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The Dow gained 1.2% (up 5.3% y-t-d), and the S&P500 added 0.7% (up 5.3% y-t-d). The Morgan Stanley Cyclical index rose 1.5% (up 12.3%), while the Transports declined 1.6% (up 13.4%). The Morgan Stanley Consumer index added 0.5% (up 13.6% y-t-d), and the Utilities increased 0.9% (up 13.6%). The small cap Russell 2000 added 0.1% (up 5.3%), and the S&P400 Mid-Cap index gained 0.7% (up 10.2%). Technology stocks were strong. The NASDAQ100 gained 2.5% (up 7.6% y-t-d), and the Morgan Stanley High Tech index jumped 3.0% (up 5.7%). The Semiconductors rose 2.3%, increasing y-t-d gains to 6.6%. The Street.com Internet Index gained 3.1% (up 5.3%), and the NASDAQ Telecommunications index rose 1.2% (up 6.2%). The Biotechs increased 1.4%, increasing 2007 gains to 10.7%. The Broker/Dealers gained 1.4% (up 4.5% y-t-d), while the Banks dipped 0.2% (down 0.5%). With bullion declining $9.60, the HUI Gold index dropped 3.2%.

Two-year government yields were little changed at 4.65%. Five-year yields added 2 bps to 4.59%, and 10-year Treasury yields gained 2 bps to 4.69%. Long-bond yields rose 3 bps to 4.88%. The 2yr/10yr spread ended the week at a positive 4 bps. The implied yield on 3-month December '07 Eurodollars rose 5.5 bps to 5.07%. Benchmark Fannie Mae MBS yields increased 2 bps to 5.81%, this week trading in line with Treasuries. The spread on Fannie's 5 1/4% 2016 note widened 3 to 35, and the spread on Freddie's 5 1/2% 2016 note widened 3 to 35. The 10-year dollar swap spread increased 1.5 to 54.0. Corporate bonds spreads were largely unchanged.

Investment grade issuers included Merrill Lynch $1.4bn, JC Penney $1.0bn, Target $1.0bn, State Street $800 million, Lehman Brothers $750 million, State Street Boston $700 million, Regions Financing Trust $700 million, Estee Lauder $600 million, Liica Holdings $550 million, Martin Marietta Material $475 million, Everest RE $400 million, Kimco Realty $300 million, Toro $125 million and Fulton Financial $100 million.

Junk issuers included Clarke American $615 million, Outback Steakhouse $550 million, Longpoint RE $500 million, USI Holdings $400 million, Crum & Forster $330 million, Mariner Energy $300 million, and Mobile Mini $150 million.

This week's convert issuers included AMD $2.2bn and Charming Shoppes $250 million.

International issuers included Woori Bank $1.0bn, Petroplus Finance $1.1bn, BLT Finance $400 million, and China Properties $300 million.

April 27 - Financial Times (Gillian Tett): "This month a striking new statistic tumbled out of Europe's vast - but somewhat shadowy - leveraged loan sector. For the first time, banks account for less that half of activity in the primary leveraged finance market, according to Standard & Poor's... That compares to 90% at the start of the decade - and an even higher proportion in previous decades, when banks controlled the loan space in Europe. Part of this seismic shift reflects the rise of so-called collateralised loan obligation (CLO) vehicles, or portfolios of loan instruments run by asset managers and other financial institutions. However, the swing also reveals another important trend: the rising power of hedge funds."

Japanese 10-year "JGB" yields declined 6 bps to a 5-wk low 1.62%. The Nikkei 225 dipped 0.3% (up 1.0% y-t-d). German 10-year bund yields increased 1.5 bps to 4.22%. Emerging markets were mixed to lower this week. Brazil's benchmark dollar bond yields rose 6 bps this week to 5.55%. Brazil's Bovespa equities index dipped 0.4% (up 10.7% y-t-d). The Mexican Bolsa declined 1.5% (up 11.1% y-t-d). Mexico's 10-year $ yields added one basis point to 5.45%. Russia's RTS equities index declined 2.9% (down 0.3% y-t-d). India's Sensex equities index was about unchanged for the week (up 0.9% y-t-d). China's Shanghai Composite index surged another 4.9%, ending the week with a y-t-d gain of 40.5% and 52-week rise of 165%.

Freddie Mac posted 30-year fixed mortgage rates dipped one basis point to 6.16% (down 42bps y-o-y). Fifteen-year fixed rates declined 2 bps to 5.87% (down 34bps y-o-y). One-year adjustable rates fell 2 bps to 5.43% (down 2bps y-o-y). The Mortgage Bankers Association Purchase Applications Index rose 3.7% this week. Purchase Applications were up 5.7% from one year ago, with dollar volume 8.7% higher. Refi applications gained 3.6% for the week, and dollar volume was up 50.2% from a year earlier. The average new Purchase mortgage increased to $238,100 (up 2.9% y-o-y), while the average ARM slipped to $392,000 (up 16.3% y-o-y).

Bank Credit declined $6.7bn (week of 4/18) to $8.403 TN. For the week, Securities Credit declined $7.5bn. Loans & Leases added $0.8bn to $6.115 TN. C&I loans jumped $7.0bn, while Real Estate loans declined $6.8bn. Consumer loans added $0.5bn, while Securities loans fell $9.0bn. Other loans rose $9.2bn. On the liability side, (previous M3) Large Time Deposits increased $8.0bn.

M2 (narrow) "money" declined $14.1bn to $7.212 TN (week of 4/16). Narrow "money" has expanded $169bn y-t-d, or 7.8% annualized, and $434bn, or 6.4%, over the past year. For the week, Currency declined $1.0bn, and Demand & Checkable Deposits fell $36.4bn. Savings Deposits jumped $20.7bn, while Small Denominated Deposits slipped $0.4bn. Retail Money Fund assets gained $3.1bn.

Total Money Market Fund Assets (from Invest. Co Inst) declined $6.3bn last week to $2.435 TN. Money Fund Assets have increased $53bn y-t-d, a 6.8% rate, and $403bn over 52 weeks, or 19.8%.

Total Commercial Paper rose $10.4bn last week to $2.046 TN, with a y-t-d gain of $71.5bn (11.1% annualized). CP has increased $321bn, or 18.6%, over the past 52 weeks.

Asset-backed Securities (ABS) issuance rose somewhat to $13bn. Year-to-date total ABS issuance of $221bn (tallied by JPMorgan) is now running slightly ahead of comparable 2006. At $121bn, y-t-d Home Equity ABS issuance is about 25% below last year's pace. Year-to-date US CDO issuance of $111 billion is running 18% ahead of comparable 2006.

Fed Foreign Holdings of Treasury, Agency Debt gained $2.1bn last week (ended 4/25) to a record $1.918 TN, with a y-t-d gain of $166bn (29.0% annualized). "Custody" holdings expanded $314bn during the past year, or 19.6%. Federal Reserve Credit last week declined $1.2bn to $850bn (down $2.2bn y-t-d). Fed Credit was up $29.8bn y-o-y, or 3.6%.

International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $436bn y-t-d (28% annualized) and $911bn y-o-y (21%) to a record $5.247 TN.

April 27 - Bloomberg (Anoop Agrawal): "India's foreign-exchange reserves rose $789 million to $203.88 billion in the week...the central bank said."

Currency Watch:

April 27 - Bloomberg (Daniel Kruger): "The Federal Reserve's trade-weighted dollar index fell to the lowest since its inception in 1971 amid expectations the currency will extend a slide against the euro."

The dollar index slipped slightly to 81.35, trading at a record low against the euro. On the upside, the Indian rupee gained 1.7%, the Turkish lira 1.2%, the Israeli shekel 1.2%, the Swedish krona 1.1%, and the Romanian leu 1.1%. On the downside, the Bolivian boliviano declined 1.2%, the Thai baht 1.0%, the New Zealand dollar 0.7%, and the Japanese yen 0.7%.

Commodities Watch

For the week, Gold declined 1.4% to $681.95, and Silver fell 2.9% to $13.68. Copper declined 1.9%. June crude jumped $2.35 to an 8-month high $66.46. May gasoline surged 10.5% and June Natural Gas rose 4.2%. For the week, the CRB index added 0.7% (up 2.3% y-t-d), and the Goldman Sachs Commodities Index (GSCI) jumped 2.3% (up 10.1% y-t-d).

Japan Watch:

April 25 - Bloomberg (Lily Nonomiya): "Japan's trade surplus widened to a record in March, buoyed by a weaker yen and exports to China, which replaced the U.S. as the nation's largest trading partner. The surplus rose 74 percent to 1.633 trillion yen ($14bn) from a year earlier..."

April 26 - Financial Times (Michiyo Nakamoto): "China has officially displaced the US as Japan's largest trading partner... Trade with China soared in the fiscal year ended last month, with Japanese ex-ports growing 21% to Y1,300bn ($95bn), almost double the growth of exports to the US. The record China figure reflected high demand for Japanese manufacturing inputs and greater shipments of finished products. Japan posted a surplus with China for the first time since 2004, although its imports from China rose 13% to an all-time high."

China Watch:

April 23 - Dow Jones (J.R. Wu): "Underpinned by domestic demand and external trade, China's economy is expected to grow around 10.9% this year, accelerating from 2006, according to a well-known domestic think tank."

April 27 - Bloomberg (Chia-Peck Wong): "China Citic Bank Corp. shares almost doubled on their first day of trading in Shanghai after the company raised $5.4 billion in the world's biggest initial public offering this year."

April 25 - Bloomberg (Simeon Bennett): "Tobacco-related diseases may kill a third of middle-aged men by 2030 in China, where smoking habits resemble those of America in the 1950s, researchers found. Cigarette consumption in the world's most populous nation lags 40 years behind the U.S., where about 33 percent of adults aged 35 to 69 died of tobacco-related causes... China has 350 million smokers, equivalent to the population of Russia, Germany and Japan."

April 25 - Bloomberg (Feiwen Rong): "China, the world's largest iron ore buyer, may boost imports as much as 20% this year as demand rises, the head of the China Metallurgical Mining Enterprise Association said, doubling a forecast from December."

April 24 - Bloomberg (Irene Shen): "China Southern Airlines Co., the nation's largest airline, and other Chinese carriers flew 16% more passengers in the first quarter as economic growth boosted travel demand... Cargo volume rose 13% from a year earlier to 858,000 tons."

April 23 - Bloomberg (Josephine Lau): "China's insurance premiums rose 22.7% in the first three months of 2007..."

Asia Boom Watch:

April 23 - Bloomberg (Theresa Tang): "Taiwan's jobless rate held close to a six-year low in March as service companies and agricultural businesses added workers. The...rate was unchanged at 3.9%..."

April 25 - Bloomberg (Yu-huay Sun): "China's missiles may not be the biggest danger to Taiwan. An impending power shortage could cause blackouts within three years and weaken the nation's economy. Power production is failing to keep pace with demand because of a ban on new nuclear plants and delays in completing projects already underway..."

April 23 - Bloomberg (Jean Chua): "Wendy Koh, director of research at Citigroup Global Markets in Singapore, said the lack of supply in Singapore's residential and commercial markets will continue to push prices and rents higher."

Unbalanced Global Economy Watch:

April 23 - Bloomberg (Brian Swint): "Annual growth in M4, the broadest measure of U.K. money supply, accelerated in March, adding to evidence that inflationary pressures are building... M4...rose 12.9% from a year earlier..."

April 25 - Bloomberg (Gabi Thesing): "German business confidence rose to the second-highest level on record in April, indicating growth in Europe's largest economy may accelerate."

April 26 - Bloomberg (Sandrine Rastello): "French business confidence unexpectedly rose to the highest in six years, aided by faster growth in Europe."

April 26 - Bloomberg (Helene Fouquet): "French unemployment fell more than forecast in March, cutting the jobless rate to the lowest in almost 24 years... The jobless rate fell to 8.3%..."

April 26 - Bloomberg (Christian Wienberg): "Denmark's jobless rate stayed at a 33-year low of 3.9% in March..."

April 27 - Bloomberg (Jonas Bergman): "Swedish retail sales growth accelerated to 9.5% in March as declining unemployment, tax cuts and warm weather propelled consumer spending in the largest Nordic economy."

April 26 - Bloomberg (Robin Wigglesworth): "Norway's jobless rate fell to 2% in April, the lowest since June 1988, fueling concern that a labor shortage will push up wages and add to pressure on the central bank to raise borrowing costs."

April 26 - Bloomberg (Lucian Kim): "Russia needs to invest 12 trillion rubles ($467bn) in new power generation by 2020, President Vladimir Putin said. 'We're talking about the second, massive electrification of the country,' Putin said in his annual state of the nation speech..."

April 25 - Bloomberg (Nasreen Seria): "South African inflation accelerated to an annual 5.5% in March, the highest since August 2003, as gasoline and food costs gained. The CPIX inflation rate, which excludes mortgage costs, rose from 4.9% in February..."

Latin American Boom Watch:

April 25 - Bloomberg (Eliana Raszewski): "Argentina's central bank raised its forecast for economic growth this year to about 8% from a previous...7.4%..."

Central Banker Watch:

April 26 - Financial Times (Chris Giles, Gillian Tett, Richard Beales, and Chrystia Freeland): "A surge in cheap corporate lending with looser credit standards 'has increased the vulnerability of the [global financial] system', the Bank of England will warn today in its strongest comments to date on financial stability. The Bank also cautions against weakening standards of risk assessment when bank loans are repackaged and resold to new investors, such as pension and hedge funds. In its twice-yearly financial stability review, it says the recent turmoil in the US subprime mortgage market illustrates a problem that original lenders, which sold off the default risk, often allowed their standards to slip. 'Similar problems in a more significant market, such as corporate credit, could have more serious consequences if credit quality were to deteriorate...'"

April 26 - Bloomberg (Tracy Withers): "New Zealand's central bank raised the benchmark interest rate to a record 7.75%, the second- highest after Iceland among AAA-rated nations, saying housing demand and consumer spending may fan inflation. 'The resurgence in economic activity has continued, with domestic demand continuing to expand strongly,' Reserve Bank Governor Alan Bollard said..."

Bubble Economy Watch:

April 25 - Reuters (Mark Felsenthal): "U.S. tax receipts from individuals hit a record one-day high of $48.7 billion on April 24... The previous record was $36.4 billion, set on April 25, 2006... The record reflects taxes not withheld from individuals over the course of the year, but paid to the government before this year's April 17 income-tax deadline. While some of those tax payments come from taxpayers who withheld less tax from their paychecks than they owed, much of it was owed on income from investments or profits.

'This reflects the fact that Americans in high-income brackets had a very good year in 2006,' said Lou Crandall, chief economist at Wrightson ICAP..."

April 25 - Bloomberg (Martin Z. Braun and Henry Goldman): "New York City's budget surplus is projected to grow to $4.4 billion, $500 million more than city officials forecast just three months ago, as Wall Street bonuses and rising property values boost tax revenue..."

Financial Sphere Bubble Watch:

April 26 - Financial Times (Richard Beales and Chrystia Freeland): "Lenders to highly indebted companies are making many of the same mistakes that undermined the US subprime mortgage market, suggesting that leveraged loans will become 'tomorrow's problem", says the chief executive of BlackRock, the $1,000bn-plus fund management group. The comments from Larry Fink highlight the rising debt levels, falling risk premiums and loosening standards in loans made to leveraged buy-out vehicles and other junk-rated groups. 'If I was the chairman of the Federal Reserve, I'd be paying more attention to that because, to me, this is going to be tomorrow's problem," Mr Fink said... 'Standards have deteriorated to levels that we never even dreamed that we would see.' His comments coincided with a warning on Wednesday from the Bank of England, which said that the surge in cheap corporate lending, combined with looser credit standards, 'has increased the vulnerability of the [global financial] system'."

Mortgage Finance Bubble Watch:

April 25 - Bloomberg (Jody Shenn): "Freddie Mac, the second-largest source of money for U.S. home loans, said its $714.5 billion portfolio of mortgage assets last month surpassed the size of rival Fannie Mae's holdings for the first time."

April 25 - Market News International (Margaret Chadbourn): "House Financial Services Chairman Barney Frank said...the committee could mark up a bill to reform the Federal Housing Administration and help troubled subprime borrowers sometime next week. 'FHA in particular, if done right, this could be one of the best answers going forward for subprime,' Frank told reporters..."

April 25 - Bloomberg (Bob Ivry): "Cheating on mortgage applications is so widespread and so seldom punished that it's fueling an increase in foreclosures that will prolong the housing slump, said Robert W. Russell, counsel to the director of the Office of Thrift Supervision... Borrowers and brokers commit fraud when they exaggerate the applicant's income, qualifying the borrower for a home he otherwise couldn't afford. 'Misstatements about employment and income are being made every day. The brokers are just putting down on paper what the underwriters would require. There are borrowers providing false information as well.'"

April 23 - Bloomberg (Jody Shenn): "Moody's...said losses on subprime mortgages made last year will be worse than it had previously forecast. Moody's expects cumulative losses of 6% to 8% of the loan principal, up from 5.5% to 6% it had previously forecast..."

April 23 - Dow Jones (Brian Blackstone): "Housing equity served as a growing source of funds for U.S. consumer spending between 2001 and 2005, financing close to 3% of total personal consumption expenditures, according to a paper co-authored by former Fed... Chairman Alan Greenspan. In the paper, posted on the Fed's Web site...Greenspan and Fed Economist James Kennedy estimate that between 1991 and 2005, equity extracted through home sales, home equity loans and cash-out refinancings freed up about $530 billion per year in cash available for other uses, such as consumption and debt repayment... Between 1991 and 2005, home equity extraction directly financed about $66 billion per year of consumer spending...and $115 billion per year when the indirect effect of non-mortgage debt repayments, mostly credit cards, is included."

Foreclosure Watch:

April 25 - Bloomberg (Bob Ivry): "Late payments on subprime mortgages drove up U.S. foreclosure filings in the first quarter of 2007 by more than a third over the same period last year, according to...RealtyTrac Inc. Almost 437,500 foreclosure filings were reported, a jump of 35% from the first three months of 2006... 'We estimate that more than 50% of the foreclosure activity we charted in the first quarter was from subprime loans,' RealtyTrac Chief Executive Officer James Saccacio said..."


April 24 - Bloomberg (Mark Pittman): "Bond investors who financed the U.S. housing boom are starting to pay the price for slumping home values and record delinquencies in subprime loans. They will lose as much as $75 billion on securities made up of millions of mortgages to people with poor credit, says Pacific Investment Management Co..."

April 25 - Bloomberg (Jody Shenn): "Standard & Poor's more than doubled the number of its downgrade warnings on bonds created last year out of so-called Alt A mortgages, and quintupled the number of such securities from 2005 on its 'watch list.' S&P...said it's making the moves today amid higher-than-anticipated delinquencies."

Real Estate Bubbles Watch:

April 25 - Bloomberg (Sharon L. Crenson): "Parking your $115,000 Maserati in Manhattan will soon be a snap. A luxury tower planned for 11th Avenue features an elevator that lifts cars to the apartment owner's floor, where they can be parked near the entry door. The cost for 4,000 square feet: as much as $16 million. 'It's a crazy idea, but we thought it was a good idea,' says Young Woo, a principal of the tower's builder... 'Living in this kind of unit gives a sense of pride.' The wealthy have never dwelt so well. Donald Trump, Miki Naftali and developers worldwide are ratcheting up the amenities, adding the use of BMWs and 24-hour restaurant service to their buildings. That's fueling a surge in luxury apartment prices in New York and London..."

April 26 - New York Times (Alex Tarquinio): "An unusual land rush is stirring in Midtown Manhattan: many companies are signing long-term leases for much more office space than they need. Brokers refer to this as 'land banking' space. It is a term that has not been heard much around Midtown in years. But land banking has come back into vogue in the last six months, said Mitchell Konsker, an executive...at Cushman & Wakefield. Mr. Konsker said this made him a bit nervous, because 'after the last time I saw this, in 2000 and 2001, there was a bust in the market.' Back then, Internet start-ups and investment banks did most of the land banking in a narrow swath of Lower Manhattan. Now the trend has hit Midtown, where the office market is stretched especially thin... The vacancy rate in Midtown fell to 5.3 percent in the first quarter of 2007, from 7.8 percent a year earlier... What's more, few new office buildings are planned for Midtown in the next five years, so some executives are worried about becoming 'landlocked' in their buildings. They are also scrambling to lock in rents at today's prices. Average rents for Class A offices, the highest quality space, in Midtown Manhattan hit $70 a square foot in the first quarter, but Cushman & Wakefield forecasts that rents could rise to $75 or $80 a square foot by the end of the year."

April 25 - Bloomberg (Terrence Dopp): "Frank Sinatra and Marlon Brando helped make Hoboken, New Jersey, famous. Now designer Michael Graves and builder Robert Toll are making the waterfront town across the Hudson River from Lower Manhattan a haven for the rich and famous. Hoboken, a city with working-class roots, long served as a refuge of junior Wall Street analysts. Its newer residents include Governor Jon Corzine and New York Giants quarterback Eli Manning, as builders convert apartments into luxury condominiums with fitness clubs, doormen and shuttles to New York City-bound trains and ferries."

M&A and Private-Equity Bubble Watch:

April 23 - Bloomberg (Christine Harper): "Goldman Sachs Group Inc., Wall Street's most profitable securities firm, raised $20 billion for its sixth leveraged-buyout fund, rivaling Blackstone Group LP's plan to create the largest pool of private-equity capital. The new GS Capital Partners fund took in more than double the $8.5 billion Goldman raised for its fifth fund in 2005... The new fund includes $11 billion from institutional clients and wealthy individuals and $9 billion from Goldman and its employees -- more than triple the $2.5 billion contributed by the firm for the last fund."

April 27 - Financial Times (James Politi): "Warburg Pincus, the US private equity group, aims to raise as much as $15bn for its biggest fund ever, demonstrating its belief in the resilience of the global buy-out boom. The massive fundraising exercise by Warburg, which is expected to be launched within the next two months, also highlights how ravenous the appetite for buy-out investing continues to be among the largest pension funds and endowments. Warburg is nearly doubling the size of its current global fund..."

April 25 - New York Times (Mark Landler): "Most years, the United States handily beats Europe for bragging rights in deal making, based on the total value of mergers and acquisitions. But this year, Europe is pulling ahead. The current takeover battle in banking, the biggest in the industry's history, is just the latest sign of the growing deal frenzy on the Continent."

Energy Boom and Crude Liquidity Watch:

April 26 - Associated Press (Jim Krane): "A handful of state-owned Gulf companies are picking up the pace of overseas buying activity, focusing on high-profile companies like Dow Chemical in a search for sound investments in which to place profits from high oil prices. Investment by Gulf countries in the United States appears to have picked up after a chill last year... After saturating their home market with about $1 trillion in project investments, state-owned companies in the United Arab Emirates, Saudi Arabia, Kuwait and Qatar have increasingly looked overseas for companies and trophy real estate to acquire."

Speculator Watch:

April 24 - Financial Times (James Mackintosh): "The combined earnings of the world's top 25 hedge fund managers of more than $14bn exceeded the national income of Jordan last year and three individuals took home more than $1bn... The survey by Alpha Magazine put Jim Simons of Renaissance Technologies on earnings of $1.7bn, Ken Griffin of Citadel Investment Group on $1.4bn and Eddie Lampert of ESL Investments on $1.3bn... The earnings reflect record investment into hedge funds, with the money increasingly flowing into the biggest managers as institutional investors such as pension funds begin to put cash into the industry."

April 26 - Financial Times (Gillian Tett): "American hedge funds and other non-bank credit investment groups now hold just over 50% of all lending to risky European companies - pushing banks into a minority role in this sector for the first time. This marks a dramatic contrast with the picture seen at the start of this decade, when banks accounted for 95% of leveraged lending, or loans made to companies with a credit rating below investment grade. The shift has largely occurred in the past couple of years. As recently as 2005, banks represented three quarters of the market... In the year to March 2007, however, their share was 49.8%. The trend highlights in an unusually stark manner how hedge funds and other non-bank investors are muscling into territory traditionally dominated by banks. Consequently, it may provoke new questions about the ability of policymakers to monitor borrowing trends, given that hedge funds are generally unregulated."


April 25 - Market News International: "Current macroeconomic conditions in the big industrial economies are gradually helping to reduce global imbalances, the Bank of England states in its latest Financial Stability Report. 'Macroeconomic conditions in advanced economies have been moving gradually to reduce global imbalances', the bank says. The BOE says increased domestic demand and investment in the euro zone and in Japan are serving to unwind the imbalances. In addition, 'Global adjustment may also be facilitated by the depreciation of the US dollar against the euro over the period since the July 2006 Report.'"

With the global economy robust and securities markets remaining exceptionally strong, apparently even the Bank of England has let its guard down. Clearly, over-liquefied global markets have become increasingly accepting of the view that U.S. and global imbalances can actually be rectified predominantly by strengthening non-American demand. I'm just a little astounded that a respected central bank would examine the current backdrop and succumb to such wishful thinking.

When it comes to global imbalances, perceptions today differ greatly from reality. The optimists look to booming exports and relatively stable U.S. trade deficits as encouraging signs. But the massive U.S. current account deficit will again this year spurn meaningful improvement. Years of dollar weakness may have finally, if only at the margin, helped to stabilize our trade position. They have also given rise to heightened speculative flows seeking profits from the allure of stronger foreign currencies and inflating global securities markets. The bottom line is that total U.S. "Bubble dollar" flows to the world - the most destabilizing global imbalance - will further worsen this year. Attempts to rectify U.S. Credit Bubble excesses through a global inflation will fail miserably.

Those discerning hopeful signs from moderating U.S. growth are being beguiled. It would be a positive development if only slower growth was a consequence of more restrained financial system excess. Instead, we are well on our way to another record year of total system (non-financial and financial) Credit creation. Unfortunately, any moderation in mortgage Credit is being more than offset by excesses in corporate, M&A-related, and securities-based Credit excess. Of course, inflating markets will fashion participants with rose colored glasses, but a less distorted perspective would ponder the reality (and future ramifications) that enormous ongoing financial excesses these days engender such unimpressive U.S. economic results.

It is worth noting that preliminary first quarter nominal GDP growth was reported this morning at 5.3% (real at 1.3%). This was up from the fourth quarter's 4.1% and the third quarter's 3.8%, but down from the year-earlier 9.0%. Inflation was apparently (we'll wait for revisions) responsible for the vast majority of nominal growth. The GDP price index surged to 4.0% during the quarter (strongest quarterly gain in 16 years), up sharply from Q4's 1.7%. This report was notable for quashing the view of sub-3% nominal GDP and bolstering the case for the dreaded combo of a weakening output and rising price pressures. But I would expect Q2 (and perhaps Q1 revisions) to show somewhat stronger real growth.

Despite the dramatic tightening in subprime, it appears mortgage debt growth is plugging along at a decent clip. This past week, for example, saw total mortgage purchase dollar volume up 8.7% from the year ago level (refi volume up 50%). Clearly, Credit remains readily available at inexpensive terms for the vast number of qualified borrowers - despite what should have been at least somewhat of a (subprime) blow to the entire mortgage industry.

I have not addressed Fannie Mae and Freddie Mac for awhile. Not that they weren't ongoing major Credit market operators, though their respective problems had them in fairly tight straightjackets. After expanding their Retained (held on balance sheets) Portfolios $243bn in 2003 (19%), growth slowed abruptly to $17bn (1%) after problems began surfacing in 2004. And on the back of Fannie's $177bn (20%) contraction, combined Fannie and Freddie Retained Portfolios actually shrunk $161bn (10%) to end 2005 at $1.438 TN. One would have normally expected such a contraction to have at least some impact on market liquidity. But with real interest rates atypically low and a massive unfolding Credit expansion throughout "Wall Street" finance, marketplace liquidity wasn't impacted at all.

It certainly didn't hurt that Fannie and Freddie's MBS guarantee business kept right on expanding ("insurance" that provides "money"-like MBS top ratings and market liquidity). Despite contracting Retained Portfolios, their combined "Books of Business" (retained mortgage/MBS and outstanding MBS guarantees) expanded $227bn (6.3%) during 2004 to $4.00 TN. Growth slowed further in 2005 to $166bn (4.3%), a market non-event because of the marketplaces' newfound insatiable demand for (higher-yielding) non-agency securitizations. Last year, however, robust growth returned, with combined "Book of Business" (BofB) growth of $352bn to $4.78 TN. Fannie's Book of Business last year grew $202bn, or 8.7%, and Freddie's $143bn, or 8.5%. When Wall Street investment bankers watched the subprime implosion, they at least had confidence that the dauntless GSEs were ready for (big) business.

Well, looking at March data, Fannie and Freddie's combined BofB jumped $55.3bn, or 15%, annualized. This was the strongest monthly increase since October 2003. This places y-t-d BofB growth at $123bn, or 11.3% annualized. Or, in nominal dollars, Fannie and Freddie are, after three months, on pace to increase their BofB about $500 billion (a majority of household mortgage debt growth). And, at this pace, BofB will approach $5.0 TN about this time next year.

Going back to at least 1994, the GSEs have on occasion played the crucial role of "buyers of first and last resort" in the MBS market, in the process operating as (central bank-like) liquidity creators during periods of financial turbulence and speculator deleveraging. Today, it appears that significantly tightened regulatory oversight (including Fed scrutiny) has restricted the ability to aggressively expand their balance sheets - thus limiting their capacity to directly create market liquidity. I've always assumed that the Fed and others' belated recognition that the GSEs were creating Credit and liquidity was an important facet of efforts to restrain their balance sheet growth. If the concern was really potential taxpayer liability, there would have been some protest directed at the past two years' $650bn BofB increase. It's clearly not an opportune time to aggressively expand mortgage exposure, although the market would be in quick trouble if they didn't.

Regarding the recent subprime implosion, it developed into an isolated liquidity event. Market yields quickly pushed lower, supporting MBS prices generally (certainly helping to offset some spread general mortgage widening). The key development was an abrupt shift in market preference away from riskier mortgage paper to agency guaranteed MBS. Capital constraints and Credit Cycle risks notwithstanding - the GSE, at least in March, were willing to step up, write tens of billions of guarantees, and buttress the U.S. mortgage market.

This week, House Financial Services Chairman Barney Frank stated that the "FHA in particular, if done right...could be one of the best answers going forward for subprime." Between Fannie, Freddie, the FHLB system, and the FHA, it appears the government will over the coming years take on an only greater role in our already largely "nationalized" system of mortgage finance. I can certainly understand why 10-year Treasury yields have reversed their inversion and now trade at a small premium to 2-year notes. It is certainly possible that we'll see trillion dollar deficits within the next decade.

Yet it's like déjà vu all over again. The duo of Art Laffer and Larry Kudlow were yesterday trumpeting tax cuts as the reason behind record stock prices, booming corporate profits, and surging federal government receipts. Mr. Laffer tells us the deficit is now essentially balanced and things will only get better from here. Did these two sleep through the technology bust and the abrupt reversal of "surpluses as far as the eye can see" to huge record deficits? For a time, I thought we had learnt a lesson regarding the seductive danger of boom-time receipt bulges. But there is nothing like a major inflation to ensure that lessons are unlearnt.

And this week the Wall Street Journal's Paul Gigot interviewed Mr. Laffer extensively on Fox's "The Journal Editorial Report", while the Financial Times went with Jeremy Siegel's op-ed "Presenting the Bullish Case for Equity Valuations." We've clearly entered one of these perilous Euphoric periods where common sense and reasonable analysis/judgment are lost in the fog easy "money".

Today's financial Euphoria is Unique. It involves asset price bullishness generally and globally. It is an especially emboldened Euphoria, nurtured from repeatedly overcoming various types of market and economic adversity. It is a Euphoria built upon the resounding confidence in the power of new technologies and the resiliency of contemporary economies. It is a Euphoria underpinned by extreme confidence in the competence and capabilities of the Federal Reserve and global central bankers. It is a Euphoria bolstered by the faith in contemporary finance and the capacity to effectively recognize, quantify and manage risk.

Today's financial Mania is also Unique. You don't see individual Americans flocking to speculate in the stock market. There's no discernable manic crowd behavior akin to what we've read in financial history books. The stock market rises, yet there's nothing too crazy (Internet-like) with respect to the nature of trading or outward excesses. And stock market gains aren't all too outrageous, while increasingly outrageous home price inflation has largely settled down.

I'll wrap up this rather uninspiring Bulletin this evening with a proposition for the pondering: What makes this period Unique and especially dangerous is that the current Mania is in sophisticated private Credit instruments, most having little or no transparency and issued outside the traditional purview of central bankers and financial regulators. Unprecedented gains in financial wealth come not predominantly from stock or asset prices shooting openly (and "vertically") to the moon. Instead, the Mania Unique to this extraordinary phase of "Financial Arbitrage Capitalism" involves the enormous (and highly concentrated) accumulation of "small" spread profits on tens of Trillions of "dollars" of highly leveraged "structured" Credit instruments (expanding insidiously and "horizontally"). Pricing isn't a critical issue and they don't even have to trade, as gains are accumulated with the receipt of "payment in kind" spread profits through the issuance of only more debt instruments.

The heart and soul of this Credit Mania is Uniquely electronic and largely "over-the-counter". It is operated chiefly by the powerful international "banks"/securities firms, largely to the betterment of themselves and a relatively select group of clients. It remains invisible to most. I'm not saying this is some conspiracy, and I certainly don't want to imply that it is operated with malice intent. I'm just suggesting to think in terms of a Unique Mania that has evolved over years and under extraordinary circumstances to the point of becoming deeply entrenched. Today, it's incredibly powerful but at the same time supported by increasingly fragile underpinnings. For one thing, the associated financial flows are becoming increasingly unwieldy and its "reserve" currency an accident in the making. We should expect its eventual unraveling to be similarly exceptional. In the meantime, this Mania is an imbalance exacerbating and "currency"-debasing behemoth. And that concludes my bout of "defiance" for this week.


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