03/10/2006 Q4 2005 Flow of Funds *

The highflyers took it on the chin at home and abroad… For the week, the Dow added 0.5%, while the S&P500 slipped 0.4%. The Transports declined 1%, and the Utilities were hit for 2.4%. The Morgan Stanley Cyclical index lost 0.9%, while the Morgan Stanley Consumer index added 0.9%. The small cap Russell 2000 declined 1.6%, reducing y-t-d gains to 7.9%. The S&P400 Mid-cap index fell 1.9%. Technology stocks were under pressure. The NASDAQ100 fell 2%, and the Morgan Stanley High Tech index lost 2.4%. The Semiconductors were hit for 6.6%, reducing 2006 gains to 4.8%. The Street.com Internet Index dipped 0.6%, and the NASDAQ Telecommunications index slipped 0.5% (up 15.4% y-t-d). The Biotechs dropped 3%. Financial stocks were mixed. The hot Broker/Dealers cooled 3.3% (up 11.1% y-t-d), while the Banks added 0.4%. With bullion sinking $24.35, the HUI gold index dropped 8.3%. Yield curve speculators had their hands full… For the week, two-year US Treasury yields dipped 1.5 bps to 4.73%. Five-year government yields rose 6 bps to 4.77%, and bellwether 10-year Treasury yields jumped 8 bps to 4.76%. Long-bond yields rose 9 bps to 4.75%. The 2yr/10yr curve steepened about 9 bps this week, leaving the spread between 2 and 10-year yields at a positive 3 bps. Benchmark Fannie Mae MBS yields rose 4 bps to 5.93%, this week nicely outperforming Treasuries. The spread on Fannie’s 4 5/8% 2014 note was little changed at 34.5, and the spread on Freddie’s 5% 2014 note was about unchanged at 36. The 10-year dollar swap spread declined one to 53.75. Investment-grade spreads narrowed slightly and junk spreads narrowed moderately. The implied yield on 3-month December ’06 Eurodollars rose 4 bps to 5.195%.           Investment grade issuers included Wachovia $3.0 billion, DaimlerChrysler $2.5 billion, Honeywell $1.25 billion, Nissan Motors $1.0 billion, Caterpillar $500 million, Con Edison $400 million, Kimco $300 million, Dun & Bradstreet $300 million, Anheuser Busch $300 million, Nationwide Life $250 million, and Equity One $125 million.  March 7 – Moody’s: “The slack pace of bond defaults globally sent corporate default rates to near record lows in February, Moody’s Investors Service reported… Moody’s global speculative-grade default rate fell to 1.6% in February from 1.8% in January, its lowest level since 1997. Following the global trend, Moody’s European speculative-grade default rate dropped to 0% in February.” Junk issuers included Alliant Techsystems $400 million, Level 3 $400 million, Levi Strauss $350 million, and Serena Software $200 million. Convertible issuance is heating up. This week issuers included Informatica $200 million, Coherent $175 million, and Albany International $150 million.   Foreign dollar debt issuers included Vodafone $1.85 billion, Penerbangan Malaysia $1.0 billion, Commercial Bank of Australia $700 million and Korea Midland Power $200 million.  March 9 – Financial Times (Steve Johnson): “Cash-laden Asian and Middle Eastern central banks are poised to invest billions of dollars in emerging market debt, says Jerome Booth, head of research at London-based Ashmore Investment Management. Mr Booth counts a number of central banks among his clients at Ashmore, which manages $18bn in emerging market funds. He believes several banks are about to invest heavily in developing nations in order to raise returns and diversify away from the dollar. ‘We have central banks as clients, and we know they are going to put billions of dollars into emerging market debt. They are starting from zero…This is predominantly coming out of Asia and the Middle East. That is where the excess reserves are.’” Japanese 10-year JGB yields rose 3 bps this week to 1.65%, as the Nikkei 225 index rose 3% (unchanged y-t-d).  The darling emerging debt and equity markets were under selling pressure this week. Brazil’s benchmark dollar bond yields rose 21 bps to 6.51%. Brazil’s Bovespa equity index dropped 6% (up 10.3% y-t-d). The Mexican Bolsa declined 4%, with y-t-d gains falling to 3.5%. Mexico's 10-year govt. yields jumped 17 bps to 5.78%. Russian 10-year dollar Eurobond yields rose 5 bps to 6.72%.  The Russian RTS equity index sank 8%, reducing 2006 gains to 20%. India’s Sensex equity index rose 1.6% this week to a new record (up 14.5% y-t-d). Freddie Mac posted 30-year fixed mortgage rates jumped 13 bps to 6.37%, up 52 basis points from one year ago. Fifteen-year fixed mortgage rates rose 11 bps to 6.00% (up 62 bps in a year), to the highest level since June 2002. One-year adjustable rates increased 11 bps to 5.45%, an increase of 121 basis points from one year ago to the highest level since September 2001. The Mortgage Bankers Association Purchase Applications Index dipped 0.4% last week. Purchase Applications were down 11.8% from one year ago, with dollar volume declining 6.4%.   Refi applications were up 2.6%. The average new Purchase mortgage increased to $234,100, and the average ARM jumped to $348,200. Broad money supply (M3) jumped $28.3 billion to a record $10.361 Trillion (week of Feb. 27). Year-to-date, M3 has expanded $150.9 billion, or 8.5% annualized. Over 52 weeks, M3 inflated $823 billion, or 8.6%. For the week, Currency added $0.6 billion. Demand & Checkable Deposits gained $11.2 billion. Savings Deposits fell $13.4 billion, while Small Denominated Deposits added $3.5 billion. Retail Money Fund deposits increased $5.4 billion, and Institutional Money Fund deposits surged $23.1 billion (up 9.3% annualized y-t-d). Large Denominated Deposits dipped $0.9 billion. Over the past 52 weeks, Large Time Deposits were up $257 billion, or 22.2%. For the week, Repurchase Agreements dropped $6.7 billion. Eurodollar deposits rose $5.5 billion.      Bank Credit expanded $24.1 billion last week to a record $7.661 Trillion, with a y-t-d gain of $155 billion, or 11.9% annualized. Over the past year, Bank Credit inflated $687 billion, or 9.8%. For the week, Securities Credit jumped $15.7 billion. Loans & Leases were up 11.8% over the past 52 weeks, with Commercial & Industrial (C&I) Loans up 15.2%. For the week, C&I loans added $0.6 billion, while Real Estate loans declined $4.1 billion. Real Estate loans have expanded at a 9.9% rate y-t-d and were up 12.8% during the past 52 weeks. For the week, Consumer loans jumped $14.3 billion, while Securities loans declined $4.8 billion. Other loans added $2.4 billion.   Total Commercial Paper declined $7.6 billion last week to $1.696 Trillion. Total CP is up $47.3 billion y-t-d (10wks), or 14.9% annualized, while having expanded $252 billion over the past 52 weeks (17.4%). Last week, Financial Sector CP borrowings declined $5.6 billion to $1.560 Trillion (up $51.7bn y-t-d), with a 52-week gain of $256 billion, or 19.7%. Non-financial CP dipped $2.0 billion to $136.5 billion, with a 52-week decline of 3.1%.  Total asset-backed securities (ABS) issuance slowed to $12 billion (from JPMorgan), with Home Equity Loan (HEL) ABS issuance at $10 billion this week. Year-to-date total ABS issuance of $139 billion is 12% ahead of 2005’s record pace, with the $95 billion y-t-d HEL issuance running 20% above last year. Fed Foreign Holdings of Treasury, Agency Debt (“US marketable securities held by the NY Fed in custody for foreign official and international accounts”) jumped $11.9 billion to a record $1.560 Trillion for the week ended March 8. “Custody” holdings are up $72.6 billion y-t-d, or 24.9% annualized, and $211.4 billion (15.3%) over the past 52 weeks. Federal Reserve Credit declined $5.4 billion last week. Fed Credit has declined $11.0 billion y-t-d, or 6.9% annualized, to $815.4 billion. Fed Credit expanded 4.9% during the past year.  International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi – were up $457 billion, or 12.2%, over the past 12 months to a record $4.203 Trillion.   March 8 – Bloomberg (Yanping Li): “China’s foreign-exchange reserves rose $26.8 billion in January to reach $845 billion, Great Wall Securities said in a research note published in the official China Securities Journal, citing central bank data.” March 9 – Financial Times (Ralph Atkins): “Asian countries’ rapid and ‘unprecedented’ accumulation of foreign reserves is heightening the dangers of inflation and asset bubbles, the European Central Bank has warned. World foreign exchange reserves have tripled in the past decade to more than $4,000bn last year, with the rate of increase accelerating in the past few years. As a result, a series of ‘risks and costs’ could materialize, with implications for the global economy, the ECB concluded…” Currency Watch: The dollar index rose 1.4% this week. Last year's strong currencies were among this week’s biggest losers. On the downside, the Iceland krona fell 6.3%, the New Zealand dollar 3.6%, the Polish zloty 3.3%, the Canadian dollar 2.3%, and the Japanese yen 2.2%.    Commodities Watch: March 8 – Bloomberg (Danielle Rossingh): “Global sugar production will fall short of demand this year by twice as much as initially expected, the International Sugar Organization said, citing declining stockpiles and growing demand in Russia. The shortfall will be 2.225 million metric tons in 2005/06, the London-based ISO said in a report late yesterday…” Commodities were generally under heavy liquidation. April crude oil sank $3.71 to $59.96. April Unleaded Gasoline fell 3%, while April Natural Gas declined 2%. For the week, the CRB index dropped 3.6% (y-t-d down 3.7%). The Goldman Sachs Commodities index fell 3.7% this week, extending the 2006 decline to 4.1%.  Japan Watch: March 8 – Bloomberg (Lily Nonomiya): “Japan’s banks increased lending for the first time in more than nine years, adding to evidence that growth in the world’s second-biggest economy will end deflation. Loans rose 0.2 percent in February from a year earlier, the Bank of Japan said… The value of loans has fallen by more than a fifth since the central bank started tracking the figure in 1991.” March 6 – Bloomberg (Lily Nonomiya): “Japanese companies increased capital spending for the eleventh quarter, signaling corporate expansion will help sustain growth in the world’s second-largest economy. Capital spending including software rose 9.5 percent in the fourth quarter from a year earlier…” March 9 – Bloomberg (Kathleen Chu): “Office vacancies in Tokyo fell last month to their lowest since October 2001, as demand continues to outstrip supply, according to a report by real estate broker Miki Shoji Co. The vacancy rate in Tokyo’s five main business districts…declined for the eighth straight month to 3.67 percent…” China Watch: March 8 – China Knowledge: “According to the results of a survey conducted by Manpower, an international human resource solution provider, 24% of the companies in China and more than 40% of the companies worldwide are facing a talent shortage, as reported by China Business News.” March 7 – China Knowledge: “According to the latest statistics released by the Hong Kong government, Hong Kong's retail sales reached HK$21.2 billion in January, up 11.6% compared with the same period in 2005…” March 6 – Bloomberg (Rob Delaney and Wing-Gar Cheng): “China will begin storing strategic oil reserves at the end of this year, after finishing the first of four government storage facilities, said Ma Kai, chairman of the National Development and Reform Commission. Remaining strategic reserve facilities will be completed in 2007 and 2008, Ma said at a press conference in Beijing today. The country’s current oil reserves are controlled by private enterprise, Ma said.” March 6 – Bloomberg (Rob Delaney): “China aims to control ‘soaring’ property prices to address complaints from people unable to buy homes, Zhu Zhixin, deputy commissioner of the National Development and Reform Commission, said. ‘The soaring property prices -- and in some regions and localities there is serious market disorder -- are a focus of public complaints,’ Zhu told reporters…” Asia Boom Watch: March 10 – Bloomberg (Sam Nagarajan): “India’s foreign-exchange reserves rose by $1.56 billion to $143.15 billion in the week ended March 3, the nation’s central bank said…” March 7 – Bloomberg (Theresa Tang): “Taiwan’s exports rose at the fastest pace in a year in February because of distortions caused by the timing of the Lunar New Year holiday. Overseas sales rose 26 percent from a year earlier to $15.5 billion after gaining 4.5 percent in January…” March 7 – Bloomberg (Stephanie Phang): “Malaysia’s exports grew in January at the slowest pace in four months as Lunar New Year holidays disrupted shipping activities. Exports rose 11.7 percent from a year earlier to 43.6 billion ringgit ($11.8 billion), after a gain of 13.2 percent in December…” Unbalanced Global Economy Watch: March 10 – Bloomberg (Theophilos Argitis and Alexandre Deslongchamps): “Canada’s jobless rate unexpectedly fell in February, matching a three-decade low, and labor costs increased at the fastest pace in five years last quarter as an oil boom in Alberta spurred demand for workers. The unemployment rate dropped to 6.4 percent…” March 9 – Financial Times (Deborah Brewster): “Sotheby’s had its best year in 2005 for at least 15 years as the art market boomed, fuelled in part by new Asian and Russian buyers. Sotheby’s yesterday said it sold $2.75bn in art last year, generating revenue of $513.5m and an 85 per cent rise in net income to $63m. Sales this year show prices continuing to rise across the board. ‘Worldwide sales to date [this year] have been exceptional,’ the group said. Sotheby’s and Christie’s together sold a record $451m of artworks at last month’s main London sales.” March 7 – Bloomberg (Simon Kennedy): “Inflation in the 30-nation Organization for Economic Cooperation and Development accelerated in January as energy prices gained. Consumer prices rose 3 percent from a year ago, higher than 2.7 percent in December…” March 9 – Bloomberg (Brian Swint): “The European Central Bank said interest rates are still ‘very low’ after it raised borrowing costs for the second time in three months last week. ‘Interest rates across the entire maturity spectrum still remain at very low levels in both nominal and real terms,’ the Frankfurt-based central bank said in its monthly report published today. ‘The evidence suggests that economic activity is improving.’” March 7 – Bloomberg (Jacob Greber): “Switzerland’s unemployment rate unexpectedly fell in February to the lowest in almost three years as an accelerating economy prompted employers to hire more workers. The jobless rate fell to 3.5 percent…” March 9 – Bloomberg (Jonas Bergman): “Swedish industrial production in January rose 1.7 percent, climbing for a second month, as orders posted their biggest monthly gain since November 2001. Production climbed 5.9 percent from a year earlier…” March 9 – Bloomberg (Tasneem Brogger): “Denmark’s jobless rate unexpectedly dropped to 5 percent in January, the lowest in 30 years, the statistics office said today.” March 9 – Bloomberg (Marketa Fiserova): “The Czech economy grew 6.9 percent in the last three months of 2005, the fastest pace in at least a decade, as exports grew more than twice faster than imports.” Latin America Watch: March 7 – Bloomberg (Matthew Walter): “Chile’s trade surplus in February nearly doubled from a year ago, as prices for copper, the country’s top export, rose to records. The country’s trade surplus rose to $1.04 billion…” March 6 – Bloomberg (Matthew Walter): “Chile’s economy grew 5.5 percent in January from a year earlier as manufacturing expanded at its fastest pace in nine months and prices for copper, the country’s top export, rose to records.” Bubble Economy Watch: January’s Trade Deficit was reported at a record $68.5 billion, up from the year ago $58.3 billion. Goods Exports were up 14.4% from January 2005 to a record $81.7 billion, while Goods Imports rose 15.8% to a record $155.1 billion. February’s job creation (243k) was strong and broad based. And the month’s 3.5% y-o-y gain in Average Hourly Earnings was the strongest since September 2001. Fourth-quarter Unit Labor Costs were up 3.3% annualized, with Productivity down 0.5%. March 7 – Bloomberg (Claudia Hirsch): “U.S. hiring activity grew at a healthy clip in February and wages continued to trend higher, led by recovery in the manufacturing sector, staffing executives said. Personnel professionals in all regions reported labor conditions tightening by varying degrees… Manufacturing growth drove hiring in most other areas, where pay climbed for skilled workers in particular. Executive recruiting was also energetic.” March 7 – Bloomberg (Courtney Schlisserman): “U.S. taxpayers have received an average income tax refund of $2,480 so far this year, up 4.6 percent from the same time in 2005.” March 8 – The Wall Street Journal (David Rogers): “As the U.S. enters its fourth year in Iraq this month, the annual cost of military operations is growing -- even as the Pentagon assumes the number of troops there will shrink. Monthly expenditures are running at $5.9 billion; the U.S. commitment in Afghanistan adds roughly another $1 billion. Taken together, annual spending for the two wars will reach $117.6 billion for the fiscal year ending Sept. 30 -- 18% above funding for the prior 12 months. That escalation reflects the fact that America's military today is a higher-cost war machine than the one that fought in Vietnam decades ago.” March 9 – CNNMoney.com: “The number of billionaires surged this year, as did their collective pile of cash, according to Forbes magazine's annual billionaire list. The magazine said the number of billionaires worldwide increased by 102 people in 2006 to 793, a record number, largely due to bullish global stock markets. Their total net worth jumped 18 percent to $2.6 trillion…New York seemed to be the hot spot for the super rich, attracting 40 billionaires, followed by Moscow with 25 and London with 23…” March 8 – Bloomberg (Josh P. Hamilton): “New York City private sector jobs grew by a revised 1.8 percent over the 12 months ending in January, double the long-term average rate, as financial services companies added workers, the state Labor Department said. Nongovernmental employers in the U.S.’s largest city boosted their payrolls by 52,600 in the 12-month period, to 3,029,400.” Mortgage Finance Bubble Watch: March 10 – Bloomberg (Al Yoon): “Freddie Mac, the second-biggest source of money for U.S. residential loans, said it delayed the release of 2005 financial data until May, disappointing analysts who expected the company to complete a three-year accounting overhaul this month. The company last year said it would deliver its 2005 earnings report by the end of March…” March 7 – Bloomberg (Al Yoon): “U.S. mortgage-backed bond investors are at greater risk of homeowner defaults in coming years amid an increase in lending to riskier borrowers, according to a report by the Bank for International Settlements. Mortgages considered below prime backed more than three-quarters of debt sold by companies other than government-chartered Fannie Mae and Freddie Mac, up from less than half in 2001, the report released today said.” Energy and Crude Liquidity Watch: March 5 – Bloomberg (Alice Ratcliffe): “Oil exporting countries deposited a record $82 billion with banks worldwide in the third quarter, the Bank for International Settlements said. Deposits from oil exporters, as well as from some central banks in Asia, contributed to an overall net outflow of $40 billion from emerging markets in the third quarter, the Basel, Switzerland-based BIS said in its quarterly report.” March 8 – Bloomberg (Joe Carroll): “Exxon Mobil Corp., the world’s largest oil company, plans a 13 percent increase in capital spending this year to lift reserves and help meet a target of 23 percent output growth by 2010. Spending will rise to $20 billion and stay near that level annually through 2010…” March 7 – Bloomberg (Joe Carroll and Sonja Franklin): “Chevron Corp., the second-largest U.S. oil company, plans to increase capital spending by 8 percent next year to $16 billion to help meet a target of more than 3 percent annual production growth through 2010.” Fiscal Deficit Watch: February’s federal deficit jumped to $119.2 billion, the largest ever for one month (according to Bloomberg’s Kevin Carmichael and Vincent Del Giudice). Fiscal y-t-d Receipts (5 months) of $873 billion are running 10.5% ahead of last year, with Individual Income Tax receipts up 10.8% and Corporate Income Taxes up 29.6%. At $1.090 Trillion, Total y-t-d Spending is 7.6% ahead of fiscal 2005.  March 7 – Dow Jones (John Connor): “Estimating that the U.S. incurred a budget deficit of $219 billion in the first five months of fiscal-year 2006, the Congressional Budget Office said outlays for net interest on the national debt were up 28% in this period from a year earlier. The budget office projected that outlays for net interest will be about 20% higher at the end of the fiscal year than they were last year… Net interest outlays for the first five months of the fiscal year were estimated at $92 billion, compared with $72 billion a year earlier.” Speculator Watch: March 7 – PRNewswire: “The world’s media wrote about hedge funds a record 39,989 times in 2005, a 43% jump from 2004 and more than six times as often as in 2000, according to…new research from Walek & Associates… ‘More than 100 times a day the world's press writes about hedge funds and their influence and insights in M&A, corporate governance, trading, investing and other core areas of the global economy," said Thomas Walek, President of Walek & Associates…” Q4 2005 “Flow of Funds:” There is no mystery surrounding strong job creation, rising wage pressures, continued robust consumer spending, the resilient U.S. (Bubble) and global economies, rising bond yields, record U.S. trade deficits, over-liquefied and highly speculative international markets, or recent heightened global financial instability. Just take a close examination of the Fed’s most recent Z.1 “Flow of Funds” report. It’s a dandy. A record fourth quarter concluded a historic year for the U.S. Credit system.  During the quarter, Total (Financial and Non-Financial) Credit Market Debt (TCMD) expanded by a seasonally-adjusted and annualized record $3.827 Trillion, a growth rate of 10.1% (vs. Q3 2005’s $3.197TN and Q4 2004’s $3.095TN). For all of 2005, TCMD expanded $3.340 Trillion to $40.230 Trillion, with debt growth up more than $500 billion compared to 2004’s record increase ($2.818TN). For comparison, Annual Total Credit Market Debt Growth averaged $1.237 Trillion during the nineties. Bubble Dynamics are conspicuous in the data and, in particular, take note throughout this analysis of the progressive nature of Credit expansion.  TCMD expanded $1.667TN during 2000, $1.929TN in 2001, $2.213TN in 2002, $2.713TN in 2003, and $2.818TN in 2004. One has to go all the way back to 1986 to surpass 2005’s 9.5% rate of expansion in Non-Financial Debt. At a record $2.295 Trillion, Non-Financial Debt expanded at more than three times the nineties average ($710bn). Non-Financial Debt expanded $839bn during 2000, $1.117TN in 2001, $1.316TN in 2002, $1.608TN in 2003, and $1.948TN in 2004. Total Household Borrowings expanded 11.7% during 2005, the fastest pace since emerging from prolonged stagnation back in 1985. Total Business Debt expanded at the fastest pace (7.8%) since 2000. State & Local Debt expanded 10.6% during 2005, and Federal government borrowings grew 7.0%. Not surprisingly, the Mortgage Finance Bubble went to only greater ("blow-off")extremes. Total Mortgage Debt (TMD) expanded an astounding $1.470 Trillion last year (14.0%). To put this number into perspective, it is five and one-half times the average annual mortgage debt growth during the nineties ($267bn). TMD expanded $546bn during 2000, $661bn in 2001, $822bn in 2002, $990bn in 2003, and $1.238TN in 2004. TMD ballooned 29% in just two years ($2.708 TN) and more than doubled in seven (up 107%). TMD increased to a record 96% of GDP during 2005, up from the 67% to commence Year 2000 and 51% back in 1982. Household Mortgage Debt expanded a record $1.133TN, or 14.1%, up from 2004’s record $992 billion growth and compared to the nineties average of $230 billion. Commercial Mortgage Debt expanded a record $266 billion, or 15.6%, to $1.968TN. This is ten times the $26 billion nineties annual average Commercial Mortgage Debt growth. Financial Sector Credit Market Debt expanded 8.2%, up from 2004’s 7.4%, although keep in mind that this Credit aggregate excludes bank deposits (non-market debt). The Banking sector enjoyed banner growth. Bank Credit expanded 10.1% to $7.459 Trillion, the strongest rate of growth since 1985. In nominal dollars, Bank Credit increased $686 billion, up sharply from 2004’s record $571 billion and the $215 billion averange from the nineties. Bank Credit posted a two-year gain of $1.257TN, or 20.3%. Bank Loans grew 11.6% ($558bn) over the past year and 21.8% ($963bn) over two years, with Mortgage loans up 14.0% ($363bn) and 31.1% ($702bn) to $2.958TN. Corporate Bond (including ABS) holdings increased 22.8% during the year to $688 billion (up 43% in 2yrs), while Government Securities holdings were little changed over the past year (down 1.6%) and up only 4.7% over two years. And what new financial claims/Credit instruments were created in the process of financing this spectacular Bank Credit inflation? Well, Total Deposits expanded $461 billion, or 9.2%, to $5.489TN, with a historic two-year gain of $974.1 billion, or 21.6%. Saving Deposits increased $271 billion (8.3%) to $3.531TN and Large Time Deposits grew $226 billion (20.2%) to $1.347TN. Large Time Deposits surged 44.2% over two years. The Liability “Federal Funds and Securities Repos (net)” expanded 12% during 2005 to $1.091TN, and Credit Instrument Liabilities increased 11.5% to $824 billion. Bond Liabilities expanded 13% to $494 billion. “Structured Finance” (combined GSE, MBS and ABS) bounced back from a relatively slow 2004 (5.5% growth) to expand 8.1%, to $9.542TN. A small contraction (down 2.3%) in GSE assets and meager growth in agency MBS (up 3.8%) was more than offset by a historic expansion of the Asset-backed Securities (ABS) marketplace. ABS expanded $200 billion during the fourth quarter (28% annual.) and $646 billion for the year, or 26.7%, to $3.059TN. ABS increased $971 billion, or 46.5%, in just two years and is up almost 130% so far this decade. Examining ABS assets, Mortgage holdings increased $717 billion during 2005 (111% of asset growth). And after ending 2002 with Mortgages comprising 42% of ABS pool assets, this ratio surged to 70% by the end of 2005.       The Securities Broker/Dealer community boom runs unabated. Total Assets expanded in 2005 by a record $299 billion, or 16.2%, to $2.144TN. This compares to average annual growth of $76 billion during the nineties. Broker/Dealer Assets surged 33% ($531bn) in two years and 61% ($809bn) in just three years. On the Asset side, Credit Market Instrument holdings were up 23% last year to $486 billion. Miscellaneous Assets surged $226 billion (23%) to $1.220TN, with a two-year gain of 42%. Corporate Bond holdings increased $85 billion (34%) to $338 billion, while both the Treasury and Agency/GSE MBS categories posted small contractions. On the Liability side, Repos surged $209 billion (40%) to $736 billion. Security Credit gained $24 billion (3%) to $798 billion. “Due Affiliates” jumped $104 billion during the year (14%) to $835 billion. Elsewhere, Money Market Funds (MMF) posted their first year of growth since 2001. MMF Assets increased $130 billion during the fourth quarter (27.8% annual.) and $127 billion for the year, or 6.8%, to $2.007TN. Fed Funds and Repos expanded $361 billion during the year, or 21.8%, to $2.011TN. “Funding Corp” Assets were up 15.7% for the year to $1.488TN. Savings Institution Liabilities expanded $140 billion, or 8.9%, to $1.789TN, with a notable two-year gain of 22%. Credit Union Assets expanded 4.7% to $686 billion, while Finance Company Assets contracted 8.4% to $1.335TN. Real Estate Investment Trust (REIT) Liabilities surged 26.5% to $581 billion, with a two-year gain of 86%. Life Insurance Assets expanded $250 billion, or 6.1%, during the year to $4.381TN. As goes the U.S. Current Account Deficit, so go Rest of World (ROW) holdings of our assets. For the year, ROW holdings of U.S. Financial Assets surged $1.318TN to $11.154TN, with a stunning (and unfathomable) two-year gain of $2.774TN (33%). Of this, Total Credit Market holdings jumped $896 billion during the year to $5.576TN, with a two-year gain of $1.657TN, or 42%.  ROW Treasury holdings increased $298 billion to $2.198TN, absorbing essentially all of 2005 Treasury issuance ($307bn). Agency holdings jumped $172 billion to $934 billion, significantly more than the new Agency debt issued during the year ($51bn). Holdings of U.S. Corporate Bonds (includes ABS) jumped a record $351 billion to $2.103 Trillion, while holdings of U.S. Equities increased $86 billion to $2.304TN. Over the past year, Foreign Direct Investment (FDI) rose $20 billion to $1.820TN. During the past four years, FDI increased $366 billion, while U.S. Corporate Bond holdings ballooned $987 billion and U.S. Equity holdings increased $237 billion (47%). Once again, the Household (and Non-profit) Sector Balance Sheet provides a wealth of Credit Bubble insight. Household Liabilities expanded at a 12.9% rate during the fourth quarter and increased $1.181TN, or 11.0%, for the year to $11.916TN. Household Liabilities were up 24.1% in two years and 50.7% in four. Yet, during 2005 Household (“perceived”) wealth inflated almost five times the nominal amount of increased Household debt. For the year, Household Assets surged $5.038TN, or 8.5%, to a record $64.023TN. Real Estate Holdings jumped $2.803TN last year (14.9%) to $21.580TN, after inflating $2.304TN (14.0%) during 2004, $1.490TN (9.9%) in 2003, and $1.253TN (9.1%) in 2002. Household Real Estate holdings were up $7.850TN, or 57%, in four years. During 2005, Financial Asset holdings increased $2.036TN, or 5.6%. Deposits Assets jumped $433 billion (7.9%) to $5.888TN. Credit Market Instrument holdings gained $53 billion (2%) to $2.733TN. Mutual Fund Shares gained $256 billion to $4.208TN and “Equity of non-corporate business” jumped $850 billion to $6.678TN.  With Household Assets last year inflating $5.038TN and Household Liabilities increasing $1.181TN, Household Net Worth jumped $3.857TN during the year to a record $52.107TN (down somewhat from 2004’s $4.418TN expansion in Net Worth). In only three years, Household Net Worth has inflated $13.033TN, or 33%. This significantly surpassed the - at the time - unprecedented $11.904TN Bubble wealth surge in the years 1997 through 1999.  Household Net Worth ended the year at 417% of GDP, up from 1995’s 351% and 1985’s 335%.  Government inflows and outflows provide another vantage point to view the current inflationary environment. Federal Government Receipts jumped 12.1% during calendar 2005 to $2.303TN, with a two-year gain of 23%. Federal Expenditures were up 7.7% during 2005 to a record $2.613TN, with a two-year rise of 16.1%. State & Local Receipts were up 5.7% to a record $1.719TN, with a two-year gain of 15.4%. S&L Expenditures jumped 6.8% during 2005 to $1.732TN, with a two-year gain of 14.5%  We are witnessing – both in the Fed’s “flow of funds” and with real world flows of finance - the consequences of many years of unrestrained asset and speculative-based Credit growth. The current explosion of non-productive Credit Inflation literally required decades of (U.S. and global) Financial Sphere and Economic Sphere “evolution.” It has been amazing to me that the economic community has generally disregarded the monumental changes that have transformed both finance and the nature of economic output. Instead of thoughtful and judicious analysis, carelessness conquered and repressed. It is a New Era, they preach to us. Credit growth doesn’t matter; Current Account Deficits don’t matter; mushrooming leveraged speculation and derivatives markets are healthy for the system; inflation has been pulverized and the Fed has complete and masterful control of both THE price level and the economy's growth rate.   As diligently as I have tried, my analytical efforts have been futile. It has been more than a challenging exercise to explain in real-time the various corrosive aspects of Credit and Asset Inflation, as well as the highly deleterious effects of Credit Bubble “Blow-offs.” It has been a struggle to comprehend and illuminate the characteristics of a Credit system where the demand for borrowings has minimal impact on the price of (unlimited) finance. My view of the great risks associated with asset markets and economies distorted by leveraged speculation-based liquidity has gained few adherents. Even subsequent to the spectacular technology boom and bust, the analysis that booming corporate profits and cash-flows are a Credit Bubble Phenomenon simply hasn’t resonated one iota. It has been virtually impossible for me to elucidate why ongoing enormous huge consumer sector debt growth and the disappearance of “savings” is problematic. Ditto the notion that Credit Bubble-induced wealth disparities and unjust wealth redistributions will eventually lead to myriad animosities and backlashes, including sentiments supportive of “protectionism” and antagonistic to free markets. I have never adequately made the case why it is so vital for our nation to be much more self-sufficient. As easy as it seems that it should have been, I don’t feel I effectively countered the absolute nonsense that our Current Account Deficit is driven by unrelenting global “capital” inflows. And I have not even come close to shedding light on the reality that unchecked – and inevitably unwieldy and unstable - global finance has been a commanding force within what the New Paradigm crowd trumpets as virtuous free-market “globalization.”  Why then, you may question, do I suspect that Credit Bubble-like analysis will garner more attention going forward? Well, I believe the Fed and global central bankers may finally comprehend that they are facing a very serious problem – that Credit and speculative excesses begetting greater excess demand a true tightening of global financial conditions. Importantly, hope that a cooling housing market will obligingly chill the Bubbling U.S. economy is fading rapidly. As the “Flow of Funds” confirmed, the Credit system is currently firing on all cylinders and the Bubble economy has a full head of steam. The U.S. Current Account and Global Imbalances are poised to only worsen, fueled by Bubble dynamics that now command Credit systems and asset markets around the globe. Expectations for a slowing U.S. are shifting to fears of a runaway Global (Credit) Boom. The U.S. Bubble economy has had years to adjust and adapt to a progressive rise in Credit growth and liquidity. I do not expect a bust to manifest first in the real economy. The Economic Sphere comfortably absorbed $3.3 Trillion of new Credit growth during 2005, and I see little reason why it couldn’t muster the same with, say, upwards of $4 Trillion this year. But boy is that Global Pool of Finance Ballooning - today exponentially. The resulting Asset Inflation, Bubbles and Imbalances were problematic last year, and they are destined to be much more so this year.  The Wildly Inflating Global Financial Sphere is the key issue today; it will likely remain the key issue until it cracks. Massive Credit inflation may flow effortlessly through contemporary real economies, but the residual is an Accumulating Elephantine Pool of Unwieldy Global Finance, much of it in the hands (directly and indirectly) of an aggressive international leveraged speculating community. With a notably more hawkish (collaborative) tone from the Fed, the ECB, and even the BOJ, global speculative finance has passed a key inflection point.  The more highflying and speculative markets around the world have suffered their first serious downdraft in some time. Perhaps, even a bit of fear has begun to supplant what has been copious greed. Have liquidity conditions begun to change – are we seeing meaningful de-leveraging - or will this prove more a case of a pause that refreshes over-liquefied speculative impulses? Will the powerful speculator community call the central bankers' bluff? I will not venture a guess as to whether we have been observing the initial “piercing” of The Global Speculative Finance Bubble. But I will continue to suggest that we have entered a much more volatile and uncertain market environment across virtually all asset classes, the Problematic Terminal Bubble Phase where underlying fragilities and vulnerabilities begin to emerge.