| US stocks lost more ground against booming global equity markets. For the week, the Dow fell 2.0% and the S&P500 declined 1.8%. The Utilities dropped 2.6%, while the Transports declined only 0.3%. The Morgan Stanley Cyclical and Morgan Stanley Consumer indices each lost 1.9%. The broader market was under significant selling pressure. The small cap Russell 2000 fell 2.5%, and the S&P400 Mid-cap index dropped 2.1%. Technology stocks held up relatively well. The NASDAQ100 declined 1.7% and the Morgan Stanley High Tech index fell 1.6%. The Semiconductors dropped 3%, while The Street.com Internet Index declined 1.4%. The NASDAQ Telecommunications index declined 1.3%. The Biotechs were hit for 2.7%. Financial stocks were somewhat mixed. The Broker/Dealers declined only 1%, while the Banks were hit for 2.6%. Although bullion rose $3.50, the HUI Gold index ended the week down 1%. Steady as she goes for the Fed. For the week, two-year Treasury yields rose 4 basis points to 4.01%, and five-year government yields added one basis point to 4.07%. At the same time, bellwether 10-year yields declined 2.5 basis points for the week to 4.25%. Long-bond yields fell 4 basis points to 4.52%. The spread between 2 and 10-year government yields dropped 6 to 24 bps. Benchmark Fannie Mae MBS yields rose one basis point, again underperforming 10-year Treasuries. The spread (to 10-year Treasuries) on Fannie’s 4 5/8% 2014 note was unchanged at 30, and the spread on Freddie’s 5% 2014 note narrowed slightly to 29. The 10-year dollar swap spread increased 0.5 to 44.75, a 5-week high. Corporate bond spreads widened somewhat, with junk bonds underperforming. The implied yield on 3-month December Eurodollars rose 8 basis points to 4.25%, almost returning to pre-Katrina levels. December ’06 Eurodollar yields increased 4.5 basis points to 4.43%. This week’s investment grade corporate issuance declined somewhat to $14.1 billion. Issuers included Harrahs $1.75 billion, Washington Mutual $1.25 billion, Dominion Resources $1.0 billion, Archer Daniels Midland $600 million, Sysco $500 million, New York Life $500 million, Colonial Realty $325 million, International Lease Finance $300 million, Florida Power & Light $300 million, Nationwide Finance $200 million and Ethan Allen $200 million. Junk bond funds reported outflows of $329 million (from AMG). Issuers included GSC Holdings $950 million, Pogo Producing $500 million, Williams Scotsman $350 million, School Specialty Inc $350 million and Wesco $150 million. Convertible debt issuers included Cyberonics $125 million. Foreign dollar debt issuers included Telecom Italia $2.2 billion, HBOS Plc $1.5 billion, Egypt $1.25 billion, Teck Cominco $1.0 billion and Desarrolla Homex $250 million. September 23 – Bloomberg (Michael Rothschild): “ABN Amro Holding NV and Citigroup are arranging Turkey’s biggest corporate loan, providing $1.4 billion to help finance the purchase of a controlling stake in Turk Telekomunikasyon AS… The government in July agreed to sell 55 percent of Turk Telek., Turkey’s state-owned phone company, to Saudi Oger in Riyadh for $6.6 billion in the country’s largest asset sale… Turkish banks and companies are borrowing record amounts to pay for acquisitions and refinance existing debt at a lower cost. ‘It’s a borrower’s market,’ said Hulya Kefeli, head of financial institutions at Akbank TAS in Istanbul…” Japanese 10-year JGB yields added one basis point this week to 1.365%. Emerging debt and equity markets continue to impress. Brazil’s benchmark dollar bond yields dropped 13 basis points to 7.40%. Brazil’s Bovespa equity index surged 5% to a new all-time high (up 19.5% ytd). The Mexican Bolsa added 1.4% to a new record high, increasing y-t-d gains to 21%. Mexican govt. yields rose 3 basis points to 5.32%. Russian 10-year dollar Eurobond yields rose 4 basis points to 6.01%. The Russian RTS equity index surged 4.6% to a new record (up 57% ytd). Freddie Mac posted 30-year fixed mortgage rates rose 6 basis points to 5.60%, up 10 basis points from one year ago. Fifteen-year fixed mortgage rates increased 5 basis points to 5.37%. One-year adjustable rates added 2 basis points to 4.48%, up 48 basis points from the year ago level. The Mortgage Bankers Association Purchase Applications Index declined 2.6%. Purchase Applications were up 9.9% from one year ago, with dollar volume up 22.4%. Refi applications jumped 7%. The average new Purchase mortgage increased to $243,900, while the average ARM declined to $366,900. The percentage of ARMs jumped to 29.8% of total applications. Broad money supply (M3) fell $3.8 billion to $9.943 Trillion (week of September 12), with a noteworthy 17-week gain of $317.5 billion, or 10.1% annualized. Year-to-date, M3 has expanded at a 6.9% rate, with M3-less Money Funds expanding at a 7.8% pace. For the week, Currency rose $2.3 billion. Demand & Checkable Deposits dropped $27.9 billion. Savings Deposits rose $13.2 billion, and Small Denominated Deposits gained $2.5 billion. Retail Money Fund deposits increased $3.0 billion, and Institutional Money Fund deposits jumped $9.1 billion (4wk gain of $33.5bn). Large Denominated Deposits dipped $2.7 billion. Year-to-date, however, Large Deposits are up $225.7 billion, or 29.4% annualized. For the week, Repurchase Agreements declined $4.8 billion, while Eurodollar deposits added $1.7 billion. Bank Credit fell $23.0 billion last week. Year-to-date, Bank Credit has expanded $617.6 billion, or 12.8% annualized (up 10.2% from a year earlier). Securities Credit slipped $3.9 billion during the week, with a year-to-date gain of $155.5 billion (11.4% ann.). Loans & Leases have expanded at a 13.7% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 16.8%. For the week, C&I loans added $1.0 billion, while Real Estate loans declined $12.7 billion. Real Estate loans have expanded at a 15.3% rate during the first 37 weeks of 2005 to $2.82 Trillion. Real Estate loans were up $363 billion, or 14.8%, over the past 52 weeks. For the week, Consumer loans added $2.7 billion, while Securities loans dropped $15.5 billion. Other loans gained $5.3 billion. Total Commercial Paper increased $7.6 billion last week to $1.617 Trillion. Total CP has expanded $203.6 billion y-t-d, a rate of 19.7% (up 21.7% over the past 52 weeks). Financial CP added $3.4 billion last week to $1.469 Trillion, with a y-t-d gain of $184.4 billion, or 19.6% annualized, and up 21.9% from a year earlier. Non-financial CP jumped $4.3 billion to $148.9 billion (up 19.2% ann. y-t-d and 19.6% over 52 wks). There was certainly no let up in the ABS market, with issuance surging to $25 billion (from JPMorgan). Year-to-date issuance of $555 billion is 19% ahead of comparable 2004. Home Equity Loan ABS issuance of $363 billion is 23% above comparable 2004. Fed Foreign Holdings of Treasury, Agency Debt slipped $3.4 billion to $1.456 Trillion for the week ended September 21. “Custody” holdings are up $120.6 billion y-t-d, or 12.4% annualized (up $166bn, or 12.9%, over 52 weeks). Federal Reserve Credit dipped $0.17 billion to $800.4 billion. Fed Credit has expanded 1.7% annualized y-t-d (up $32.9bn, or 4.3%, over 52 weeks). International reserve assets (excluding gold) - as accumulated by Bloomberg’s Alex Tanzi - were up $628 billion, or 18.8%, over the past 12 months to $3.963 Trillion. September 22 – Bloomberg (Torrey Clark): “Russia’s foreign currency and gold reserves rose for a fourth straight week, the longest consecutive gain since May, to a record $155 billion. Reserves rose by $3.1 billion in the week to Sept. 16…” Currency Watch: The dollar index gained better than 1% this week. On the upside, the Brazil real gained another 1.3%. The South African rand added 0.5%, the Colombian peso 0.2%, and the Uruguay peso 0.2%. While declining today, the Canadian dollar this week traded to a 13-year high. On the downside, the New Zealand dollar fell 1.8%, the Hungarian forint 1.5%, the Czech koruna 1.5%, the British pound 1.5%, and the Swedish krona 1.5%. Commodities Watch: September 20 – Bloomberg (Claudia Carpenter): “Commodities surged the most since Dwight Eisenhower was U.S. president 49 years ago after energy prices soared on concern Tropical Storm Rita might disrupt fuel production… The Reuters/Jefferies CRB Index of 19 commodities rose 12.02, or 3.8 percent, to 327.41, the biggest percentage gain since the index debuted in September 1956. The index has climbed 19 percent in the past year, reaching a 24-year high of 337.18…” September 19 – Financial Times (Kevin Morrison ): “The soaring rubber price has prompted tyre makers to hike up their prices several times this year, while some makers of large construction equipment have faced tyre shortages due to a lack of available material. Bridgestone, the world’s second-largest tyremaker, announced on Friday that it planned to raise tyre prices by up to 8 per cent at its US and Canadian operations - the seventh price rise since 2003… Rubber-glove makers in Asia have been another group forced to pass on the cost of higher raw material charges… Bridgestone’s move comes amid predictions of rubber shortages… The conditions in the rubber industry are very similar to other natural resource industries where a lack of investment in new supply during the 1990s meant that the industry was unprepared for the start of the sharp sustained lift in demand from China four years ago.” September 19 – Bloomberg (Alison Fitzgerald): “Kevin O’Neill, a homebuilder from Cooksville, Maryland, is buying all the lumber he can for his current jobs, expecting that prices will skyrocket. Since Hurricane Katrina, price quotes from his supplier are only good for two weeks, rather than the usual 90 days, he says. ‘This is all in anticipation,’ O'Neill says. ‘Nobody’s buying anything to rebuild Louisiana or Mississippi yet. Building-materials costs, already rising this year with housing starts near a 20-year high, will go even higher as hurricane reconstruction increases demand.” September 19 – Bloomberg (Rip Watson): “Hundreds of Mississippi River barges are backed up and waiting to unload grain at hurricane-damaged terminals in Louisiana, causing a shipping shortage that has doubled equipment rental prices and raised export costs.” November crude oil added 85 cents to $64.19. November Unleaded gasoline surged 12% this week, with November Natural Gas up almost 7%. Copper gained almost 7% to a new record. For the week, the CRB jumped 2.4%, increasing y-t-d gains to 13.8%. The Goldman Sachs Commodities index rose 3.5%, with 2005 gains increasing to 45.2%. China Watch: September 22 – Dow Jones: “Investing some of China’s massive foreign reserves into U.S. Treasurys is ‘not worthwhile,’ a senior party official said… ‘I think it’s better that China should invest its huge forex reserves in overseas energy resources stocks as reserves,’ said Zheng Xinli, deputy minister of China’s Central Policy Research Office.” September 20 – Bloomberg (Philip Lagerkranser and Joshua Fellman): “Hong Kong’s unemployment rate stayed at a 4-year low in August as the economy improved, helping to create jobs for students entering the workforce. The…jobless rate was 5.7%...” Asia Boom Watch: September 20 – Bloomberg (Kathleen Chu): “Land prices rose in central Tokyo for the first time since 1990 and spread to outlying districts of the city as Japan’s economic recovery and demand from property trusts and funds helped boost values.” September 23 – Bloomberg (Theresa Tang): “Taiwan’s export orders rose almost twice as fast as expected in August and industrial production had the biggest gain in 11 months, as electronics demand picked up… Orders, indicative of actual shipments in one to three months, surged 22.7 percent from a year earlier to a record $22.2 billion…” September 22 – Bloomberg (Theresa Tang): “Taiwan’s unemployment rate fell to a four-year low in August, sliding as companies including AU Optronics Corp. and Chi Mei Optoelectronics Corp. expand to meet rising demand. The seasonally adjusted jobless rate fell to 4.11 percent… The rate hasn’t been lower since March 2001.” September 21 – Bloomberg (William Sim): “South Korea’s economy will expand at 3.8 percent this year after growing 3 percent in the first half, the Ministry of Planning and Budget said. Economic growth will reach 5 percent next year…” Unbalanced Global Economy Watch: September 20 – Financial Times (Roula Khalaf ): “Dark blue sofas are arranged in rows in front of a giant screen. Men sit around leisurely drinking coffee, smoking and chatting as their eyes follow the flickering lights on the screen. It may have the feel of a cafe and the appearance of an entertainment centre but this is the ‘investment lounge’ at a branch of the Saudi British Bank in Riyadh, capital of the conservative Saudi kingdom, where such things as cinemas and concerts are banned… Investment lounges such as this have proliferated over the past two years as the Saudi stock market has surged… ‘It’s a service that the banks offer but it’s become a social thing now," says one banker. "Some people come and stay for hours. They follow stock prices, and call up their brokers.’ The stock market craze is the most obvious sign of the economic boom in the world’s largest oil producer… So extraordinary is the liquidity and so limited the reliable research on companies that investors act on tips heard from friends, internet chat rooms and message boards, driving prices of even money-losing stocks steadily higher.” September 21 – Bloomberg (Greg Quinn): “Canada’s retail sales rose 1.5 percent to a record in July, faster than economists predicted, led by purchases of new cars and gasoline.” September 22 – Bloomberg (Theophilos Argitis): “Canadian consumer prices rose 2.6 percent in August from the same month last year, the fastest pace in more than two years, as the cost of gasoline climbed.” September 21 – Bloomberg (Sandrine Rastello): “Consumer spending in France, Europe’s third-largest economy, rose the most in 16 months in August as unemployment declined and retailers cut prices. Spending on manufactured goods rose 1.9 percent from July…” September 23 – Bloomberg (Brian Swint): “Import price inflation in Germany, Europe’s largest economy, held steady at the fastest pace in more than four years in August as oil prices surged to a record. Import prices increased 4.7 percent from a year earlier…” September 22 – Bloomberg (Hugo Miller): “Swiss watch exports rose 15.5 percent in August, buoyed by a jump of a fifth in shipments to the U.S. for watchmakers such as Compagnie Financiere Richemont SA and Swatch Group.” September 21 – Bloomberg (Jacob Greber): “Swiss retail sales rose in July for a second month as shoppers boosted spending on clothes and electronics, adding to signs Europe’s eighth-largest economy is strengthening. Sales increased 5.5 percent from a year earlier…” September 20 – Bloomberg (Sheyam Ghieth): “Italy’s jobless rate fell to the lowest in more than a decade in the second quarter after Europe’s fourth-biggest economy emerged from recession… The unemployment rate in the second quarter, adjusted for seasonal factors, fell to 7.7%...” September 23 – Bloomberg (Victoria Batchelor): “Australian sales of newly built homes increased for a second month in August, spurred by sales in the nation’s most populous state… New home sales rose 5.6 percent last month from July…” Latin America Watch: September 23 – Bloomberg (Patrick Harrington): “Mexico’s exports rose in August as oil prices surged and automakers…boosted production for sale in the U.S. market… The 15 percent increase in August exports from the year-earlier period was double the 7.3 percent median forecast…” September 19 – Bloomberg (Alex Emery): “Peru’s exports jumped 24.7 percent in August, spurred by U.S. and Chinese demand for the country’s copper, gold and natural gas. Exports rose to $1.43 billion, the second-highest monthly figure in Peru’s history…” Bubble Economy Watch: September 20 – Bloomberg (David M. Levitt): “New Jersey developer Dean Geibel is partnering with…Donald Trump to build Trump Plaza in Jersey City, which they said would be the two tallest residential towers in the state. Construction will begin later this year on the high-rise condominiums…The site of the two buildings, one 55 stories, the other 50 is to be…a block west of the city’s Hudson River waterfront…” September 21 – Bloomberg (Rodney Yap): “U.S. hotels’ revenue per available room rose 15.0 percent in the week ended September 17 from the same period a year earlier, according to Smith Travel Research.” Speculator Watch: September 22 – Financial Times (David Wighton): “Germany’s top financial regulator on Thursday tried to persuade Wall Street it should be “scared as hell” about the threat posed by hedge funds to the world financial system. The audience at a Goldman Sachs conference on the top 10 risks to the global economy heard Jochen Sanio, head of BaFin, warn that it was only a matter of time before there was another Long-Term Capital Management... “It will happen. And nobody at the moment is prepared for it. That is why I am scared as hell,” Mr Sanio said. But, judging by an electronic poll at the end of the conference session on hedge funds, the audience hardly seemed scared at all.” California Bubble Watch: September 21 – Bloomberg (Vivien Lou Chen): “Californians are growing more pessimistic about the state's economy partly because fewer residents are confident inflation will remain stable, according to a poll taken before Hurricane Katrina… Thirty percent of those surveyed…said the state’s economy will worsen in the next year compared with 14 percent who held that view a year ago…” Mortgage Finance Bubble Watch: September 21 – Bloomberg (Kathleen M. Howley): “U.S. home refinancing may rise to the second-highest level ever this year as borrowers convert adjustable-rate mortgages to fixed-rate loans, according to Fannie Mae… Lending probably will increase to $2.77 billion from $2.73 billion in 2004… A record $3.76 billion was lent in 2003.” September 23 – Bloomberg (Peter Woodifield): “New Century Financial Corp., a mortgage lender to people with below-average credit histories, cut its earnings forecast for the year, saying rising interest rates and inflation concerns were squeezing profits.” Q2 2005 “Flow of Funds”: Demonstrating unrelenting Credit Bubble Excess, Total Credit Market Debt (TCMD) expanded $721.6 billion, a 7.7% rate, during the quarter to $38.11 Trillion. This was up from the first quarter’s 7.1% growth rate and significantly higher than the year earlier 6.6%. Seasonally-adjusted and annualized (SAA) by the Fed, TCMD expanded $3.025 Trillion during the quarter, slightly below the first quarter’s record $3.051 Trillion. These numbers compare to 2004’s record $2.767 Trillion expansion, 2003’s $2.757 Trillion, 2002’s $2.238 Trillion, 2001’s $1.955 Trillion and 2,000's $1,686 Trillion. TCMD is up $2.986 Trillion during the past year, or 8.5%, with a 2-year gain of $5.523 Trillion, or 17%. Since the beginning of 2000, TCMD has surged $12.837 Trillion, or 51% and, since the start of 1998, $17.040 Trillion, or 81%. Since the beginning of 1998, TCMD as a percentage of GDP has increased from 256% to 308%. After borrowing heavily during the first quarter, Federal debt was about unchanged during the quarter (up 5.5% ann. during the first half). But there was certainly no let-up in the private-sector borrowing binge. Total Non-federal debt expanded at an 8.9% rate, equaling the first quarter. Total Household Debt expanded at a 9.9% rate, up from the first quarter’s 9.6% and slightly ahead of the year ago 9.8%. Total Business borrowings increased at an 8.4% rate, up from the first quarter’s 7.2% to the strongest pace since Q2 2000. After expanding debt at a 12% pace during the first quarter, State & Local borrowings slowed to a 5.6% rate during the second quarter. Conversely, Financial Sector Debt expanded at a 9.5% rate during the first quarter, up from the first quarter’s 5.5%. Financial Sector borrowings increased $1.125 Trillion SAA, the strongest rate of quarterly growth since Q3 2003. And it is worth nothing the marked change in the nature of this sector’s borrowings/Credit intermediation. For the entire year 2003, Financial Sector Credit market borrowings increased $1.029 Trillion, comprised of Agency MBS $330.5 billion; GSE debt $243.7 billion; ABS $239.3 billion; Finance Company debt $118.2 billion; REIT borrowings $31.9 billion; Commercial Banks' market debt $49.2 billion; and other $16.2 billion (Funding Corps contracted $1.4bn). During the second quarter, SAA borrowings were as follows: ABS issuance $507.6 billion; Funding Corps $378.2 billion; Agency MBS $122.1 billion; REITs $84.3 billion; Savings Institutions $82.4 billion; and Commercial Banks $41.5 billion; with GSE debt contracting $84.3 billion. ABS increased $128.5 billion during the quarter, or 19.7% annualized (up 19.5% ann. during the first-half), to $2.734 Trillion. Over the past year, ABS has ballooned $437.4 billion, or 19%. This compares to growth during year-2000 of $168.6 billion, 2001 of $243.2 billion, 2002 of $195.1 billion, and 2003 of $239.5 billion. On a SAA basis, ABS holdings increased $508.2 billion during the second quarter. Examining ABS assets, Mortgage holdings surged $527.4 billion SAA during the quarter, or 104% of total ABS expansion. This ratio compares to (mortgages comprising) 39% of ABS expansion in 2000, 47% in 2001, 41% in 2002, 102% in 2003 and 142% during 2004. At this pace, it won’t be long until the ABS market is essentially all mortgage-related. And as the ABS marketplace enjoys a historic boom, the GSEs stagnate and agency MBS growth slows significantly. During the second quarter, GSE debt contacted $20 billion (2.8% ann.) to $2.801 Trillion. GSE debt is down 1.5% over the past year. MBS expanded by only $20.7 billion during the quarter (2.3% ann.) to $3.568 Trillion, with a one-year gain of 1.3%. Over the past 10 quarters, ABS has increased $778 billion (40%), Agency MBS $409.6 billion (13%), and GSE debt $252 billion (9.9%). ABS has now more than doubled (103%) since the beginning of 2000. The boom in Wall Street Finance is, not surprisingly, also conspicuous with the Wall Street securities firms. Broker/Dealer Financial Asset holdings expanded at SAA $565.8 billion pace, up from the first quarter $450.5 billion and quite a reversal from the year ago decline of $37.8 billion. For comparison, Broker/Dealer assets expanded $277.6 billion during 2003 and $231.9 billion during 2004. Assets expanded at a 20% rate during the quarter, with a growth rate of 24% over the past four quarters. Credit Market Instruments expanded $26.2 billion during the quarter to $466.2 billion, and Miscellaneous Asset jumped $85.3 billion to $1.134 Trillion. On the Liability Side, “Repos” increased $59.7 billion to $681.1 billion. Repo Liabilities were up 81% over the past year, financing fully 77% of total Broker/Dealer Asset growth. (Wall Street) Funding Corporation (“Funding subsidiaries, nonbank financial holding companies, and custodial accounts for reinvested collateral of securities lending operations.”) assets ballooned SAA $652.4 billion during the quarter. For the quarter, Assets expanded 41% annualized to $1.490 Trillion. On the Asset side, “Open Market Paper” holdings rose SAA $310.1 billion and “Investment in Broker/Dealers” increased SAA $353.9 billion. On the Liability side, “Open Market Paper” increased SAA $346.2 billion and “Securities Loaned (net)” expanded SAA $297.9 billion. Funding Corp assets increased 19% over the past year, while expanding at a 30% rate during this year’s first-half. Commercial Bank Assets expanded at a 9.4% rate during the quarter to $8.929 Trillion. This was down from the second quarter’s 11.1% rate but up from the year ago 7.8%. Bank Credit expanded at a 9.6% rate, led by booming Loan growth. Bank Loans expanded at a 12.6% rate, up from the second quarter’s 9.6%. On a SAA basis, Total Loans expanded $596.8 billion, up slightly from the first quarter and significantly higher than the year earlier $356.8 billion. Loans to corporations expanded at SAA $206.8 billion, up from the first quarter’s $110 billion and the year ago $64.9 billion. Bank Mortgage Assets expanded at a 15% rate to $2.790 Trillion. Bank Mortgage holdings have increased 14.5% over the past four quarters and 27.2% over the past two years. Financing this enormous Bank Credit expansion? On the Liability side (the financial claims created in the process of Bank Credit expansion), Large Time Deposits expanded at a 14.8% rate to $1.222 Trillion. Large Time Deposits expanded 18% during the past year and 30.7% over the past two years. Total Deposit growth slowed to a 6.4% rate during the quarter (up 8.7% over the past year) to $5.222 Trillion. The Liability “Fed Funds and Repo” expanded at a 22.4% rate during the quarter to $1.081 Trillion (netted against “repo” assets). The Liability “Credit Market Instruments” expanded at an 8.1% rate to $792 billion, while “Miscellaneous” Liabilities increased at an 11.4% rate to $1.785 Trillion. Bank “Bond” Liability growth slowed to a 6.7% rate at $465 billion, reducing one-year growth to 15.5%. Total system “Fed Funds & Repo (net)” expanded at a 29% rate during the quarter to $1.916 Trillion (up 22% y-o-y). REIT Liabilities increased at a 31% rate during the quarter to $507.9 billion (up 42% y-o-y). Finance Companies expanded at a 2.4% rate to $1.431 Trillion, with Credit Union assets growing at a 4.1% rate to $677 billion. Money Market Fund Assets declined at a 2% rate during the quarter to $1.832 Trillion, the slowest pace of contraction in several years. Total Non-Federal (non-financial) Debt (NFFD) expanded $1.807 Trillion SAA during the second quarter, up from the first-quarter’s $1.754 Trillion and significantly higher than comparable 2004's $1.264 Trillion. For comparison, NFFD expanded $1.103 Trillion during 1999, $1.130 Trillion during 2000, $1.113 during 2001, $1.075 Trillion during 2002, $1.278 Trillion during 2003, and $1.541 Trillion during 2004. Household Sector borrowings increased at a SAA $1.037 Trillion, up from the first quarter’s $985.2 billion and the year ago $931.7 billion. Household debt continues to boom at historic extremes, and now business debt is expanding rapidly as well. Business borrowings jumped to $672 billion SAA, up from the first quarter’s $567 billion and the year ago $281.1 billion. For comparison, total Business borrowings increased $556.9 billion during 2000, $393.8 billion during 2001, $184.8 during 2002, $311.1 billion during 2003 and $419.2 billion during 2004. Total Mortgage Debt (TMD) expanded $1.270 Trillion SAA during the quarter, second only to Q3 2004. This compares to the first quarter’s $1.170 Trillion and is significantly higher than the year ago $1.039 Trillion. Total Mortgage Debt expanded at a 12.1% pace during the quarter to $11.11 Trillion, up from the first quarter’s 9.6% rate. Over the past four quarters, TMD expanded a record $1.247 Trillion, or 12.6%. For perspective, TMD expanded $555 billion during 2000, $673.8 billion during 2001, $835.3 billion during 2002, $1.014 Trillion during 2003, and $1.183 Trillion during 2004. TMD has increased to 90% of GDP, up from 64% to begin 1998. Household Mortgage Debt also expanded at a 12.1% rate during the quarter, ending June at $8.528 Trillion. Household Mortgage Debt is up 12.9% over the past year, 27% over two years and 41% over three years. Household Mortgage Debt is up an historic 105% from just seven years ago. Home Mortgage Debt is on pace to expand $950 billion this year, which compares to the nineties’ average of $231 billion. With Mortgage Finance Bubble excesses fueling an annual Current Account Deficit approaching $800 billion, there is no mystery surrounding the $973.3 billion seasonally-adjusted annualized (SAA) Rest of World (ROW) Acquisition of US Financial Assets. And let’s remind ourselves that this household debt-binge-created “liquidity” largely represents what some refer to as a “global savings glut.” On a SAA basis, ROW acquired $294 billion of U.S. Time Deposits, $160 billion of Checkable Deposits & Currency, and $79.6 billion of Security Repurchase Agreements. Holdings of Credit Market Instruments increased $750.1 billion SAA, including $136.9 billion of Treasuries, $167.9 billion of Agency Debt, and $346.2 billion of Corporate Bonds (which include ABS). (Misc. Other Assets declined $432.6bn SAA). It is worth noting that ROW purchased more Treasury and Agency debt securities than were issued (net) during the second quarter. ROW holdings of US Financial Assets were up $1.48 Trillion over the past year (16.6%) to $10.416 Trillion, with a two-year gain of $2.607 Trillion (33%). Over the past year, holdings of Credit Market Instruments were up $744 billion (17.2%), with a two-year gain of $1.382 Trillion (38%). Holdings of “Repos” were up $74.2 billion over the past year to $625.3 billion, with a two-year gain of 72%. Foreign Direct Investment was up $136.2 billion over the past year to $1.763 Trillion, with a two-year gain of 15%. Not only is the ongoing U.S. Credit Bubble stoking The Global Liquidity Glut; it is also swelling the U.S. Household Balance Sheet. Household (including non-profits) Assets jumped $1.207 Trillion during the quarter, or 8.1% annualized, to a record $60.976 Trillion. Household Liabilities rose at a 9.8% pace to $11.142 Trillion. And the more aggressive we borrow, the greater the resulting asset inflation. Household Net Worth – referred to yesterday as our actual “savings and impressive at that!” by Larry Kudlow – jumped $940.3 billion during the quarter (7.7%) to a record $49.834 Trillion. Over the past year, Household Net Worth has inflated $4.284 Trillion, or 9.4% - representing about 35% of GDP for the period. This has been the upshot of Assets inflating $5.367 Trillion (9.7%), offset by Liabilities increasing $1.084 Trillion (10.8%). Real Estate holdings were up $708 billion (14.6% ann.) during the quarter and $2.673 Trillion (14.6%) over the past four quarters. For comparison, Real Estate holdings increased $1.462 Trillion during 2003. Household holdings of Financial Assets increased $438 billion during the quarter (4.8%) to $37.03 Trillion, with a one-year gain of $2.462 Trillion (7.1%). The “Flow of Funds” remains an amazing document, although I will be the first to admit that one report now seems to blend right into the next. The data are painfully tedious, while at the same time extraordinarily illuminating. There is no mystery with regard to over-liquefied global financial markets; we continue to witness the greatest asset-based (securities and real estate) lending boom the world has ever experienced. And if we had any doubt that the Credit Bubble could continue to expand with the GSEs relegated to the infirmary, well, the ballooning Bank and Broker/Dealer balance sheets have, for now, settled the issue. And if we wondered how an increasingly securities-based Credit system could create sufficient instruments to sustain the Great Mortgage Finance Bubble, the ballooning ABS market has, for now, settled the issue. If we pondered the possibility that we were approaching some limit to the amount of leveraged securities speculation that the system could finance, well, ballooning “Fed Funds & Repo” and “Funding Corps” have, for now, settled the issue. The Flow of Funds provides us with the capacity to recognize and appreciate historic financial evolution. And while the capacity for contemporary Credit excess continues to amaze, I become more convinced every quarter of the impossibility of avoiding a precarious endgame. Each quarter we are provided additional evidence that our contemporary Credit system is incapable of moderation and self-adjustment – Credit inflation begets only greater Credit inflation. And the Credit Bubble has now gone full-fledged international, a development consistent with surging oil prices and gold at a near 18-year high (not to mention global equities and bond prices). Global Credit systems have evolved to the point of having attained the capability to aggressively inflate in tandem. This has played a major role in buttressing the vulnerable dollar, thus delaying the inevitable dollar crisis. Importantly, this postponement has provided ample opportunity for major booms to unfold in global real estate and securities markets, oil exporting economies, commodity-based economies, global energy exploration and development, and emerging debt and equity markets. These respective booms today have, in an era of rampant global over-liquidity, the inherent capacity for engendering ongoing enormous Credit and speculative excess. The potential for a dollar crisis that would have incited a global debt crisis dissipated, opening the floodgates for extraordinary global Credit inflation and speculative excess. And while the Global Credit Bubble will now be susceptible to potential crises around the globe, the “Flow of Funds” helps identify a potential fault-line in the nature of US securities finance. The confluence of booming mortgage Credit, ballooning Wall Street balance sheets, surging “repo” finance and unprecedented ABS issuance is seductively problematic. “Financial conditions” are patently and conspicuously much too easy. The “confluence” works magically in loose monetary conditions, creating only more liquidity and the loosest environment imaginable. This “confluence,” however, will function especially poorly when financial conditions eventually tighten, a development increasingly necessary to rein in heightened global inflationary pressures and precarious asset Bubbles. |
Tuesday, September 9, 2014
09/22/2005 Q2 2005 'Flow of Funds' *
