03/14/2003 Climbing the Wall of Water *

It was dizzying.  For the week, the Dow added 2% on the back of a 500 point late-week surge.  The S&P500 and Morgan Stanley Consumer indices ended the volatile week with gains of 1%.  The Utilities were unchanged and the Transports lost 1%.  The small cap Russell 2000 and S&P400 Mid-cap indices were about unchanged.  The technology sector enjoyed a big rally.  For the week, the NASDAQ100 jumped 4% (year-to-date gain of almost 5%).  The Morgan Stanley High Tech index added 4% (y-t-d up 2%) and the Semiconductors 7% (y-t-d up 6%).  The Street.com Internet and NASDAQ Telecom indices rose 3%, with year-to-date gains of 5% and 8%.  The Biotechs added 2%.  While rallying strongly yesterday and today, the financial stocks nonetheless underperformed.  For the week, the Securities Broker/Dealers and Bank indices dipped about 1%.  With bullion sinking $14.30, the HUI gold index declined 3%. The stock market reversal threw cold water on the Credit market melt-up.  For the week, two-year Treasury yields jumped 14 basis points to 1.54%, while five-year yields added 11 basis points to 2.68%.  The 10-year Treasury yield rose six basis points to 3.70, as the long-bond yield added two basis points to 4.70.  Benchmark mortgage-back yields shot 18 basis points higher, while implied agency yields jumped 11 basis points.  The implied yield on June Eurodollars rose 7 basis points to 1.185%.  The spread on Fannie 5 3/8% 2001 note widened five, while the 10-year dollar swap spread added 1.5 to 44.5.  Corporate spreads generally narrowed, with junk bonds outperforming. The dollar rallied about 2% and the CRB index gave up 1%. The corporate debt issuance boom runs unabated.  Citigroup sold $1.5 billion of bonds, Verizon $1 billion, Comcast $1.5 billion (up from $1 billion), Chubb $525 million, Eli Lilly $400 million, International Paper $1 billion, and Clear Channel $500 million.  Donald Trump’s Trump Holdings sold $475 million of junk bonds with a yield of 17.625%, Shaw Group sold $250 million of junk, and Ameripath $275 million.  Interpublic Group issued $800 million of bonds, Boston Properties $300 million, La Quinta Properties $325 million, Simon Property $500 million, Peabody Energy $650 million, Alabama Power $200 million, and American Electric Power $500 million. (Inflationary bias in the real estate and energy sector) The nervous but booming asset-backed securities market saw $11 billion of new issuance, as a quarterly sales record looks increasingly likely.  While bond issuance continues at a torrid pace, broad money supply added a tempered $1.4 billion.  Demand and Checkable Deposits jumped $15.3 billion and Savings Deposits gained $2.1 billion.  Institutional Money Fund deposits declined $10.9 billion and Large Denominated Deposits dipped $2.4 billion.  Repurchase Agreements increased $2.8 billion, while Eurodollars declined $4.6 billion.  Foreign Holdings of U.S. Debt, Agencies at the Fed jumped $11.1 billion and are up $44 billion in six weeks (up $156 billion, or 21% y-o-y!).  Elsewhere, Commercial Paper outstanding jumped $9 billion last week.  Non-financial CP added $1.9 billion, while Financial sector CP borrowings jumped $7.1 billion.  Total Bank Assets surged $54.8 billion (week of March 5th).  Securities holdings jumped $26.2 billion, with five-week gains of $98.8 billion.  Loans and Leases increased $2 billion.  Commercial and Industrial loans declined $2.7 billion, while Real Estate loans jumped $9.6 billion.  Real Estate loans are up 17% annualized since October (23 weeks) and 16% y-o-y.  Total Bank Assets are up $319 billion, or 10.6% annualized, to $7.12 Trillion since October. The $41.1 billion January trade deficit was up 38% y-o-y.  Goods Exports increased 3% to $56.8 billion, while Good Imports jumped 15% to $101.6 billion.  Goods Imports were 79% larger than Goods Exports, compared to 61% one year ago.  Year-over-year, imports from Japan were up 5.5%, Canada 8%, Mexico 8.5%, and China 35.5%.  The fourth-quarter’s $136.9 billion ($547 bn annualized!) Current Account deficit was up 44% from 2001’s fourth-quarter.  Fourth-quarter Imports were up 15%, while Exports increased 6%.    The Producer Price Index jumped a stronger-than-expected 1% during February, this after January’s 1.6% surge.  This is the first back-to-back 1% or more PPI gains since 1990.  By Stage of Processing, Finished Consumer Goods prices were up 4.9% y-o-y (Consumer Goods-ex Food up 6.9%).  Capital Equipment prices were down 0.5%.  Prices of Intermediate Materials were up 6.7% y-o-y, with Crude Materials up 36.8%.  Energy Prices jumped 7.4% during the month of February. The University of Michigan’s preliminary reading of March Consumer Confidence was not encouraging.  Down almost five points, Confidence has sunk to the lowest level since September 1993.  Personal bankruptcies jumped to 36,841 (fourth highest on record), up 9% y-o-y.  February Retail Sales were reported at a disappointing 1.6% decline.  Year-over-year, Retail Sales were up a reasonable 2.6%.  By category, and less comforting, we see that Motor Vehicles, Parts were down 0.6% y-o-y, Food, Beverages down 0.9%, Furniture down 1.5%, Electronics down 0.8%, and Department Stores down 5%.  On the upside, Gasoline Stations were up 23.9% y-o-y, Health, Personal Care up 4.5%, General Merchandise up 3.7%, and Eating, Drinking up 3.5%.  For an appreciation of important spending patterns changes, it may be instructive to analyze data back from December 2001.  Year-over-year sales were up 2.9%, with Ex-autos up 1.1%.  Durable purchases were booming, with Vehicles & Parts up 10.9%, Furniture up 9.5%, and Electronic Stores up 10.8%.  Food & Beverage were up 1.6%, while Gasoline Stations was down 17.5%.   March 15 – Washington Post (Robert O’Harrow Jr.):  “New York City’s employee pension system could lose more than $89 million because of investments in bonds issued by collapsed financier National Century Financial Enterprises Inc…  New York’s pension plan acquired the National Century bonds through an investment program run by Citibank, which serves as the plan’s custodian and lending agent … As with many pension programs, the city arranged to loan securities to broker-dealers in exchange for collateral, most often cash, the source said. That cash was then invested in investment-grade securities -- in this case, bonds from a special-purpose entity created by National Century that filed for bankruptcy in the fall.” March 15 – Washington Post (Albert Crenshaw):  “The value of state employee pension plans has plunged over the past three years, with the assets in the plans now worth less than the benefits they are committed to pay, according to a new study.  The report, by the investment advisory firm Wilshire Associates Inc. of Santa Monica, Calif., describes what it calls ‘a story of a rapidly deteriorating financial health of state retirement systems.’ The decline is the result of the slump in the stock market and a sharp rise in the plans’ liabilities.  Overall, the total value of assets in these plans declined from 115 percent of liabilities in 2000 to 91 percent at the end of 2002. The 79 percent of plans that are underfunded is the highest in the history of the Wilshire survey, which dates back to 1990.” March 11 - Dow Jones (Christine Richard and Stan Rosenberg):  “Conservative investors who bought $350 billion in municipal bonds last year are starting to ask questions about how conservatively the companies who insure about half of all muni bonds are running their own businesses.  At issue is the substantial involvement of bond insurers in the credit derivatives market, a market in which parties buy and sell credit protection on individual corporate names or pools of names. According to a survey released Monday by Fitch Ratings, bond insurers are the largest sellers of credit protection in the market, having sold protection to the tune of $222 billion in a market that Fitch estimates totals around $2 trillion. Along with direct exposure to individual corporate issuers through credit default swaps, bond insurers also effectively have written insurance on pools of debt by insuring tranches of collateralized debt obligations or CDOs. CDOs are leveraged pools of corporate debt securities funded through the issuance of variously subordinated and rated tranches of debt.” March 11 – Reuters:  “Bond insurer MBIA Inc. said on Tuesday it expects no losses from $840 million worth of exposure to asset-backed securities, supported by credit card receivables from the banking arm of retailer The Spiegel Group… ‘We do not expect any material losses at this time,’ MBIA spokesman Michael Ballinger told Reuters… MBIA’s exposure came from two series of Spiegel credit card securitizations, Ballinger said.  On Tuesday, Spiegel said its First Consumers National Bank unit has told trustees, which oversees all six of its credit card securitizations, that the bank will begin to pay back bondholders early. This "pay out event" was triggered because the credit card portfolio that supports each series of bonds failed to meet their return requirements, Spiegel said.” This week MBIA also purchased about $1.5 billion of US Airways aircraft securitizations, of which they have $536 million of exposure.  “MBIA does not expect to incur a loss with respect to this exposure.”  This follows similar “we expect no loss” pronouncements regarding exposures to Union Acceptance, Americredit and Metris.    Freddie Mac’s 30-year mortgage rates dropped six basis points this week to 5.61%, while one-year adjustable rates declined eight basis points to 3.68%. As was widely reported, the Mortgage Bankers Association’s Application index surged to new (blow-off) highs, with total applications double the year ago level.  The Refi Application index surged 35% for the week to 8,920.  This is 400% of the year ago level and the first time the index has surpassed 7,000.  Wow…  The Purchase Application index was about unchanged for the week and up about 10% y-o-y. From Countrywide:  “Average daily applications in February remained strong at $2.2 billion, up 10 percent over January 2003, and up 108 percent over last year… Loan fundings during the short, 19-working day month, reached $31 billion, up 121 percent from last year.  This marks the fifth consecutive month whereby fundings have exceeded $30 billion…  The closing February mortgage loan pipeline was $49 billion, up 104 percent over last year’s $24 billion; Average daily applications month-to-date in March are running at $3.0 billion, 35 percent higher than February; The servicing portfolio continued its uninterrupted climb to $484 billion in February, a gain of 39 percent over last year…”  Compared to February 2002, Purchase Fundings were up 37%, Non-purchase (refis) 165%, Home Equity 45% and Subprime 59%. “Total assets at Countrywide Bank reached $7.3 billion, up 12 percent over January 2003, and in line with the Company’s expectations to generate $17 billion in assets by the end of 2003.”  March 10th – “Countrywide Bank, a division of Treasury Bank, N.A., today announced the opening of a bank branch in Dallas, Texas.  Countrywide Bank marked its launch into banking more than a year ago and has since established a national presence.  Since that time, the Bank has experienced tremendous consumer interest in its high rate certificates of deposit and money market accounts, helping the Bank’s assets grow to more than $6 billion.” Fannie Mae reported a huge February.  “Total Business volume (mortgage purchases) was $106.1 billion, the third highest on record (behind January and December).”  Total three-month Business Volume of $341 billion is up 60% from the comparable period one year ago.  Fannie’s February Total Book of Business (mortgages held and MBS sold into the marketplace) increased almost $32 billion, or 22.6% annualized.  During the past 12 months, Fannie’s Book of Business was up $286 billion, or 18%.  After two months, 2003's Book of Business is on pace for growth of $420 billion, or 23%.  Fannie’s Mortgage Portfolio expanded at a rate of 9.5% during the month, with y-t-d growth of an annualized 21.4% to $817 billion.  Fannie MBS held in the marketplace surged $26 billion, or 33.7% annualized to $1.07 Trillion.  Year-to-date growth is at an annualized pace of $265 billion, or 28.6%.      March 12 - Wall Street Journal Op-ed: “There are reasons other than war for the stock market to be jumpy these days, as William Poole demonstrated Monday morning.  The president of the Federal Reserve Bank of St. Louis declared that federal regulators ought to pay attention to a potential crisis arising from Fannie Mae and Freddie Mac… Fannie responded to Mr. Poole’s remarks with familiar grace, charging that he was uninformed. We’d say Mr. Poole has done a public service by noticing the elephant in the economy. Now it’s up to federal regulators, and Congress, to put a harness on it.” March 11 - Wall Street Journal Op-ed:  “Warren Buffett is on a crusade (again). In his annual letter to shareholders, the famous investor attacks financial derivatives as economic ‘time bombs…’ Valuing derivatives on a mark-to-market basis can be an exercise in fantasy. For many derivatives, the market is so thin that valuation models must be used and those models can contain a great amount of unwarranted optimism. The result is inflated earnings. Limited and fanciful disclosure can also mask the possibility that risk, rather than being widely dispersed, has actually migrated to one or two sectors - insurance and pension funds come to mind -- or even to a few companies. But these are reasons for scrutiny, not for banning a helpful financial innovation. On balance, the $2 trillion derivatives market is a very good thing. It allows institutions to lay off risk, making the financial system less vulnerable to a giant blow-out. Mr. Buffett is not only shooting the messenger, he’s also blaming the gun.” It’s a rather strange love/hate type of thing, The Journal editorial staff’s impulsive infatuation with derivatives and utter disdain for Fannie Mae. The best we can tell it’s ideological: The splendid wonderment of free markets has, in its infinite wisdom, created “a very good thing” named derivatives that enhances wealth creation through the efficient trading of various risks in the marketplace.  Derivatives provide the capacity to “lay off risk” and make the system less vulnerable to a “giant blow-out.”  At the same time, quasi-governmental lenders are anathema to free markets and the efficient flow of capital.  The GSEs are as evil as derivatives are good.  Well, the Journal has seemed to lose sight of the forest for the idealized trees, and we are again left anguished that ideology plays such a prominent role in economic and financial thinking. Before we dive into the analysis, we’ll begin by questioning the Journal’s “$2 Trillion derivatives market.”  Seems a little understated.  The Bank of International Settlements estimated global OTC derivatives at almost $130 Trillion mid-2002.  This week, the Office of the Comptroller of the Currency (OCC) released its fourth-quarter 2002 (U.S. commercial) Bank Derivatives Report. Total notional derivative positions jumped $2.9 Trillion (22% annualized) to $56 Trillion.  By Product, Futures & Forwards jumped $586 billion (22% ann.) to $11.4 Trillion.  Swaps surged $3.1 Trillion (41% ann.) to $32.6 Trillion, while Options declined $802 billion to $11.5 Trillion.  Credit derivatives were up $62 billion (43% ann.) to $635 billion.  Year-over-year, Futures and Forwards were up 22%, Swaps 27%, Options 14%, and Credit 61%.  By Type, notional Interest Rate derivative positions jumped $2.7 Trillion (23% ann.) to $48.3 Trillion, Foreign Exchange $240 billion (16% ann.) to $6.1 Trillion and Credit the $62 billion to $635 billion. As always, the industry is dominated by The Three Derivative Kingpins, JPMorganChase, Bank of America and Citigroup.  Their combined positions actually expanded by $3.1 Trillion during the quarter (26% ann.), offsetting small declines elsewhere.  It is certainly worth noting that there has been anything but a letup at troubled JPMorganChase.  Notional positions jumped almost $1.8 Trillion (27% ann.) to $28.8 Trillion (up 21% y-o-y).  BofA saw positions increase $663 billion (22% ann.) to $12.5 Trillion (up 33% y-o-y).  Citigroup’s derivatives were up $651 billion (28% ann.) to almost $10 Trillion (up 9% y-o-y). That derivative growth runs unabated (accelerating?) is the striking feature of this data.  Yet it's perfectly consistent with our view that the overriding role played by derivatives is to accommodate the Credit creation process.  And, as we appreciate, Credit growth remains extreme, specifically in the mortgage finance arena.  Derivatives foster the expansion of risk by augmenting lending (the GSEs providing the most conspicuous example) and nurturing speculation (as examples, hedge funds and REITS using hedges in their strategies of leveraging mortgage-backs).  Derivatives, in total, do not mitigate risk, but the opposite.  The Journal may love derivatives and hate the GSEs, but they are one and the same.  You either cherish our contemporary structured finance Wall Street Monetary Regime or you don’t.  And when it comes to the parallel growth of Credit and derivative positions, we are witnessing Bubble dynamics all the way. As such, we commend Federal Reserve Bank of St. Louis President William Poole for drawing more attention to the critical issue of the GSEs and systemic risk.  That his speech came only days after Chairman Greenspan delivered a sanguine talk on mortgage finance only adds to the intrigue.  The first sign of a long overdue “uprising” within the ranks of the Federal Reserve?  We were also pleased that Dr. Poole praised the recent systemic risk report issued by Armando Falcon and the Office of Federal Housing Enterprise Oversight.  Furthermore, we strongly support Dr. Poole’s call for the GSEs to raise additional capital (it’s likely the best we can hope for).  That these extraordinarily leveraged and exposed companies continue to aggressively repurchase their stock is ridiculous.  But, at the same time, we will not be holding our breath waiting for the Fed or Congress to “harness” the “elephant” or bring about any sweeping changes to the way the GSEs do business.  It’s too late.  Importantly, I doubt today that any such criticism or additional scrutiny will have a meaningful impact on GSE growth, but we’ll be watching attentively. At this point, I see the GSE issue as an extremely important intellectual debate, but, in reality, likely no more than this.  When Bloomberg began running headlines from Dr. Poole’s speech, one in particular caught my eye:  “Poole Says Government Should End Implied Guarantee of FNM, FRE.”  Well, if it were only that easy… Let’s move immediately to revoke the implied guarantee, but how?  To appreciate the significance of the notorious government backing of the GSEs, it’s helpful to think in terms of what has become the Greenspan Fed’s guarantee of continuous and ample systemic liquidity to the financial markets – an assurance that has evolved to being absolutely fundamental to the viability of contemporary finance.  First of all, it is a prerequisite of the derivatives marketplace.  Derivatives/risk models and attendant trading/hedging strategies must assume continuous and liquid markets (that the marketplace will sufficiently accommodate the buying and selling of securities requisite to dynamically hedge myriad market risks).  Fallacious real-world assumptions yes, but transformed to a seemingly miraculous phenomenon (with enormous profit potential!) by the coveted Fed liquidity guarantee.  Secondly, a Credit and financial system dominated by leveraged speculation is only possible with an implied guarantee of marketplace liquidity.  And, most fundamentally, the very premise of a viable contemporary securities-based Credit mechanism becomes rather suspect without the credible promise of liquid markets. It is my long-held view that the GSE’s, with the evolving role of Credit market “Buyers of First and Last Resort” (especially in mortgage-backs, including “fringe” instruments such as Conseco securitizations), have been instrumental in nurturing endemic leveraged speculation.  And with the GSEs ascending to the status of outright governors of the liquidity creation process – a “parallel central bank” - there is absolutely no decoupling the Fed’s guarantee of marketplace liquidity from the government’s implied guarantee of GSE debt.  None.  It’s one bold, historic guarantee - the Fed and GSEs now joined at the hip - and there will be no turning back.  The GSEs know it, the sophisticated players know it, and the debt market wallows in it.  And it certainly didn’t take long for Fannie’s Franklin Raines to trumpet the fact that the bond market dismissed Poole’s comments.  This environment is bringing new meaning to the doctrine of “Too Big to Fail.” And this returns us back to those anxious, dark days of last October and The Savior Governor Bernanke.  If I analyzed his historic doctrine accurately – that when he writes “deflation” risk we can read “structured finance” risk, with the Fed fully committed to “extraordinary measures” to counter episodes of heightened systemic stress - his speech essentially is a direct Fed guarantee of the GSEs, the Wall Street firms, and the major banks/derivative players (the structured finance “daisy-chain”).  As such, The Bernanke/Greenspan Doctrine is categorically a bold (desperate?)guarantee of the entire Wall Street Finance Monetary Regime.  At least that’s my read on the market’s response, with the collapse of risk premiums throughout the Credit market since October. And the longer the Credit market’s perception of systemic risk remains muted – especially in the face of recent extraordinary developments – the more I am convinced that the financial world is truly different post-Bernanke.  In keeping with the times, it’s an usually murky doctrine and one impossible to fully ascertain.  But we must nonetheless remain cognizant of its (potentially profound) ramifications.  Has the vulnerable U.S. Credit system been emboldened? With this unavoidable nebulousness in mind, it is interesting to peruse through current prices for Credit default swap (CDS) protection.  We see that it costs about 800 basis points (8%) to buy a year’s protection against a default at troubled UnumProvident.  If you own Sprint bonds, default insurance will cost you about 500 basis points.  Insurance against a Capital One default is priced at 430 basis points, Sears 425, GMAC 330, and Ford Credit 535.  One might argue that this insurance is relatively inexpensive considering the financial and economic backdrop, yet it looks outrageously pricy when compared to those of the major “structured finance” players.  Credit default swap protection for Citigroup can be had for a mere 35 basis points (35 cents per $100 insured).  For Bank of America and Bank One, only about 30 basis points will suffice.  At troubled FleetBoston and JPMorganChase, it’s only 62 and 75 basis points.  Yes, the unquantifiable risk associated with $28 Trillion of derivatives and a $760 billion balance sheet ($42 billion shareholder’s equity) can be insured for a paltry 68 cents on $100 dollars of coverage.  At the highly leveraged and exposed Wall Street firms, the cost of insurance is even cheaper.  For Bear Stearns, Goldman, Lehman, Merrill and Morgan Stanley, prices range between 50 and 70 basis points.  And I have highlighted on a weekly basis the collapse in GSE spreads, risk premiums that have diverged radically from ballooning risk exposure.  Simply stated, none of these prices make sense in a world without the Bernanke/Greenspan Put.     I mention this to underscore the truly extraordinary market environment.  Even during the intense global stock market sell-off (and the surge in equity option volatility!) over the past few weeks, U.S. Credit spreads (with the exception of the faltering autos) widened only begrudgingly.  Then with yesterday’s equity surge, spreads generally narrowed sharply.   Speculative grade Credit spreads are a case in point.  They widened about 22 basis points over four weeks (after declining 300 basis points from October highs), only to sink 15 basis points yesterday.  Sprint provides another example of today’s risk perceptions.  In October, Sprint CDS protection surged to 1400 basis points. Today, they go for about 40% of this amount.  Or, much more significant from a systemic standpoint, let’s examine JPMorganChase:  Last September and October CDS prices jumped from about 70 basis points to 125.  Over the past few weeks prices have risen about eight basis points to 68. As students of the Credit system and contemporary finance, we do not want to dismiss the atypical performance of the “risk” market over the pasts few weeks.  While there are severe problems throughout – credit cards, aircraft leases, subprime generally, the Credit insurers, international financial institutions, etc. – the general U.S. Credit system hasn’t yet missed a beat.  In the midst of a global equity rout, the junk bond and U.S. corporate bond market remains wide open for business.  Donald Trump even raised about a half a billion, for heaven’s sake. I just can’t shake the notion that the important unfolding story is the unrelenting nature of Credit Bubble excess and its myriad consequences.  The vulnerable U.S. Credit system had the opportunity to turn panicky, but remained so composed - as if it knew something.  Global equity markets again approached the edge of the cliff with attendant acute financial stress, but Credit systems appeared unusually immune from contagion.  This is much different than what we have seen in the past, and it today seems significant.  Perhaps it’s related to the (unsustainable) liquidity barrage emanating from the mortgage sector.  Or perhaps it’s the Bernanke/Greenspan Put in action. It’s impossible to know.  But we do recognize that the Credit system is firing on all cylinders.  We also appreciate that the resulting liquidity is drawn more to the hyperactive financial sphere rather than the despondent economic sphere.  This lends support to the view that acute financial fragility and instability are the paramount inflationary manifestations at this late stage of the Great Credit Bubble.   We have reached the point where there is no turning off the Credit excess, no turning off the GSEs, no turning off the Mortgage Finance Bubble, no turning off the destabilizing world of derivative trading, and no turning off the rampant financial speculation and its increasingly destabilizing effects.  It is truly one massive Bubble running out of control.  And let’s not ignore the reality that these frightening financial convulsions are symptomatic of an extremely sick system.  One of these days there will be a life-threatening seizure.  What we have here is an historic circumstance of a dysfunctional monetary regime and a central bank that will defend it at all costs. I have in the past used a flood insurance analogy in an attempt to explain how derivatives – an inexpensive market in flood insurance – increase risk by fostering a building boom along a river.  I also “updated” A Derivative Story awhile back, ending the tale abruptly with torrential rains falling, near chaos in the flood “re-insurance” market, and increasing homeowner panic along the river.  Well, devastating floods and resulting financial collapse were fortunately averted.  Specifically, the community made it through the panic after a bold government official guaranteed that the authorities would “take extraordinary measures” to stop the flood waters before damage initiated a vicious spiral of financial and economic collapse.  The authorities began working frantically up the river, using whatever materials and means available to construct dykes, dams and levees. These efforts saw the river level recede and, quite favorably, the rain let up for a few months.  However, the torrential rains soon return, although, curiously, this time there is little panic in the insurance marketplace.  The players sleep well at night with the knowledge that the authorities are on the case - up the river working diligently to hold the water at bay.  Down river in the community the water level rises only minimally.  And, much to the delight of everyone, the insurance market remains open for business and prices remain uncharacteristically stable.  The trepidation and angst that had become the rainy day norm, has been replaced by calm and optimism.  (Those incessant naysayers are shocked by the complacency)  What’s more, in the midst of the rainy season the community is emboldened to increase construction.  With the river level rising only moderately and the insurance market functioning splendidly, the litany of homeowners, builders, bankers and insurers come to a consensus that it has become practical to build well inside the 100-year flood plane.  The insurers are emboldened by now tested assurances from the authorities – they promised and delivered.  Homeowners, witnessing newfound stability and inexpensive prices in the insurance market, have been relieved of one of their greatest worries.    And while the energized community gets back to business as usual, up the river the make-shift dams and levies grow only taller and less stable.  There’s one hell of a Wall of Water rising steadily, inches by the day.  With no viable alternative, the authorities just keep stacking sand bags, one after one, day after day, week after week.  A few now regret that they did not settle for a less than catastrophic flood some time ago.  But most expect it to stop raining soon and then everything will be ok.  But what about the ever-Climbing Wall of water? Order more sandbags and keep it a secret. Well returning to reality, what a strange week in a most extraordinary period.  On Tuesday, Harry Dent and James Glassman appear on CNBC to commemorate the 3-year anniversary of the NASDAQ Bubble peak.  Instead of appropriate contrition, both made it sound like, while admittedly a little bumpy, things are progressing about as they expected toward Dow 36,000 and The Great Boom Ahead.  And then on Wednesday viewers witnessed Milton Friedman calling for the legalization of insider trading, which really makes about as much sense in today’s environment as his monetary theories.  But the lunacy was not confined to CNBC.  The schizophrenic stock market had the wheels coming off Wednesday morning, only to miraculously engage in four-wheel drive for Thursday’s melt-up. And, all the while, we countdown the days to a war opposed by much of the world community.  This is a much different world nowadays than it was not all that long ago.