08/28/2003 Two Runaway Bubbles and Global Reflation *

The stock market seemed to enjoy itself. For the week, the Dow added almost 1% and the S&P500 gained about 2%. The Transports and Morgan Stanley Consumer index added 2%, while the Utilities advanced 1%. The Morgan Stanley Cyclical index added another 2%, increasing year-to-date gains to 26%. The broader market continues to outperform the major averages. The small cap Russell 2000 gained 2.5% this week, with 2003 gains reaching 30%. The S&P400 Mid-cap index added 2% (y-t-d gains 21%). The NASDAQ100 gained 3%, increasing y-t-d gains to 36%. The Morgan Stanley High Tech index added 3.5%, as 2003 gains reached 46%. The Semiconductors jumped 4% (y-t-d up 58%) and The Street.com Internet index gained 2% (y-t-d up 54%). The NASDAQ Telecom index jumped 4%, increasing y-t-d gains to 44%. The Biotechs added 2% (up 34% y-t-d). The Broker/Dealers (up 38% y-t-d) and the Banks (up 17% y-t-d) added 1%. With bullion surging $12.50, the HUI Gold index gained 7%. The Credit market remains extraordinarily unsettled, although rates ended the week little changed. The 2-year Treasury yield declined 2 basis points this week to 1.90%, while the 5-year yield was unchanged at 3.46%. The 10-year Treasury note saw its yield decline 1 basis point to 4.46%, with the long-bond yield down 4 basis points to 5.22%. Mortgage-backs and agency debt continue to under perform. Benchmark mortgage-backed yields were up less than 1 basis point. The spread on Fannie 4 3/8% 2013 note widened 5 basis points to 53, as the spread on Freddie’s 4 ½% 2013 note widened 4 to 53. The 10-year dollar swap spread added 1.5 to 50.5. Measures of bond market option volatility remain unusually high. Corporate bonds continue to outperform, with investment grade spreads narrowing slightly and junk spreads narrowing meaningfully. Junk bond spreads declined this week to levels last seen in June 2002. It was the second-slowest issuance week of the year for the corporate bond market. Citigroup issued $2 billion and Toll Brothers $250 million. ICI reported that investors pulled $10.8 billion from bond funds during July, ending 18 months of inflows. “Investors poured a net $249.4 billion into taxable bond funds the past three years as the stock market declined…(from Bloomberg).” After 5 weeks of outflows, junk bond funds saw record inflows of $3.26 billion this past week (from AMG). The quest for yield is very much alive, from households to the leveraged speculating community. Japanese government yields rose almost 5 basis points this week to 1.45%. With the economy demonstrating encouraging signs (and Japanese central bankers seemingly less enthusiastic about supporting the greenback), the yen today rose to a three-month high against the dollar. And with regional growth in Asia set to excel, Latin American currencies are under increasing pressure. Mexican and Argentine pesos this week traded to 5-month lows against the dollar. Emerging market debt, however, continues to perform well. Commodity Watch: The CRB index today traded to the highest level since March 12th. Soybeans enjoyed the strongest one-month price gains since June 1998 (according to Bloomberg). Prices surged 16%, with y-o-y gains of about 10%. Retail gasoline prices jumped 15% this month to a record high ($1.747 nationally), with y-o-y gains of 25%. Gold rose today to a six-month high. Copper enjoyed its best one-day jump “because of increasing demand from China, the world’s biggest consumer of the metal… Demand for the metal in China rose 24% from a year earlier…” August 27 – Bloomberg: “Cattle futures in Chicago surged to a 10-year high because of strong demand for beef at a time of reduced supplies of slaughter-ready animals. Wholesale beef prices have climbed almost 10 percent since July 1…” August 28 – USAToday: “‘Refining is a feast or famine business, and it’s a festive orgy right now,’ says Tom Kloza, chief oil analyst at Oil Price Information Service. Last week, refiners in some markets could buy oil for about $30 a barrel, refine it all into gasoline and sell the gas for $69. That’s a $39 profit vs. $4 to $10 normally. ‘Some are looking at their bottom lines and saying, ‘A few more days of this and we’ve made our year.’” Global Reflation Watch: August 28 – Bloomberg: “The New York Mercantile Exchange said a member seat to trade metals on its Comex division sold for a record $220,000, almost double the price for the last sale, which was in June.” Yesterday from Interfax: “With the severe gasoline and diesel shortages on domestic markets showing no sign of relief after several weeks, top refineries in China will begin another major output hike starting from September, and might see high demand continue into the fourth quarter, one refinery official predicted… As another way of relieving the domestic supply shortages, PetroChina has decided to reduce its September gasoline export volume by 14%...” August 29 – Bloomberg: “Japan, the world’s largest consumer of crude oil after the U.S., said oil imports rose 8.8 percent in July from a year earlier, the 11th straight month of year-on-year gains.” Bloomberg: “Mexican retail sales rose in June at their fastest rate in four months.” Market News Int.: “German real plant and equipment orders rose a strong 10% in July from their level of a year earlier.” Bloomberg: “Japanese machine tool orders rose a revised 25.4 percent in July from a year earlier…” “S. Korean Consumer Prices Rise First Time in 5 Months,” up 3.0% y-o-y. August 28 – Bloomberg: “Canadian existing home sales and prices rose to record highs in July as purchasers took advantage of the lowest mortgage rates in half a century. Sales rose 11 percent to a seasonally adjusted 41,886 in July, surpassing the prior record of 41,193 in January 2002… The average price was C$207,615 ($148,550), 12 percent greater than a year earlier and the sixth straight month of record prices.” August 28 – Market News International: “The value of new (UK) mortgage loans approved rose to its highest level on record in July, while the number of loans approved topped 100,000, the highest since May last year… These latest figures add to evidence which suggests the strength in the housing market is showing few signs of abating.” August 29 – Market News International: “UK house prices once again shattered expectations of a slowdown, rising 1.1% on the month in August… The survey showed the year-on-year growth rate slowed to 16.6% from 17.9% in July…” Eurozone M3 money supply growth expanded at an 8.5% annualized rate during July. This was up from June’s 8.3% rate of growth, with growth not stronger since last September. Total Credit growth expanded at a 5.3% annualized rate, up from June’s 4.8% to the strongest rate of growth since January 2002. Canadian broad money supply (M3) has expanded at a 10.2% annualized rate from year end through July, with 14.8% annualized growth over the past five months. UK’s lending (M4) expanded at a 10.1% pace over the past three months and is up 10.3% over 12 months. August 26 – Bloomberg: “Malaysia’s broadest measure of money supply rose at the fastest pace in four years in July because an interest rate cut boosted demand for loans from factory owners, contractors and consumers. M3, the most closely watched measure of money in circulation, rose 8.7 percent from a year earlier…” August 27 – Bloomberg: “Malaysia’s economy grew at a faster-than-expected pace in the second quarter, after Kuala Lumpur Kepong Bhd. and other planters shipped more palm oil and Petroliam Nasional Bhd. sold more liquefied natural gas and oil. Gross domestic product expanded 4.4 percent in the three months to June 30… Malaysia, Southeast Asia’s third largest economy after Indonesia and Thailand, is being helped by rising demand for commodities and higher prices…” August 27 – Bloomberg: “Thailand raised its economic growth forecast for 2003 by a full percentage point because of rising exports to China and other parts of Asia, and an increase in local consumption and investments. The Finance Ministry yesterday raised the forecast to 6.1 percent from its previous estimate of 5.1 percent… Exports have on average risen 18 percent this year because of a surge in shipments to China and other Asian nations, even as the U.S., Thailand’s single biggest buyer of Thai exports, has ordered fewer Thai goods. Exports to countries in the Association of Southeast Asian Nations grouping rose 16 percent in the second quarter to $4 billion, while sales to China surged 73 percent.” August 27 – Bloomberg: “India’s economy may grow at its fastest pace in five years in the 12 months that began April 1 as heavier than normal monsoon rains boost farm production and spending on goods and services, the central bank said. Asia’s third-largest economy may grow ‘significantly’ more than the 6 percent the Reserve Bank of India forecast in April, the central bank said… Lower rates are encouraging consumers to borrow to buy cars and homes. The central bank expects banks to lend 16 percent more in the year through March in the fiscal ending March 31.” August 28 – Bloomberg: “Airbus SAS, the world’s second largest aircraft maker, said demand for new planes is rising, especially from Asian carriers as passenger traffic increases following the containment of the deadly severe acute respiratory syndrome. Several Asian airlines that earlier had asked Airbus to push back deliveries next year because of SARS are now asking if they can have the planes on the originally scheduled dates, said John Leahy, Airbus’s chief commercial officer. ‘SARS now appears not only to be over, but there’s some pent-up demand we’re seeing as some of the traffic is even higher now than at this time last year,’ said Leahy…” August 27 – AP: “Tennessee Valley Authority directors voted Wednesday to raise electric rates for the first time since 1997. The nation’s largest public utility which serves customers in seven southeastern states said the estimated $365 million rate boost was needed to pay for $3.6 billion in required pollution controls for its coal-fired power plants by decade’s end. Homes and businesses will see a 7.4 percent rate jump beginning Oct. 1... The rate hike was only the second in 16 years for TVA.” U.S. Bubble Watch: Broad money supply (M3) was about unchanged last week. Currency was up $1.0 billion and Demand and Checkable Deposits surged $26.4 billion. Savings Deposits jumped $22.9 billion and Small Denominated Deposits declined $2.6 billion. Retail Money Fund deposits and Institutional Money Fund deposits each dropped $4.1 billion. Large Denominated Deposits dropped $12.6 billion and Eurodollar deposits dipped $1.7 billion. Curiously, Repurchase Agreements sank $25.3 billion. Foreign (Fed “custody”) Holdings of U.S. Debt increased $2.6 billion, with 4-week gains of $17 billion. Total Bank Assets dropped $49.8 billion. Securities holdings added $6.2 billion, while Loans and Leases dropped $36.7 billion. Commercial and Industrial loans dipped $1.3 billion and Real Estate loans declined $$4.3 billion. Securities loans sank $31.2 billion. Other Assets declined $18.1 billion. Elsewhere, Commercial Paper outstanding dipped $1.8 billion last week. Financial CP added $0.5 billion, while Non-financial CP declined $2.3 billion. For the first time since early 2001, Durable Goods Orders posted back-to-back monthly gains. Ex-transports, it was the strongest gain in six months. Durable Goods Shipments were the strongest in twelve months. The Chicago Manufacturing index rose for the fourth straight month to the highest level since May 2002. August’s reading of 58.9 compares to April’s 47.6 and March 2001’s 35.5. Prices Paid jumped 4.5 points to 52.4. Production added 3.2 points to the highest level since February. New Orders declined slightly but remained at a strong 61.6. Today’s Personal Income and Personal Spending data again illuminate an imbalanced economy. Personal Income was up 0.2%, with y-o-y gains of 3.3%. Benefiting from a lower tax bill, Disposable Income jumped 1.5% during July, with y-o-y gains of a noteworthy 5.2%. By category, Personal Income from Services was up 3.9% y-o-y and from Government was up 4.4% (Transfer Payments up 6.3% y-o-y). Meanwhile, Personal Income from the Goods Producing sector was up 0.2% y-o-y, with Manufacturing down 1.3% y-o-y. Personal Spending jumped 0.8% during July, the strongest gain in four months. Personal Consumption was up 4.6% y-o-y, with spending on Durables up 6.1%. J.D. Power and Associates is projecting August vehicle sales to jump to a booming 18.2 million unit pace, which would be the strongest reading since December. Goldman Sachs is forecasting sales at an 18.8 million unit rate. June sales were at a 16.4 million unit rate and July sales were at 17.3 million. Having over the past several months watched Credit excess go to extraordinary extremes – with unprecedented excesses throughout mortgage finance - we should not today be surprised by the jump in economic “output.” This week’s upward revision of second-quarter GDP to 3.1% (fueled by stronger household, corporate and government spending) now sets the stage for significant growth through the end of the year. Lehman Brothers this week raised their estimate for third-quarter growth to 5%. ISI is also saying 5% growth is “likely.” Former Fed governor Laurence Meyer is forecasting third-quarter growth of 5.25%. August 26 – San Francisco Chronicle (Kelly Zito): “Mortgage giant Fannie Mae today will announce the infusion of $35 billion into affordable housing programs in the Bay Area -- more than double the amount earmarked for such initiatives four years ago. The firm said the increase is due in part to the higher cost of housing in the Bay Area. ‘It takes more money to fill the affordability gap here,’ said Sheila Burks, director of Fannie Mae’s Bay Area Partnership office. ‘The size of the deals is bigger, the land is more expensive, and so we have to account for that.’” (“Inflation begets greater inflation”) August 24 – Akron Beacon Journal (Gloria Irwin): “Each month, hundreds of Ohioans get a free house down payment, thanks to the marketing efforts of Tom Brubaker. Brubaker is one of 70 independent representatives nationwide for AmeriDream Charity, a nonprofit organization headquartered in Maryland that helps people without significant savings get Federal Housing Administration loans. The program and others like it across the nation work because FHA rules allow borrowers to use a gift down payment. The ‘gift’ comes from the home seller, who agrees to kick back 3.75 percent of the sale price to the buyer to be used as a down payment. Brubaker is a strong advocate of such programs, which are generating 17,000 home sales a month nationally, according to one trade association. People who have worked hard and have decent credit should be able to buy homes, even if they haven’t managed to save money for a down payment, said (Brubaker)… ‘Everybody deserves to own a home,’ Brubaker said… Now, however, the federal government is studying whether these programs are also putting taxpayers on the hook for riskier loans. The inspector general at the U.S. Department of Housing and Urban Development studied 2,261 mortgages in four cities where California’s similar Nehemiah program provided the down payment. The report, released last September, found that 19.39 percent of them were in default… The findings were disputed by Nehemiah Corp., which pioneered the down payment gift program in 1997. The sample size wasn’t large enough to draw specific conclusions, Nehemiah officials said. In response, HUD is in the midst of a comprehensive internal study… In the meantime, AmeriDream and similar programs are growing in popularity. In some situations, builders of new homes also are using the program…The program isn’t perfect, though. ‘My concern with it is that the buyer has no money in the transaction,’ (mortgage company executive Mary) Schoenfeld said. Even worse, ‘99.9 percent of the time, the buyer has no money in savings at all…’ Despite the criticisms, Brubaker maintains AmeriDream's advantages outweigh its disadvantages… Even if borrowers are more likely to default, ‘is it not worth it for those people who didn’t default?’ and became homeowners, he said.” (“Hats off” to Ms. Schoenfeld!) Existing Home Sales surged to a record high in July, with sales up almost 14% from July 2002. Average Prices (mean) were up 12% over four months and 13.8% y-o-y. Average Prices were up 20% over two years, 29% over three years, and 49% since (pre-Bubble) July 1997. With July Average Prices up 13.8% and Sales Volume up 10.3%, Calculated Annualized Transaction Value (CTV) surged 25.4% to $1.40 Trillion. CTV was up 39% over two years, 61% over three years, and 109% over six years. By region, Northeast Average Prices were up 10.9% ($23,600) y-o-y, with three-year gains of 30.7% ($56,300). Midwest Average Prices were up 4.2% ($7,400) y-o-y, with three-year prices up 21.2% ($31,900). Average Prices in the South were up 16.1% ($31,000) y-o-y, and 39.5% ($63,300) since July 2000. The West saw Average Prices increase 8.1% ($21,600) over the past year, with three-year gains of 22.7% ($53,100). August 26 - American Banker: “The median existing-home price was $182,100, up 12.1% from a year earlier, the (National Association of) Realtors said. ‘That’s the strongest national price increase since November 1980, a reflection of tight inventories in a record market,’ David Lereah, the trade group’s chief economist, said… Because home prices are still rising, the ‘cost to wait,’ as Pinnacle (Financial’s) Mr. Long put it, will be higher than any savings on interest costs that would result from rates coming back down. Homebuyers should keep in mind that the effects of higher rates will not offset the costs of remaining on the sidelines while homes appreciate, Mr. Long said. ‘You always have the opportunity of bringing down your interest rate when it comes back down,’ he said.” (Shame on Mr. Long) New Home Sales were similarly “impressive.” July’s annualized volume of 1.165 million units was slightly below June’s (revised higher) record. Sales volume was up 21% y-o-y and up 32% from July 2001. Average Prices surged almost $20,000 during the month to $256,000. Average Prices were up 17.5% ($38,200) y-o-y, with six-year gains of 46%. Calculated Annualized Transaction Volume was up a notable 42.5% y-o-y to $298 billion. CTV was up 62% over two years and 111% over six years. The inventory of new homes declined 2,000 last month to 338,000, or 3.5 months supply. Freddie Mac 30-year mortgage rates increased 4 basis points lasts week to 6.32%, with 1-year adjustable rates adding 4 basis points to 3.88%. The (now widely followed) Mortgage Bankers Association refi application index sank 21% the past week to the lowest level since mid-June 2002. Purchase Applications dipped 5.7% for the third straight week of decline. Yet Purchase Applications were up 9.5% from one year ago, with dollar application volume up 18.2%. Purchase Applications were up 27% from the comparable week two years ago. August 25 – California Association of Realtors (C.A.R): “The median price of an existing, single-family detached home in California during July 2003 was $383,320, a 19.1 percent increase over the revised $321,900 median for July 2002, C.A.R. reported. The July 2003 median price increased 2.1 percent compared to a revised June 2003 $375,610 median price.” Sales were up 10% from July 2002, while the inventory of unsold homes dropped to 2.4 months from the year ago 2.6 months. Notable year-over-year price inflation included Los Angeles County up 25.4%, Riverside/San Bernardino up 27.7%, Central Valley up 20.0%, High Desert up 19.6%, Northern California up 21.5% and Santa Barbara County up 23.6%. It is worth noting that the median California home price inflated $7,710 during July and $61,420 over the past year. August 25 – Florida Association of Realtors: “It’s a bird, it’s a plane, it’s Florida’s red-hot housing resale market, soaring 16 percent in July… Statewide, a total of 19,724 existing single-family homes sold last month compared to 16,939 homes in July 2002. At the same time, the statewide median sales price also rose 13 percent to $164,000; a year ago, it was $144,700. In July 1998, the statewide median sales price for existing single-family homes was $103,800, representing a 57.9 percent increase over the five-year period…” There is a strong consensus that the mortgage boom is over and that home prices will now quietly plateau. While convenient, such an outcome would be quite unBubble-like. It is the nature of entrenched speculative Bubbles that they run increasingly out of control - that is until prices eventually reverse and hammer the speculators. Today, the American homeowner has never felt as wealthy or as infatuated with housing as the ultimate investment. It has become a full-fledged mania, with spectacular price gains only reinforcing inflationary psychology. Many key markets are very short of inventory, with virtual buyers’ panic dynamics now in play. Enjoying the fruits of rampant asset inflation and ultra-easy equity extraction, the consumer is borrowing and spending aggressively. Refinancings have slowed markedly. However, the household sector has accumulated enormous liquidity over the past year. Additionally, inflated values have again set the stage for significant equity extraction (increasingly through home equity loans as opposed to refis). There is little in today’s rate or Credit availability environment that would lead me to believe retrenchment is imminent. As Mr. Greenspan stated today, “A mild calibration of monetary policy to address asset bubbles does not and cannot work.” Well, how about 1% Fed funds with California (and other) home prices rising at an almost 20% clip? Major inflationary psychology (“blow-off”) has taken hold in housing markets from coast-to-coast. As such, Bubble dynamics would lead us to believe that surprises (Credit growth, resulting inflation and spending) will continue to be largely on the upside. Financial fragility remains the prominent wildcard. China Bubble Watch: I am also increasingly of the view that “upside surprises” are likely in store for the second historic Bubble now running on full throttle in China. Similar to the mortgage finance Bubble, I don’t believe analysts or policymakers really appreciate what has been developing. Many, in fact, have been quite dismissive of the Chinese economy, a view increasingly difficult to justify. And, again paralleling U.S. mortgage finance, when excesses reach the manic stage things have a way of becoming quite unstable and prone to running completely out of control. August 26 – Australian Financial Review: “China’s economy appears to have overcome the effects of the severe acute respiratory syndrome crisis. Retail sales, industrial production and foreign direct investment rose sharply in July 2003… China’s demand for industrial raw materials is particularly strong, and analysts expect the country’s imports of such products to continue to rise. There was strong growth in China’s consumption of key commodities such as alumina, copper, zinc, nickel and stainless steel in 2002, as more multinationals elected to use China as a major manufacturing base.” August 29 – Dow Jones: “During the next 17 years, China plans to build 30 nuclear plants with capacity totaling 32 million-40 million kilowatts, state media reported Friday. Based on China’s gross domestic product target of $4 trillion by 2020, the National Development & Reform Commission forecast China will need power generation capacity of 800 million-850 million KW by that year, compared with the current 350 million kilowatts, reported the government-run newspaper People’s Daily.” This past weekend The Peoples Bank of China announced that it would raise bank deposit reserve ratios from 6% to 7%. Bloomberg’s William Pesek wrote a good article with the poor title (I know, “Those who live in glass houses…”), “China’s Central Bank Takes Away Punchbowl.” Another economic commentator averred, “China’s actions…indicate that they will not allow the bubble to build further. This is bad news for global growth.” And another: “This is a smart move by the Chinese authorities, who are going to take a soft economic landing now instead of a hard economic landing later.” Well, let’s not get all carried away by an inconsequential reserve adjustment. And we definitely cannot disregard Bubble dynamics that, over years, have developed powerful inflationary and speculative momentum. It is worth recalling that Japanese authorities raised the discount rate from 2.50% in mid-1989 to 6% by late 1990. And even with the 1990 equities collapse, the Japanese economy posted 5.9% growth during the first quarter of 1991. It was not until the third quarter of 1993 that GDP posted a 0.1% decline. And here at home, despite a collapsing NASDAQ and Fed funds at 6.50%, the booming economy did not post negative growth until the Q1 2001’s 0.6% decline (with only mild contraction over three quarters). This week’s move by Chinese authorities will surely have little impact whatsoever on what is increasingly an unwieldy boom. If anything, it is evidence that the Chinese government is nervous, though understandably unwilling to take the risky measures that would be necessary to cool a clearly overheated economy. Contemporary central bankers – operating with global fiat currencies and unmanageable Credit systems - are notoriously soft. “Soft landings,” for the most part, are an urban myth. The bottom line is that Chinese are in the throes of one heck of a boom, a circumstance that becomes much more significant for a lot of things (global growth, commodity prices, interest rates, financial stability, etc.) as the U.S. Post-boom Boom takes hold. China’s financial institutions are said “to have made loans at the fastest pace since 1996 in July” (Austin American-Statesman). From the People’s Daily: “New bank loans grew by 1.9 trillion yuan ($230 billion) in the first six months, almost equaling the total for the whole of last year, leading banking experts to predict that the loan growth will surpass 30 percent this year.” Money supply is running up almost 21% y-o-y, compared to about 15% one year ago and 14% two years ago. “Overall national fixed income investment hit 1.93 trillion yuan ($233 billion) in the first half of this year, up an annualized 31.1 percent, the highest growth rate in ten years.” “During the first six months of this year, production and investment in steel and iron sectors grew by 21 percent and 130 percent respectively…” “In June, new construction of housing projects increased by 27.9 percent, but sales jumped by 36.4 percent…” Automobile sales are up 30% y-o-y. Think for a moment about the role that the island of Japan came to play in the global economy. Then ponder the size of China and the number of hard-working, enterprising Chinese. The SARS scare reduced economic growth from the first quarter’s 9.9% rate to 6.7% during the second quarter. But the Chinese economy (and the entire region) is now quickly bouncing back, with inflationary pressures building (as one would expect during the advanced stage of a protracted Credit boom). There are major housing Bubbles in key markets, and consumption is surging. July imports were up 35.3% y-o-y, compared to 28.9% during July 2002 and 7.5% during July 2001. As I have written in the past, the nature of inflationary manifestations changes over the course of a Credit boom. Going forward, I would expect much less talk of China “exporting” global deflation. This week, Intel announced that it would invest $375 million to build its second manufacturing facility in China, joining scores of companies (large and small) rushing to participate in the boom. Direct foreign investment was up 34% during the first seven months of the year. There are now more than 400,000 foreign companies set up to do business in China. Increasingly, there is an historic “gold rush” dynamic to the China boom that will certainly not be squelched by tinkering with reserve requirements. And demonstrating the self-reinforcing nature inherent to Credit booms, there is an interesting and significant dynamic at play regarding speculative financial flows: The greater the production boom and the larger its trade surpluses, the greater the expectation that the Chinese currency will eventually be revalued higher. This is leading to enormous speculative flows that only exacerbate the boom. Official reserves are expanding by $10 billion per month and have reached $350 billion. China’s “embarrassment of riches” leaves it with an enormous treasure trove of purchasing power. The Chinese appear increasingly willing to spend. It is worth noting that Japanese July exports were up 5% y-o-y. And while exports to the U.S. were down 6%, exports to other Asian nations were up 13% y-o-y. Leading the pack, sales to China were up 28%. Chinese imports are now stoking Asian exports, fueling impressive regional growth that has real potential to help pull even Japan out of its morass. It’s been awhile since the world has concurrently experienced Two Runaway Bubbles. And to have these companion booms now simultaneously lurching forward - fueled by unprecedented global monetary accommodation, Credit expansion, and speculative excess - is something truly extraordinary. Since the Japanese bust in the early nineties, recurring booms and busts and resulting global deflationary pressures provided, ironically, a quite auspicious environment for the blossoming U.S. Credit Bubble. Things are different these days: there are Two major unwieldy Bubbles increasingly inflating other economies. Moreover, there is presently a dearth of collapsing Bubbles working to offset inflationary pressures for the global system as a whole. These Changing Times would appear to provide a near ideal environment for energy prices, gold, commodities, and other “hard” assets. At the same time, it is difficult to envisage how the unfolding global Reflation could be anywhere near as accommodating to U.S. financial assets. It is a backdrop that looks certain to test the mettle of the leveraged and speculation-rife U.S. Credit system.