financial stress and record defaults.

With the previous illustration of Credit Bubble dynamics in mind, let's now take a close look at truly historic developments within the Great Mortgage Finance Bubble. Total Mortgage Credit expanded at a record annualized $1.07 Trillion during the fourth quarter, with Household Mortgage Debt surging at an annualized $854.7 billion pace. Household Mortgage debt Growth is fully 60% greater than 2001's record $530.9 billion. To bring additional perspective to the enormity of this Credit explosion, recall that pre-Bubble 1997 saw total Household Mortgage growth of $238 billion (nineties average of $250 billion). The fourth quarter saw a lending frenzy at almost four times the pace of only five years ago. For 2002, Household Mortgage borrowings jumped $723 billion (12.6%), with Total Mortgage Debt growth of $880.9 billion (11.6%). Total Mortgage Debt growth was up 25% from the previous year's record ($881 bn vs. $706 bn) and up 190% from 1997's growth. For comparison, the eighties' (Total Mortgage debt growth) peak was 1988's $316 billion, while the nineties averaged $277 billion. Total outstanding Mortgage Debt is up $1.59 Trillion over two years (23%) and $3.3 Trillion (64%) over five years. For comparison, the previous five-year period saw Total Mortgage Credit growth of $1.1 Trillion.

The Great Mortgage Finance Bubble is fueled by unprecedented financial Credit creation (financial sector liability/"electronic IOU" expansion). Financial Sector debt increased at a 10.9% rate during the fourth quarter, the strongest pace in two years. And demonstrating truly the most conspicuous Credit Bubble attestation, Financial Sector Credit Market liabilities have surged 89% to $10.3 Trillion since the beginning of 1998 (from 66% to 99% of GDP). This debt growth, as we know, has been completely dominated by the Structure Finance Trio of the government-sponsored enterprises (GSE), Mortgage-backed Securities (MBS), and Asset-backed Securities (ABS).

During a quarter that saw just over 1% annualized GDP growth, GSE borrowings increased at a 15.1% rate to $2.55 Trillion. Outstanding Mortgage-backed Securities expanded at a rate of 9.6% to $3.16 Trillion, and Asset-backed Securities at a 16.1% pace to $2.39 Trillion. Combined (GSE, MBS, and ABS) "Structured Finance Trio" debt expanded at a $1.04 Trillion pace (13.2%) during the fourth quarter to $8.1 Trillion. For all of 2002, Structured Finance borrowings increased $838 billion, or 11.6% (GSE's 10.7%, MBS 11.6%, and ABS 12.4%). GDP expanded by less than $400 billion during 2002. Over five years, Structured Finance borrowings are up 103% (GSE 132%, MBS 73%, and ABS 124%). And over ten years, borrowings are up 263% (GSE 361%, MBS 148%, and ABS 488%). In just five years, Structured Finance Trio debt has jumped from 48% to 77% of GDP. It's up from 1990's 30% and '85's 17%. Cheesecake Dependency. Looking at dollars, Structured Finance debt has expanded $4.1 Trillion in five years, while GDP has increased $2.1 Trillion (about 1.9 to 1). And to elucidate the parabolic nature of the escalating divergence between debt growth and economic "output" (inflating financial claims versus stagnating "output" growth), over the past two years Structured Finance Trio debt has surged $1.8 Trillion, while GDP has increased $621 billion (about 2.9 to 1).

Elsewhere, a veritable mortgage lending (Cheesecake) bonanza has irreparably overwhelmed the banking sector, fueling the fourth-quarter's 8.5% annualized Commercial Bank assets expansion. Bank assets were up a record $526.3 billion, or 7.7%, for all of 2002 to $7.36 Trillion. This compares to asset growth of $362 billion (5.6%) during 2001. Last year's $269.3 billion (15%!) increase in Mortgage Loans was more than double 2001's $129.8 billion. Mortgages increased at an annualized rate of $357 billion, or a noteworthy 18%, during the fourth quarter to $2.1 Trillion. U.S. Government Securities (Treasury and Agency) holdings increased $182.1 billion to $1.1 Trillion, compared to 2001's $33.7 billion increase. Agency securities holdings jumped $139.2 billion (18%) during 2002 to $916.6 billion, versus the previous year's $55.6 billion increase. Holdings of Corporate and Foreign Bonds added only $3.7 billion to $380.1 billion, a fraction of 2001's $97.8 billion increase. Corporate Bank Loans dropped $75.8 billion to $1.35 Trillion, after declining $76.2 billion during 2001. Over the past two years, Bank Mortgage holdings have surged 24%, while corporate bank loans have dropped 10%. Jettison the veggies and gorge on decadent desserts.

And with the manic refinancing, equity-extracting Household sector flush with liquidity, it is worth a brief look to note its disposition. We see $668.3 billion Household and Nonprofit Organization Net (2002) Acquisition of Financial Assets (compared to 2001's $553.7 bn). Time and Savings Deposits increased $309 billion (compared to 2001's $206.5 bn), while about $300 billion went into Pension and Life Insurance Reserves. Changes to Equity and Mutual Fund holdings netted to an increase of about $45 billion, while Agencies dropped about $100 billion. Curiously, we see that the acquisition of Municipal Securities more than doubled to $110 billion. In fact, Households increased Muni holdings by 22% to $616.6 billion during the year. Is the Household sector speculating on interest rate differentials, borrowing tax-deductible mortgage debt to acquire tax-free muni securities? It is also worth noting that Household (and Nonprofit) sector Total Assets ended 2002 at $47.9 Trillion. And while this is off 2.7% from the year-2000 high, Total Assets remain up 47% over seven years. Real Estate values increased $1.1 Trillion last year to $14.9 Trillion, with five-year gains of $5.3 Trillion (50%). Inflating Real Estate and debt securities prices have largely offset collapsing equity values.

International financial flows are accounted for in the "Rest of World" (ROW) sector. While the hype of the hyper-productive U.S. economy is unrelenting, foreign investors are in dramatic retreat. Importantly, Foreign Direct Investment (FDI) in the U.S. has collapsed. FDI surpassed $100 billion for the first time during 1997 ($109.3 bn), then jumped to $179 billion during 1998. The escalating financial and economic Bubble enticed $289.5 billion of FDI during 1999 and the high-water mark $307.7 billion for year-2000. Speculative FDI was stemmed, however, by the bursting equity/NASDAQ Bubble. FDI sank to $130.8 billion during 2001 and collapsed to last year's $46.0 billion, the lowest level since 1992.

Yet, our massive trade deficits create international dollar balances that must find their way to U.S. financial asset markets. Hence, Rest of World acquisition of U.S. Credit Market Instruments surged last year to $416.9 billion. This compares to 2001's $320.6 billion, 2000's $225.9 billion and 1999's $139.7 billion. Last year, ROW increased holdings of Agencies by $126.1 billion, Treasuries by $99.3 billion, and U.S. Corporate Bonds (includes ABS) by $166.9 billion. It is worth noting that ROW made net Agency purchases of $11 billion during 1998 and $63.5 billion during 1999. Importantly, we do not expect FDI to the U.S. to recover for many years. And that the dollar has sunk in the face of massive purchases of U.S. securities portends ominous dollar vulnerability. If there is any waning of demand for Agencies and U.S. Corporates (especially asset-backs), we have a serious problem. The day our foreign-sourced financiers move to liquidate U.S. securities, we are faced with a calamitous dislocation. As goes Structured Finance, so goes the dollar.

This Tuesday from Chairman Greenspan: "The very large flows of mortgage funds over the past two years have been described by some analysts as possibly symptomatic of an emerging housing bubble, not unlike the stock market bubble whose bursting wreaked considerable distress in recent years… It is, of course, possible for home prices to fall as they did in a couple of quarters in 1990. But any analogy to stock market pricing behavior and bubbles is a rather large stretch."

It's not a stretch. Today, an explosion of mortgage lending is behind a destabilizing ballooning of financial sector assets. As the Household Sector aggressively inflates its liabilities, it obtains in return liquidity for continued rampant consumption, as well as the accumulation of financial assets (savings deposits, municipal debt, etc.). This Household financial asset accumulation provides liquidity for government borrowing and spending, along with the newfound liquidity in the corporate bond market. Record systemic Credit creation (including speculative Credit market leveraging) then extends the inflation in home and Credit market securities values, which stimulates only greater borrowings. Credit excess begets asset inflation that begets further Credit excess. Along with conspicuous Credit abuse, there are distinct speculative components as well. There has been a mad rush by the household sector to procure the most valuable inflating asset (home) possible, stretching the limits of borrowing capacity. In the financial sector, there has evolved unparalleled leveraged speculation in Agency, Mortgage-backs and other debt instruments. And the more extreme the resulting over-liquefication (inflation) throughout the financial sphere, the more virulent the inflationary bias in securities prices. Or, said another way, in today's market any hint of economic weakness (or even housing vulnerability), incites a "melt-up" in Agency, Treasury and other debt instruments. These collapsing yields, as we have witnessed, then incite the (real estate manic) household sector to refinance and expand borrowings. This only leads to further inflating of financial sector liabilities, further self-reinforcing debt monetization, and additional marketplace liquidity. And let's not forget all the derivatives and mortgage debt (and other interest rate) hedging that leads to further self-reinforcing market pricing distortions.

Dr. Greenspan, it's a textbook Bubble. And, as we are witnessing, this one has, as enormous Bubbles tend to do, taken on a precarious life of its own. Until something changes, we should err on the side of expecting this amazing blow-off in Mortgage Finance to spur continued rampant dollar financial claims inflation. This remains dollar bearish, economic stability bearish and financial fragility bullish. But what is not so clear is to what extent a depreciating dollar - inflating relative values for things non-dollar - incites self-reinforcing sectoral Credit and speculative excess going forward.

Mastering the obvious, it is fair to say that this is an incredibly uncertain and volatile period for both the financial and economic "spheres." A great deal rides on the outcome of the impending war.

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