The Dow slipped 0.6%, and the S&P500 declined 0.9%. The Transports were hit for 2.7%, and the Utilities fell 1.3%. The Morgan Stanley Cyclical and Morgan Stanley Consumer indices each dipped 0.4%. The small cap Russell 2000 fell 1.8%, and the S&P400 Mid-cap index declined 1.9%. The NASDAQ100 dipped 0.9%, and the Morgan Stanley High Tech index fell 1.4%. The Semiconductors declined 1.3%. The Street.com Internet Index declined 1.1%, and the NASDAQ Telecommunications index was hit for 2.8%. The Biotechs dropped 1.9%. The Broker/Dealers fell 0.9%, and the Banks dipped 0.4%. With bullion down $14.85, the HUI Gold index sank 4.5%.

For the week, two-year Treasury yields gained 5 bps to 4.81%. Five-year yields added 3 bps to 4.71%, and bellwether 10-year yields rose 5 bps to 4.78%. Long-bond yields gained 5 bps to 4.92%. The 2yr/10yr spread ended the week inverted 3 bps. The implied yield on 3-month December '06 Eurodollars rose 3.5 bps to 5.375%. Benchmark Fannie Mae MBS yields rose only one basis point to 5.95%, this week outperforming Treasuries. The spread on Fannie's 4 5/8% 2014 note narrowed 2 bps to 34, and the spread on Freddie's 5% 2014 note narrowed 2 to 31. The 10-year dollar swap spread declined 2.2 to 53.3. Corporate bonds gained some lost ground this week, with junk spreads narrowing about 15 bps.

Investment grade issuers included Capital One Financial $2.2 billion, Merrill Lynch $1.75 billion, CRH America $1.75 billion, Disney $1.5 billion, DaimlerChrysler $1.5 billion, American Express $1.0 billion, CIT Group $500 million, American General Financial $375 million, Reality Income $275 million, and Northwestern Corp $150 million.

Junk bond funds saw inflows of $107 million during the week (from AMG). Junk issuers included Avnet $300 million and Turning Stone $160 million.

Convertible issuers included Alliant Techsystems $300 million.

International dollar debt issuers included European Investment Bank $3.0 billion, National Australia Bank $1.25 billion, Colombia $1.0 billion, Canada Mortgage & Housing $750 million, Woori Bank $500 million, and Corp Andina $250 million.

Japanese 10-year "JGB" yields rose 4 bps this week to 1.68%. The Nikkei 225 index dipped 0.3% (down 0.2% y-t-d). German 10-year bund yields increased 4 bps to 3.78%. Emerging debt markets held their own, while equities were generally under moderate selling pressure. Brazil's benchmark dollar bond yields added 2 bps to 6.37%. Brazil's Bovespa equity index fell 2.0%, reducing 2006 gains to 9.3%. The Mexican Bolsa declined 1.9% this week, lowering y-t-d gains to 16.8%. Mexico's 10-year $ yields rose 3 bps to 5.82%. Russian 10-year dollar Eurobond yields added 2 bps to 6.79%. The Russian RTS equities index declined 1.8%, reducing 2006 gains to 41.4% and 52-week gains to 80%. India's Sensex equities index added 1.2% (up 26.8 y-t-d).

Freddie Mac posted 30-year fixed mortgage rates rose 3 bps to 6.47%, up 76 basis points from one year ago. Fifteen-year fixed mortgage rates added 2 bps to 6.16%, 86 bps higher than a year earlier. One-year adjustable rates gained 4 bps to 5.63%, an increase of 118 bps y-o-y. The Mortgage Bankers Association Purchase Applications Index rose 3.7% this week to a 7-week high. Purchase Applications were down 19% from one year ago, with dollar volume down 20%. Refi applications dipped 0.9%. The average new Purchase mortgage dropped to $215,600, and the average ARM declined to $357,300.

Bank Credit expanded $4.3 billion last week to a record $8.052TN (7-wk gain of $107.5bn). Year-to-date, Bank Credit has expanded $546 billion, or 10.8% annualized. Bank Credit inflated $663 billion, or 9.0%, over 52 weeks. For the week, Securities Credit dipped $1.5 billion. Loans & Leases increased $5.8 billion during the week and were up $369 billion y-t-d (10.0% annualized). Commercial & Industrial (C&I) Loans have expanded at a 16.5% rate y-t-d and 14.7% over the past year. For the week, C&I loans dipped $0.4 billion, and Real Estate loans declined $5.7 billion. Real Estate loans have expanded at a 10.8% rate y-t-d and were up 10.3% during the past 52 weeks. For the week, Consumer loans were little changed, while Securities loans jumped $9.1 billion. Other loans were up $2.8 billion. On the liability side, (previous M3 component) Large Time Deposits increased $6.8 billion.

M2 (narrow) "money" supply declined $6.5 billion to $6.876 TN (week of August 28th). Year-to-date, narrow "money" has expanded $190 billion, or 4.2% annualized. Over 52 weeks, M2 has inflated $299 billion, or 4.5%. For the week, Currency added $0.7 billion, and Demand & Checkable Deposits rose $8.7 billion. Savings Deposits dropped $24.1 billion, while Small Denominated Deposits gained $5.2 billion. Retail Money Fund assets increased $3.0 billion.

Total Money Market Fund Assets, as reported by the Investment Company Institute, surged $24 billion last week to $2.225 Trillion. Money Fund Assets have increased $168 billion y-t-d, or 11.8% annualized, with a one-year gain of $265 billion (13.5%).

Total Commercial Paper jumped $16 billion last week to a record $1.860 Trillion. Total CP is up $219 billion y-t-d, or 19.3% annualized, while having expanded $272 billion over the past 52 weeks (17.1%).

Asset-backed Securities (ABS) issuance increased this week to $14 billion. Year-to-date total ABS issuance of $484 billion (tallied by JPMorgan) is running about 5% below 2005's record pace, with y-t-d Home Equity Loan ABS sales of $336 billion 1% above last year.

Fed Foreign Holdings of Treasury, Agency Debt gained $1.5 billion to a record $1.680 Trillion for the week ended September 6th. "Custody" holdings were up $161 billion y-t-d, or 15.3% annualized, and $214 billion (14.6%) over the past 52 weeks. Federal Reserve Credit rose $3.2 billion to $832 billion. Fed Credit has increased $5.7 billion y-t-d, or 1.0% annualized. Fed Credit is up 4.1% ($32.8bn) over the past year.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $542 billion y-t-d (19.4% annualized) and $648 billion (16.4%) in the past year to $4.589 Trillion.

September 7 - Financial Times (Richard McGregor): "China's swelling foreign exchange reserves, which are on track to top a record $1,000bn within weeks, could be used to moderate the impact of any economic slowdown or financial crisis, according to the country's leaders. Wen Jiabao, prime minister, and Zeng Qinghong, a vice-president, have both made public comments this week putting a largely positive spin on the potential uses of the reserves, which reached $955bn at the end of July. With the reserves growing by about $20bn a month, fuelled by a large trade surplus, speculative capital inflows and foreign investment, the total is likely to surpass $1,000bn by the end of September or October."

Currency Watch:

The dollar index gained 1.3% to 85.96. On the upside, the Belize dollar added 1.0%, the Indian rupee 0.6%, the Philippines peso 0.4% and the South Korean won 0.4%. On the downside, the Iceland krona declined 3.5%, the New Zealand dollar 2.7%, the Norwegian krone 2.6%, the South African rand 2.3%, and the British pound 2.1%.

Commodities Watch:

Commodity prices in retreat... Gold dropped 2.4% to $610.60, and Silver sank 5.9% to $12.295. Copper rose 3.1%, increasing y-t-d gains to 85%. October crude fell $2.89 to end the week at a five-month low $66.30. October Unleaded Gasoline sank 7%, and October Natural Gas declined 3.7%. For the week, the CRB index declined 1.5% (down 3.4% y-t-d). The Goldman Sachs Commodities Index (GSCI) dropped 3.6%, reducing 2006 gains to 2.7%.

Japan Watch:

September 8 - Bloomberg (Lily Nonomiya): "Japanese bank lending rose for a seventh month in August as companies in the world's second-largest economy sought cash to fund increases in capital spending. Loans climbed 1.9 percent in August from the same month a year earlier..."

China Watch:

September 8 - Bloomberg (Nerys Avery): "China's trade surplus widened to a record $18.8 billion last month as exports soared, Dow Jones Newswires reported..."

September 5 - Bloomberg (Claudia Maedler): "Trade between China and Gulf states including Saudi Arabia and the United Arab Emirates increased to more than $32 billion last year. Goods and services moving between China and the U.A.E. was $10 billion in 2005..."

September 8 - Bloomberg (Samuel Shen): "China had to spend about 1.08 trillion yuan ($136 billion) to dispose of pollutants in 2004, the government said in its first official report to quantify the impact of growing pollution on the economy."

Asia Boom Watch:

September 6 - Bloomberg (Cherian Thomas): "The Asian Development Bank raised its 2006 growth forecast for Asia excluding Japan for the second time this year, citing 'strong performances' in China and India, which account for half the region's economy. Asia's developing economies will expand 7.7 percent this year, 0.5 percentage points higher than April's forecast..."

September 8 - Bloomberg (Saikat Chatterjee): "India's Finance Minister Palaniappan Chidambaram said the country's economic growth was close to 8 percent in the first half of the fiscal year..."

September 5 - Bloomberg (Seyoon Kim): "South Korea's producer prices rose at the fastest pace in 19 months in August as more expensive oil pushed up the cost of industrial goods. The producer price index gained 3.4 percent last month..."

September 7 - Bloomberg (Nipa Piboontanasawat): "Taiwan's export growth slowed for the first time in three months in August... Overseas sales grew 16.6 percent last month from a year earlier to $19.4 billion after gaining 21.2 percent in July..."

September 5 - Bloomberg (Toru Fujioka): "Asian countries including Indonesia and the Philippines need about $1 trillion of spending over the next five years on infrastructure projects to sustain economic growth rates, the Asian Development Bank said."

September 5 - Bloomberg (Stephanie Phang and Shamim Adam): "Malaysia's exports grew in July at the fastest pace in 16 months, helped by increased shipments of electronics and higher oil prices. Exports rose 16 percent from a year earlier..."

Unbalanced Global Economy Watch:

September 6 - Bloomberg (Bill Murray): "Multinational companies will invest $1.2 trillion worldwide this year, the London-based Times said, citing a report by the Economist Intelligence Unit. The investment would be a 22 percent increase from last year..."

September 6 - Bloomberg (Simon Kennedy): "The European Commission said growth in the dozen euro nations is stronger than expected, lending the economy more momentum going into 2007 than it anticipated. The $10 trillion economy will expand 2.5 percent in 2006, the fastest pace since 2000 and above the 2.1 percent it projected in May..."

September 7 - Bloomberg (Brian Swint and John Fraher): "Industrial production in Germany...expanded 1.2 percent from June... From a year earlier, output jumped 4.7 percent."

September 6 - Bloomberg (Brian O'Neill): "Irish mortgage lending increased 21 percent in the second quarter, the Irish Bankers Federation said, citing a survey of lenders. The amount lent to homebuyers rose to 10.1 billion euros ($12.9 billion) from 8.4 billion euros in the same three-month period last year..."

September 4 - Bloomberg (Fergal O'Brien): "Irish tax revenue climbed an annual 13 percent in the eight months through August, twice as fast as the government predicted earlier this year, underpinned by sales taxes and levies on property transactions."

September 7 - Bloomberg (Fergal O'Brien): "Irish inflation reached a 3 1/2-year high in August... Inflation accelerated to 4.5 percent from 4.2 percent in July..."

September 7 - Bloomberg (Tasneem Brogger): "Denmark's jobless rate dropped to 4.4 percent in July, the lowest since 1974, as employers hired workers to keep pace with rising demand."

September 8 - Bloomberg (Alistair Holloway): "Finland's economic growth accelerated to 6 percent in the second quarter as production in the paper industry rebounded after an industrial dispute shut plants in the same period of last year."

September 8 - Bloomberg (Bogdan Preda): "Romania's economy grew at a faster pace in the second quarter...led by a boom in the construction industry. Gross domestic product grew an annual 7.8 percent in the second quarter of this year..."

September 8 - Bloomberg (Svenja O'Donnell): "Russia's trade surplus widened to $100.1 billion in the first seven months as exports surged by almost a third..."

September 6 - Bloomberg (Svenja O'Donnell): "Russian economic growth quickened for a third consecutive month in August, expanding at the strongest rate since March 2004, MNB Capital Markets said. Moscow Narodny Bank's gross domestic product indicator showed the economy grew an annual 7.7 percent in August, the highest rate since March 2004..."

September 5 - Bloomberg (Sebastian Boyd and Todd Prince): "A record amount of consumer borrowing in Russia, for everything from foreign cars to DVD players, is creating a new bond market. Russian banks sold $1.3 billion of asset-backed debt in the last 12 months, compared with $350 million in the previous year..."

September 7 - Bloomberg (Bradley Cook): "Moscow leapfrogged Paris and Zurich to become Europe's second-most expensive city for office space, after prices surged 60 percent in a year, Vedomosti said... The maximum base rate for prime office space in the Russian capital rose to an annual $1,200 a square meter...from $750 a year earlier..."

September 8 - Bloomberg (Steve Bryant): "Turkey's industrial production growth rose to an annual 9.5 percent in July as a drop in the value of the lira boosted export growth to the second-fastest pace in 17 months."

September 7 - Bloomberg (Hans van Leeuwen): "Australian employment climbed more than twice as much as expected in August, exacerbating a worker shortage... The jobless rate rose to 4.9 percent from a 30-year low of 4.8..."

September 6 - Bloomberg (Hans van Leeuwen): "Australia's economy grew at the slowest pace in three years in the second quarter...Gross domestic product rose 0.3 percent from the first quarter..."

Latin American Boom Watch:

September 8 - Bloomberg (Eliana Raszewski): "Argentina will raise social security payments 13 percent in January, taking advantage of surging tax revenue to make the 10th increase since President Nestor Kirchner took office three years ago."

September 5 - Bloomberg (Matthew Walter): "Chile, the world's biggest copper producer, said its economy grew 4.2 percent in July from a year earlier..."

September 7 - Bloomberg (Alex Kennedy): "Venezuelan vehicle sales rose to a record in August as President Hugo Chavez used surging oil revenue to increase government spending... Sales of cars, trucks and buses by the nation's seven assemblers, plus estimated sales by importers, rose 74 percent..."

Central Bank Watch:

September 8 - Bloomberg (Lily Nonomiya): "Bank of Japan Governor Toshihiko Fukui said consumer prices will keep rising, reinforcing speculation that the central bank will increase interest rates before the end of the year."

September 5 - Bloomberg (Kathleen Hays and Scott Lanman): "The Federal Reserve can be 'patient' in considering whether to raise interest rates again, even while inflation stands above the comfort level of policy makers, said St. Louis Fed President William Poole. 'If we believe that we're headed off in the right direction, then we can be patient and sit there and not create a disturbance in the economy,' Poole said..."

Bubble Economy Watch:

September 6 - Bloomberg (Joe Richter): "The productivity of U.S. workers slowed last quarter and labor costs jumped in the first half by the most in six years, suggesting inflation pressures persist as the economy cools. Productivity, a measure of how much an employee produces for each hour of work, increased at an annual rate of 1.6 percent after a 4.3 percent gain the prior three months... Labor costs rose 5 percent in the past 12 months, the biggest year-over-year increase since 1990, after a 3.6 percent year-over-year increase in the first quarter."

At 310,000, Initial Claims for unemployment declined to a six-week low. The ISM Non-Manufacturing Index increased a stronger-than-expected 2.2 points during August to 57.

Real Estate Bubble Watch:

September 6 - Dow Jones: "Offering further evidence that the housing market has hit a wall in much of the country, the average second-quarter price for a U.S. home grew just 1.17% from the first quarter, the Office of Federal Housing Oversight said. The results are 'a strong indication that the housing market is cooling in a very significant way,' OFHEO Director James Lockhart said... 'The deceleration appears in almost every region of the country.' The increase, which contrasted with the 3.65% one for the second quarter of last year, was the lowest since the fourth quarter of 1999..."

Financial Sphere Bubble Watch:

September 5 - Bloomberg (Elizabeth Hester): "A type of initial public offering that vanished in the 1990s in a wave of scandals is making a comeback, and regulators say they are concerned investors may be defrauded again. NASD...says it is investigating the resurgence of 'blank checks' -- shell companies that raise money in public markets without saying what they will spend it on. This year, blank-check companies have sold $2.2 billion of stock in 28 offerings, and $4.3 billion more in new issues is planned with help from some of Wall Street's best-known banks and underwriters..."

Energy Boom and Crude Liquidity Watch:

September 7 - Bloomberg (Will McSheehy): "Saudi Arabia, the world's largest oil producer, Kuwait and four other states in the Persian Gulf may have their debt ratings raised by Moody's...as record oil prices boost their region's economy."

September 6 - Bloomberg (Lucian Kim and Trisha Huang): "OAO Lukoil, Russia's biggest oil producer, will spend $100 billion over 10 years to double output and invest in refineries abroad, as President Vladimir Putin tightens state control of the industry at home."

September 5 - Bloomberg (Claudia Maedler): "The insurance industry in the Persian Gulf region is growing more rapidly than in developed markets as the Arab states utilize record oil revenue to update infrastructure, Standard & Poor's said. Demand for insurance in 2005 grew more than 30 percent in the United Arab Emirates, the second largest Arab economy, 17 percent in Qatar and 5 percent in Bahrain..."

Income Inflation:

As is often the manner of mercurial financial backdrops, a marketplace can decide it doesn't care about a particular development. It may ignore the development, over time becoming only more dismissive to the point that it appears the market refuses to ever care - only to abruptly change course and perhaps care very intensely. The markets will now care about the phenomenon of rising U.S. labor costs, although they aren't today at all clear as to why.

Total Non-farm Compensation Per Hour was up 7.7% y-o-y during the second quarter, a notable increase compared to Q1 2006's 6.4%, Q4 2005's 4.1%, Q3 2005's 4.8%, Q2 2005's 4.0%, Q1 2005's 4.5%, Q4 2004's 3.8%, and Q3 2004's 3.2%. I want to say right from the get-go that, while it is my view that Income Inflation has evolved into a key Inflationary Manifestation, my thinking is much less clear when it comes to analyzing consequences over the short, intermediate and longer-terms. And as much as I expect the markets to now follow wage and Income developments with decidedly keener interest, I at the same time expect ample confusion with regard to ramifications for traditional inflation measures, the financial markets and economies.

Most conventional analysis is disappointingly superficial. With the structures of today's Financial and Economic Spheres virtually unrecognizable from those in place during the 1970s, analyzing current Income developments in the context of a seventies' "wage/price spiral" is likely a fruitless exercise. Others, such as JPMorganChase's Jim Glassman, focus on the impact of wage gains to corporate profitability: "In order for higher wages to be a problem, they have to be squeezing margins, and we're not seeing it. Instead we're watching the profit share reach a record level." The Fed apparently also maintains a sanguine view of rising pay, comforted that it remains "difficult for corporations to pass along costs." These lines of analysis all miss the essence of contemporary Inflation dynamics.

I doubt we are on the verge of a rapid '70s-style acceleration in (an aggregate of) consumer price Inflation. The vast ("elastic") supply of contemporary output (including imports, digital media, technology, telecommunications services, medical, education, financial services and "services" generally) works to restrain rapid general price index gains. I would also be surprised if rising wage pressures put much of an immediate dent in corporate bottom lines. Rising incomes are more of an upshot of a protracted Credit-induced corporate profits boom, with corporate and government sectors increasingly flush with finance - flush, that is, for as long as the Credit Bubble is sustained (creating the backdrop for a future profits collapse).

Perpetuating a perilous dynamic, inflation's effects (and evils) will likely remain highly insidious. The scourge of Inflation will creep and skulk. Rather than alarming jumps in measures of the general price level that would force the Fed to actually tighten financial conditions, traditional inflation indictors will offer up hope that recent price gains will prove fleeting. Certainly, the Fed and the markets expect that a housing-led economic slowdown will repress price pressures. Perhaps it will. But as I analyze the mosaic of Credit, financial, and economic data - with a diligent study of Credit creation, liquidity and speculative dynamics, and the resulting Flow of Finance - I come to an analytical perspective with respect to today's Income Inflation much at variance with conventional thinking.

From a Macro Credit Analysis perspective, the resiliency of inflated home prices in the face of rapidly slowing sales, higher rates and bulging inventories is both a notable and major 2006 development. Stable to somewhat rising prices in many markets have supported (and been supported by) continued rapid mortgage Credit growth. The housing equity "piggybank", in particular, is bolstered by prices that have to this point stabilized at inflated levels. The year could see record equity extraction and yet another year of double-digit mortgage Credit growth, with rising wages also surely helping mitigate the burden of enlarged adjustable-rate mortgage payments. And I would imagine that wage and Income trends are inspiring to the energized MBS, ABS and mortgage derivatives marketplaces. Heightened Income Inflation is today playing a prominent role in prolonging the Mortgage Finance Bubble.

Continued robust mortgage borrowings and huge ongoing corporate and government debt growth combine for Record Total System Credit growth, this despite the significant decline in home sales transactions. The unrelenting massive Credit expansion - pursuant to several years of an intensifying Inflationary Bias permeating the wages and Incomes arena - readily explains today's heightened Income Inflation. Record Total Credit Growth, then, continues to buttress home prices, in the process bolstering the Aged Credit Bubble and its brethren, the stock market Bubble.

To be sure, the interplay of Credit growth and Inflation is a recursive process, with Credit expansion imposing price effects that tend to motivate additional Credit expansion and only more self-reinforcing Inflation. This rather uncomplicated concept is, however, in real life greatly complicated by the evolving nature of prominent Inflationary Processes and Manifestations - most that go completely unrecognized as impulses of Credit Inflation.

While conventional analysts go about conjecturing about and debating the extent to which wage growth will impact future CPI, wage/prices spirals, corporate profits, and Fed policy, I'll maintain a different focus: With Income Inflation having now evolved into a (THE?) prominent Inflationary Manifestation, what are the prospects for and ramifications of prolonging the U.S. Credit and Economic Bubbles? Does Income Inflation now play a prominent role in prolonging the Mortgage Credit Bubble, in the process buoying consumer spending, corporate profits, aggressive stock buybacks, the M&A boom, leveraged securities speculation, government receipts, and Credit Bubble excesses generally? Going forward, will Income Inflation play a pronounced role in sustaining massive U.S. Current Account Deficits? Will U.S. Income Inflation now play a decided role in furthering Global Imbalances, including destabilizing Credit and liquidity excesses round the world? To what extent will Income Inflation temper and offset the impact of the housing slowdown?

I am cognizant that my analysis may very well appear oblivious to the widespread belief that the housing bust is in the process of pulling down the general U.S. economy and, prospectively, a vulnerable global economy too dependent upon exporting to the soon-to-be much less profligate consumer. With market talk turning to recession - and even the occasional whisper of deflation - the Income Inflation issue is sure to get the analytical short shrift. News and "analysis" is always prone to follow the direction of the markets, and I am certainly mindful that U.S. and global bond yields are in retreat, energy prices are in a marked decline, and commodity prices are also seemingly affirming the slowdown view.

Yet, if Income Inflation is today underpinning housing prices, Credit growth, consumption, and Current Account Deficits, we must also recognize that this Inflationary Manifestations is quite likely poised to bolster U.S. and global liquidity. Instead of the much anticipated housing downturn initiating a Credit slowdown and long overdue imbalance adjustment period, we could very well witness a further round of Credit Bubble Perpetuation and liquidity over-abundance. This view is supported by the ongoing global equities market boom and generally narrow risk premiums, not to mention global Credit and growth data. The emerging markets (the "periphery"), in particular, continue to indicate robust global liquidity and growth dynamics, with seemingly little fear of negative developments from the U.S. (the "core")

Especially considering the global prominence of speculation and derivative hedging strategies, I wouldn't rule out the possibility that the decline in U.S. and international bond yields is more "technical" in nature than a fundamental response to slowing growth, waning liquidity and quiescent inflation. Indeed, a decent case can be made that the highly liquid global backdrop (ongoing massive U.S. Current Account Deficits, along with aggressive global leveraged securities speculation banking on the Fed having wrapped up its "tightening" cycle) has again thrust a robust Inflationary Bias upon U.S. Treasury, agency, and MBS markets (forcing prices up and yields down). And with speculators and hedgers caught on the wrong side of bearish rate bets, one can assume that market dynamics have forced retrenchment in a number of similarly-minded speculations (certainly including the global "reflation trade"). Moreover, the good fortune so far enjoyed with respect to energy supplies - no gulf hurricanes, generally milder temperatures, some cooling of Middle East tensions and no move toward imminent confrontation with Iranian - only puts further pressure on speculators that had placed bets with inflation and potential commodities shortages in mind.

Whether recent market direction has been more technical than fundamental in nature deserves contemplation. As we have observed on a recurring basis for some years now, any indication of waning economic activity tends to be greeted by such an exaggerated response in the Credit markets (sinking rates) that the end result turns out to be fortuitous stimulation. Considering the poor state of U.S. housing markets, to what extent lower mortgage and market yields stimulate the U.S. Bubble Economy is very much an open question. But I will suggest that lower global yields will almost certainly add fuel to already strong economies abroad. I have no desire to go out on the limb with guesses as to what extent the bulls will be shaken out of their increasingly painful energy and commodities bets. But I remain very circumspect of notions of waning inflationary pressures in the U.S. or world economies.

How confident am I this evening in my analysis? Candidly, I look at an incredibly complex, fluid and dynamic global backdrop and suggest to readers that it is difficult these days to be confident in much of anything. If liquidity and market dynamics have again - as I suspect - assumed prominence throughout global markets, I'm forced to operate with the discomforting premise that it is basically impossible at this point to satisfactorily anticipate the scope and direction of Credit and speculative excesses, as well as attendant market direction and economic performance. I fear heightened Monetary Disorder and dynamics increasingly dictated by the "law of the jungle."

In hindsight, foreseeing the emergence of the Mortgage Finance Bubble from technology Bubble wreckage was not really that difficult of a call. Fed and U.S. Credit system responses were readily predictable. The same can be said for the expectation that, with continued Fed accommodation, the U.S. Credit Bubble would eventually evolve into a Global Credit Bubble. I do, however, have the sense that the analysis has now become decidedly more challenging and will become only more so.

The U.S. Credit Bubble has morphed into a global phenomenon, and the Fed certainly no longer controls the process. To what extent the mammoth U.S. Credit system is losing some command over global growth and inflation trends to the mighty conflux of overheated global Credit systems and markets is an issue worth pondering. Fed interest rate management did hold significant sway over previous commanding Inflationary Manifestations (notably, U.S. securities, real estate and general asset inflation). However, housing market and general system fragility now seemingly has monetary policy hamstrung and inoperative. Alarmingly, today's prominent Inflationary Manifestations - the Global Credit Bubble and Resurgent U.S. Income Inflation - are left to their own devices, with quite uncertain prospects and consequences.

Labor markets are a notoriously unwieldy animal to corral once let loose, and this one awhile ago slipped out the back when no one was paying attention. The Fed does apparently recognize expanding labor shortages and "sharp wage increases or wage pressures," including workers in information technology, finance, accounting, nursing and healthcare, trucking and transportation, engineering, oil services, and other "skilled positions." Pressures are clearly broad-based, while "salaries offered for positions that are difficult to fill have increased substantially."

To wrap this up, it is my view that ("inflation") expectations have changed rather dramatically. Workers in an increasing number of sectors, industries and skill levels (unlike the late-90's boom largely isolated within the tech industry!) have come to demand more pay, while businesses are able and increasingly willing (because of expectations for ongoing profit Inflation) to aptly accommodate. When it comes to "anchored inflation expectations," the Fed should pay less heed to Treasury yields and devote more attention to salary and Income trends. But, then again, I've seen no indication that the Fed appreciates the nature of, nor ramifications for, today's Income Inflation.