Saturday, November 1, 2014

01/21/2011 Recalling January 2008 *

For the week, the S&P500 declined 0.8% (up 2.0% y-t-d), while the Dow gained 0.7% (up 2.5%). The Banks declined 2.1% (up 2.6%), and the Broker/Dealers fell 2.3% (up 2.3%). The Morgan Stanley Cyclicals dropped 2.3% (up 1.1%), and the Transports were hit for 3.6% (down 1.2%). The Morgan Stanley Consumer index slipped 0.1% (up 0.2%), and the Utilities declined 1.4% (up 2.0%). The S&P 400 Mid-Caps dropped 1.8% (up 0.8%), and the small cap Russell 2000 sank 4.4% (down 1.3%). The Nasdaq100 fell 2.4% (up 2.3%), and the Morgan Stanley High Tech index dropped 2.5% (up 2.9%). The Semiconductors were smacked for 4.6% (up 4.8%). The InteractiveWeek Internet index sank 4.0% (up 0.8%). The Biotechs lost 2.1% (down 1.1%). With bullion down $19, the HUI gold index slid another 2.2% (down 12.0%).

One-month Treasury bill rates ended the week at 14 bps and three-month bills closed at 15 bps. Two-year government yields were 3 bps higher to 0.585%. Five-year T-note yields ended the week 9 bps higher to 1.98%. Ten-year yields rose 8 bps to 3.41%. Long bond yields ended the week up 3 bps to 4.56%. Benchmark Fannie MBS yields were 8 bps higher to 4.17%. The spread between 10-year Treasury yields and benchmark MBS yields was little changed at 76 bps. Agency 10-yr debt spreads were about a basis point wider to 11 bps. The implied yield on December 2011 eurodollar futures rose 2 bps to 0.745%. The 10-year dollar swap spread was little changed at 7.0 bps. The 30-year swap spread increased 2 to negative 38 bps. Corporate bond spreads were relatively quiet. An index of investment grade bond risk was little changed at 83 bps. An index of junk bond risk rose 2 to 414 bps.

Investment grade issuers included Morgan Stanley $5.25bn, Goldman Sachs $2.5bn, HCP $2.45bn, Oneok Partners $1.3bn, Fifth Third Bank $1.0bn, Private Export Funding $500 million, Progress Energy $500 million, and South Carolina E&G $250 million.

Junk bond funds saw inflows of $739 million (from Lipper). Issuers included Vanguard Health $1.1bn, Inergy $750 million, Crown America $700 million, American Airlines $650 million, Floria East $475 million, Targa Resources $325 million, Phibro Animal Health $300 million, CCO Holdings $300 million, Speedway Motorsports $150 million, Empire Today $150 million, and Constellation Enterprise $130 million.

Convertible debt issuers included Areas Capital $500 million and Apollo Corp $175 million.

International dollar debt issuers included Petrobras $6.0bn, Ontario $3.5bn, Petroleos de Venezuela $3.15bn, Lloyds Bank $2.0bn, Total Capital Canada $2.0bn, CIBC $2.0bn, Bank of Montreal $1.5bn, Buenos Aire $750 million, Hyundai $700 million, Banco Safra $500 million, Nigeria $500 million, Halyk Savings Bank $500 million, West China Cement $400 million, Bacardi $300 million, Virgolino $300 million, Banco Daycoval $300 million, BR Properties $285 million, and Energisa $200 million.

U.K. 10-year gilt yields rose 9 bps this week to 3.69% (up 30bps y-t-d), and German bund yields jumped 15 bps to 3.17% (up 21bps). Ten-year Portuguese yields fell 11 bps this week to 6.70%. Spanish yields sank 16 bps to 5.17%, while Irish yields jumped 28 bps to 8.61%. Greek 10-year bond yields increased 7 bps to 11.18%. The German DAX equities index slipped 0.2% (up 2.1% y-t-d). Japanese 10-year "JGB" yields added one basis point to 1.21% (up 9bps y-t-d). Japan's Nikkei fell 2.1% (up 0.4%). Emerging markets were mostly lower. For the week, Brazil's Bovespa equities index dropped 2.5% (down 0.2%), while Mexico's Bolsa declined 1.8% (down 3.2%). South Korea's Kospi index declined 1.8% (up 0.9%). India’s equities index rallied 0.8% (down 7.3%). China’s Shanghai Exchange dropped 2.7% (down 3.3%). Brazil’s benchmark dollar bond yields jumped 14 bps to 4.47%, while Mexico's benchmark bond yields fell 15 bps to 4.39%.

Freddie Mac 30-year fixed mortgage rates increased 3 bps last week to 4.74% (down 25bps y-o-y). Fifteen-year fixed rates slipped 3 bps to 4.05% (down 35bps y-o-y). One-year ARMs added 2 bps to 3.25% (down 107bps y-o-y). Bankrate's survey of jumbo mortgage borrowing costs had 30-yr fixed jumbo rates down 11 bps to 5.50% (down 59bps y-o-y).

Federal Reserve Credit declined $16.1bn to $2.416 TN (11-wk gain of $136bn). Fed Credit was up $185bn from a year ago (8.3%). Elsewhere, Fed Foreign Holdings of Treasury, Agency Debt this past week (ended 1/19) fell $7.3bn to $3.343 TN. "Custody holdings" were up $397bn from a year ago, or 13.5%.

M2 (narrow) "money" supply increased $6.9bn to $8.815 TN. Over the past year, "narrow money" grew 4.0%. For the week, Currency increased $1.8bn. Demand and Checkable Deposits fell $11.2bn, while Savings Deposits jumped $22.6bn. Small Denominated Deposits slipped $3.8bn. Retail Money Funds declined $2.4bn.

Total Money Market Fund assets (from Invest Co Inst) dropped $35.1bn to $2.761 TN. Over the past year, money fund assets have sank $489bn, or 14.9%.

Total Commercial Paper outstanding dropped $19.9bn to $916 billion, the lowest level going all the way back to 1998. CP was down $176bn y-o-y, or 16.1%.

Global central bank "international reserve assets" (excluding gold) - as tallied by Bloomberg – were up $1.424 TN y-o-y, or 18.2%, to a record $9.244 TN.

Global Credit Market Watch:

January 21 – Bloomberg (John Detrixhe): “Borrowers from China to Brazil to Nigeria are boosting dollar bond sales, taking advantage of investor demand for assets from the fastest-growing economies amid growing concern that U.S. junk debt is overpriced. Emerging-market borrowers are poised to raise at least $13.9 billion in the U.S. corporate bond market this month…”

January 21 – Bloomberg (Emre Peker): “Bain Capital LLC is leading private- equity firms in capitalizing on investor demand for leveraged loans in the U.S. to extract payouts from companies they own. Styron, taken private by Bain for $1.63 billion in June, is raising a $1.3 billion term loan to refinance debt and pay back a portion of the Boston-based firm’s investment in the maker of polystyrene and latex. TowerCo LLC is marketing $390 million of loans with $150 million slated for a payout to its backers…”

Global Bubble Watch:

January 21 – Bloomberg (Bryan Keogh): “Credit-default swaps on Europe’s deficit-ridden nations are rallying the most on record on speculation policy makers will let governments buy back their bonds at a discount to avoid restructuring their debts. The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 countries fell 12.75 bps this week to 180.25, following a 26.5 bps drop in the previous period…”

January 21 – Bloomberg: “China’s benchmark money-market rate surged to the highest since October 2007 as lenders ran short of cash after the central bank’s four increases in their reserve requirements in the past three months. The seven-day repurchase rate, which measures money availability between banks, surged 4.7 percentage points in the past five days…”

Muni Watch:

January 21 – Dow Jones (Kelly Nolan): “Investors pulled $4 billion out of municipal bond funds in the week ended Wednesday… Lipper FMI said… The outflow comes on the heels of a $1.5 billion pullout in the week ended Jan. 12. It marks the 10th straight week of outflows, which total roughly $20.6 billion.”

January 19 – Bloomberg (Alison Vekshin and Steven Church): “Vallejo, California, the biggest U.S. municipality in bankruptcy, filed a reorganization plan intended to pay creditors and end court control of its finances. The city would pay general unsecured creditors about 5% to 20% of their claims… The creditors, who include retirees and former employees, will be paid $6 million over two years…”

Currency Watch:

The U.S. dollar index declined 1.3% to 78.124 (down 1.1%), although individual currency performance varied widely. On the upside for the week, the euro increased 1.7%, the Danish krone 1.7%, the Swedish krona 1.1%, the British pound 0.8%, the Brazilian real 0.4%, the Norwegian krone 0.4%, the Japanese yen 0.4%, the Singapore dollar 0.3% and the Australian dollar 0.1%. On the downside, the South African rand declined 1.7%, the New Zealand dollar 0.9%, the South Korean won 0.9%, the Taiwanese dollar 0.3%, the Canadian dollar 0.2%, and the Mexican peso 0.1%.

Commodities and Food Watch:

January 19 – Bloomberg (Alan Bjerga and Tony Dreibus): “The same record food prices causing riots in Algeria and export bans in India are allowing President Barack Obama to combine the biggest-ever U.S. farm exports with the tamest inflation since the 1960s. Global food costs jumped 25% last year to an all- time high in December, according to the United Nations. Countries probably spent at least $1 trillion on imports, with the poorest paying as much as 20% more than in 2009, the UN says. In the U.S., the largest exporter, retail food rose 1.5% last year and will gain as little as 2% in 2011… Governments from Beijing to Belgrade are boosting imports, limiting sales or releasing stockpiles to curb food inflation.”

January 21 – Bloomberg (Maria Kolesnikova): “Cotton and wheat are leading agriculture product price gains this year and outpacing metals as frost in China, floods in Australia, rains in India and dry weather in Brazil hamper crop prospects… Cotton more than doubled and wheat futures climbed 47% in 2010 while silver jumped 83% and gold rose 30%.”

January 21 – Bloomberg (Maria Kolesnikova): “Tin rose to a record in London on speculation that a shortfall of the metal used to make solders may worsen.”

The CRB index added 0.3% (up 0.4% y-t-d). The Goldman Sachs Commodities Index declined 1.3% (up 0.5%). Spot Gold fell 1.4% to $1,342 (down 5.5%). Silver dropped 3.1% to $27.45 (down 11.3%). February Crude fell $3.40 to $89.17 (down 2.4%). February Gasoline declined 1.3% (up 1.3%), while February Natural Gas jumped 5.2% (up 7.0%). March Copper declined 2.3% (down 3.1%). March Wheat jumped 6.6% (up 3.8%), and March Corn added 1.3% (up 4.5%).

China Bubble Watch:

January 21 – Bloomberg: “China’s 10.3% economic growth last year drove the biggest increase in the nation’s rural incomes in a quarter century, bolstering efforts to spur consumption in the world’s most populous nation. In the countryside, per capita net income rose 10.9% to 5,919 yuan ($898)… The gain was faster than for urban incomes for the first time since 1997. The report also showed an acceleration in retail sales and industrial production at the end of last year.”

January 19 – Bloomberg: “Yolkie Sun’s addiction to Facebook Inc. cost China Mobile Communications Corp. a longtime customer. Sun… switched to China United Network Communications Group… to access the social networking site. Her smartphone accesses the website through a virtual private network that can take three times longer to run on China Mobile… The… company plans to more than triple its Wi-Fi hotspots this year… China Mobile may increase its number of hotspots to 1.1 million by year’s end from the 300,000 it had in June… Its capital expenditures of 111 billion yuan ($16.8 billion) this year may be 13% above previous projections, he said.”

January 21 – Bloomberg (Kelvin Wong): “Sarah Cheung was bracing for a rent increase on her apartment in Hong Kong’s Happy Valley district ahead of the expiration of her lease this month. She still wasn’t prepared when her landlord demanded 43% more. ‘We’ve looked around and this is still one of the better deals, even after the raise’ to HK$40,000 ($4,890) a month… Rents of Hong Kong luxury homes… are growing faster than in London, fuelling lease increases in the broader market, fanning inflation and hampering government efforts to cool housing prices. Hong Kong luxury rents may jump as much as 15% this year after a 13% gain in 2010…”

Japan Watch:

January 21 – Bloomberg (Toru Fujioka): “Japanese Prime Minister Naoto Kan is projected to break his fiscal promise of capping bond sales as he struggles to secure revenue, boosting the case for higher taxes to contain the world’s largest public-debt burden. Japan’s new bond sales will expand to 46.7 trillion yen ($563bn) in the year starting April 2012, surpassing Kan’s target of 44.3 trillion yen…”

January 20 – Bloomberg (Takahiko Hyuga): “Japanese housewives’ ‘secret savings’ fell 18% to the lowest in three years in 2010 as slumping family incomes and rising prices for food and energy forced them to tap reserves, a survey shows. The value of so-called hesokuri, the cash and investments that housewives stash without telling their husbands, fell to an average 3.1 million yen ($37,700) in 2010…”

India Watch:

January 20 – Bloomberg (Kartikay Mehrotra): “Indian power developers are seeking financing from China to fuel expansion as rupee interest rates soar and local banks say they can’t keep up with demand to fund about $45 billion of equipment orders from China needed by 2017… Utilities are turning to China as they buy boilers and turbines to help meet India’s 100,000 megawatt capacity-addition target in the five years ending March 2017.”

Asia Bubble Watch:

January 19 – Bloomberg (Eunkyung Seo): “South Korea must continue efforts to reduce threats from cross-border capital flows to shield the nation’s economy from external shocks, Bank of Korea Governor Kim Choong Soo said…”

January 21 – Bloomberg (Suttinee Yuvejwattana): “Thailand’s economy expanded at the top end of the central bank’s forecast range last year… Gross domestic product probably increased 8%...”

Latin America Watch:

January 20 – Bloomberg (Iuri Dantas and Gabrielle Coppola): “The heaviest rainfall in Brazil since 1967, already a disaster that has killed 741 people, is adding to the fastest inflation in two years. Storms that dropped at least 17.6 inches of rain this month in the hardest-hit areas triggered mudslides that washed away highways and damaged crops, igniting concern food prices may rise as much as 17% in the first quarter, according to Fabio Romao, an economist with LCA Consultoria in Sao Paulo. ‘The shock in food prices caused by rains is hitting an already heated economy,’ Ures Folchini, the head of fixed income investments at Banco WestLB do Brasil SA in Sao Paulo, said…”

January 20 – Bloomberg (Gabrielle Coppola): “Petroleo Brasileiro SA plans to raise $6 billion on international markets in Brazil’s largest corporate bond offering.”

Unbalanced Global Economy Watch:

January 21 – Bloomberg (Greg Quinn): “Canadian retail sales rose faster than economists predicted in November, with widespread advances led by gains at new car dealers. Sales advanced 1.3% to a seasonally adjusted C$37.3 billion ($37.4bn), the sixth gain in a row…”

January 18 – Bloomberg (Jennifer Ryan): “U.K. inflation accelerated more than economists forecast to an eight-month high in December as fuel and food prices rose, adding to pressure on the Bank of England to raise the key interest rate from its record low. Consumer prices rose 3.7% from a year earlier after a 3.3 percent increase in November…”

January 21 – Bloomberg (Jana Randow): “German business confidence unexpectedly rose to a record high in January as booming exports to Asia and stronger household spending bolstered growth in Europe’s largest economy.”

January 19 – Financial Times (Gerrit Wiesmann): “Germany’s public sector deficit looks set fall below the European Union’s 3% limit in 2011 – one year ahead of schedule – according to data that the government hopes will send a strong signal that the eurozone is getting to grips with its debt problem. Rainer BrĂ¼derle, the Germany’s economy minister, said another year of strong growth and declining joblessness would ‘probably’ narrow the gap between public spending and tax receipts to 2.5% of gross domestic product, from 3.5% in 2010. Since the global crisis saw governments pile up debt to fund bank bail-outs and stimulus spending, Berlin has been intent on leading the eurozone out of its borrowing binge as soon as possible.”

U.S. Bubble Economy Watch:

January 18 – Bloomberg (Shobhana Chandra and Anthony Feld): “Rich shoppers are driving an increase in consumer spending, bolstering a recovery that masks reluctance among less affluent Americans to join in. Sales are up at Tiffany & Co. and Coach Inc., buoyed by demand for $6,000 diamond pendants and $1,200 leather handbags as a stock-market surge pads the wallets of the wealthy. At the other end of the economic spectrum, Wal-Mart… reports ‘everyday Americans’ are living paycheck to paycheck as they await an improvement in job prospects. ‘The heavy lifting is being done by the upper-income households,’ said Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase… ‘They’re the ones benefiting the most from the stock market rally, and they’re spending.’”

January 19 – Bloomberg (David Mildenberg): “Texas lawmakers plan to unveil a $79.3 billion two-year general-fund budget that would cut spending by 10% from the current fiscal biennium and not raise taxes… The draft budget would slash education spending by 10%, to $44.3 billion, and health and human services by 7.7%...”

January 20 – Bond Buyer (Jim Watts): “Dallas is facing a revenue gap in fiscal 2012 of at least $41 million… In the worst-case scenario presented to the council… revenue would fall by $44.7 million and expenditures would be $51.3 million more than in fiscal 2011, producing a $96 million shortfall.”

Real Estate Watch:

January 21 – Bloomberg (Hugh Son): “Bank of America Corp., the largest U.S. bank by assets, reported a $1.24 billion fourth-quarter loss as costs mounted for refunds, writedowns and litigation tied to faulty mortgages.”

Central Bank Watch:

January 19 – Bloomberg (James G. Neuger): “Axel Weber’s candidacy for the European Central Bank presidency got a boost after two smaller countries laid claim to an ECB Executive Board post, saving the top job for one of the European Union’s powers. Belgium and Slovakia nominated candidates for an ECB seat becoming vacant in May, clearing an obstacle to a bid by the German banker for the top job when Jean-Claude Trichet’s term ends in October.”

January 19 – Bloomberg (Scott Hamilton and Jennifer Ryan): “U.K. lawmakers who scrutinize Bank of England officials including Governor Mervyn King said they’re concerned about accelerating price gains and want reassurance the central bank isn’t losing control of inflation. ‘This is a big test for them now and they need to weather this to ensure that credibility is maintained,’ John Thurso, a Liberal Democrat member of the British Parliament’s Treasury Committee, said… ‘I’m looking for reassurance’ that ‘we’re not just quietly abandoning the inflation target.’”

GSE Watch:

January 21 – Bloomberg (Clea Benson): “Fannie Mae and Freddie Mac’s combined inventory of foreclosed residential property has quadrupled in just three years and now stands at a record $24 billion. The number of properties on their rolls -- now at nearly 242,000 -- has increased fivefold. That’s roughly a third of the total U.S. portfolio of repossessed homes. And it’s growing because the two mortgage companies operating under U.S. conservatorship aren’t finding buyers faster than new foreclosures come in.”

Recalling January 2008:

The first few weeks of 2011 have me recalling early-2008. It’s as if someone reached over, flicked a switch and changed market dynamics. Abruptly, last year’s outperformers have come under heavy selling pressure, while the underperformers have in many cases caught strong bids. Things are unsettled and there are divergences. And I’m not just talking U.S. equities.

Peripheral European debt markets have enjoyed a dramatic reversal of fortune. Greek Credit default prices (CDS) are down a notable 173 bps so far this year (down 210 bps in the past 9 sessions). Portugal’s 10-year CDS price was down 116 bps in nine sessions and 64 bps y-t-d. Spanish CDS has declined 94 bps in 9 sessions (down 83bps y-t-d). Peripheral bond spreads (to German bunds) have collapsed. Bond spreads have declined 150bps in Greece, 95bps in Portugal and 49 bps in Spain – in only three weeks!

The dollar index jumped 2.5% the first week of the year, sank 2.3% the second week and declined a further 1.3% this past week. Reminiscent of currency market volatility back in January 2008, the euro has gained 1.8% y-t-d against the dollar, this despite a 3.5% decline the first week of the year. Last year’s strongest currencies have lagged so far in 2011. The “safe haven” Japanese yen and Swiss franc have declined 1.8% and 2.4%, respectively. The “commodities currencies,” also strong 2010 performers, have stumbled out of the blocks. The Australian dollar has declined 3.3% and the New Zealand dollar 2.9%.

After a stellar 2010, the precious metals stocks have suffered thus far in 2011. Silver has been hit for 11.30% and gold is down 5.5%. Many of the metals stocks have been hit harder. The HUI “Gold Bugs” index is down 12.0% y-t-d. And defying those that had believed that year-end anomalies had created exceptional buying opportunities, municipal bond prices have been slammed further to begin the year.

Equities markets have seen significant volatility and sector divergences. After a big 2010, the broader U.S. stock market is lagging. The small cap Russell 2000 has declined 1.3%, while the S&P400 Mid-Cap index is up only 0.8%. Some of last year’s laggards have sprung to life. The S&P Homebuilding index has gained 6.5%. The NYSE Financials have outperformed, gaining 3.8%. The Semiconductors are up 4.8% y-t-d.

Selling pressure in the stock market has certainly not been as heavy as that experienced in January 2008. Yet the past few weeks have been reminiscent of how volatility and rather abrupt changes in market underpinnings caught market players – especially the leveraged speculating community – flat footed.

Players began 2008 out of synch, with trading conditions across various asset classes turning challenging - and progressively frustrating. Almost overnight, uncertainty seemed to take root throughout equities, fixed-income, currency and commodities markets. Breathtaking moves and abrupt market reversals began to subtly take their toll. Things that had worked quit working. An increasingly uncomfortable crowd of speculators saw their various long exposures lag and their shorts outperform.

And it wasn’t all that long before losses began to mount and defensiveness became the order of the day – with inflated markets hanging in the balance. De-risking and de-leveraging then fueled atypically high correlations amongst various markets, causing considerable angst for the leveraged players and others dependent upon "quant" models. The “wrecking ball” of high volatility and highly-synchronized global risk markets began working against systemic stability. This dynamic fed - and was being fed by - the concurrent rapid slowing of mortgage Credit. Instability took on a life of its own, as markets dependent upon abundant liquidity and speculation began to suffer withdrawals.

There have been various recent reports suggesting that hedge fund assets and leverage have returned to near pre-crisis levels. Record industry assets seem reasonable to me; near record leverage does not. A major increase in speculative leverage is not apparent from ongoing stagnation in Wall Street balance sheets, bank Credit, and reported “repo” positions. There is, at the same time, the huge unknown of “carry trade” leverage embedded throughout global currency and fixed-income markets. And while I doubt the leveraged players are today the marginal source of marketplace liquidity to the extent they were in 2008, they are surely a major force to be reckoned with.

I’ll assume that many leveraged players came into the year positioned short the euro, short peripheral Europe CDS, short European financials, and long precious metals, mining and energy stocks. In global equities, those short Spanish (IBEX 35 up 9.8% y-t-d) and Italian (FTSE MIB up 9.5% y-t-d) equities have suffered losses. Those caught short some of the major European banks have been badly stung. There are also some losses for those long U.S. small caps and American retailers and/or short banks and homebuilders.

With parallels to 2008, the success or failure of the leveraged players takes on additional prominence now that there are cracks in the global government finance Bubble. On the margin, global yields continue to have an upward bias. Our ten-year Treasury yield is up 11 bps so far in January, while the long-bond has seen yields jump 23 bps to a near nine-month high 4.58%. Few sectors, however, are showing the effects of waning marginal liquidity than U.S. municipal finance.

The Bloomberg 20-year municipal bond yield composite index has jumped 33 bps in three weeks to a near 2-year high 4.72%. Muni yields are now up 150 bps in about three months. Muni funds saw $3.9bn of outflows this past week (from Lipper), with over $20bn having exited over the last ten weeks. The heated debate regarding the number of prospective defaults misses the point: the important – and vulnerable – U.S. municipal finance sector has suffered a decisive reversal of flows and liquidity dynamics. Whether it turns out to be hundreds of defaults or merely a few, the reality is that market-imposed “austerity” will now provide headwinds against economic growth. This dynamic also creates heighted uncertainty and potential financial instability.

I have argued that the Fed’s “activist” policymaking from the second-half of 2007 actually exacerbated systemic fragilities and contributed directly to the severity of the 2008 crisis. The overabundance of liquidity, coupled with the perception that policymaking would restrain the unfolding debt crisis, proved destabilizing and, inevitably, devastating. They fostered intense speculative excess, inflated market prices, unsustainable financial flows, and Bubble Dynamics. Myriad booms were fun while they lasted, although the heavy costs included heightened uncertainty and fragilities. Last year’s discussion and then implementation of “QE2” has had similar effects.

Marketplace liquidity can be steadfast or fickle. Market confidence varies between incredibly resilient to stunningly fleeting. To be sure, crises of confidence are difficult to predict. But one can monitor and gauge the forces that create susceptibility to abrupt shifts in market sentiment and altered trading conditions. Policymaker responses to structural problems (i.e. zero rates, massive monetization, federal stimulus and “Build America Bonds”) created distortions in risk perceptions and the flow of finance to the muni sector, while in the process delaying needed structural reform. The muni debt issue was allowed to fester; financial market distortions worsened.

For now, QE2 reliably generates additional liquidity for the liquidity-dependant markets. Somewhat ironically – yet altogether Bubble-like - rising bond yields and unfolding problems in municipal finance have bolstered flows into equities. And on the back of ongoing federal spending excess, economic prospects look ok and earnings appear swell. Yet recent developments do beckon for heightened diligence when it comes to monitoring for fissures developing below the surface of our fragile financial system. At least from my perspective, one can now discern unsettling parallels to early 2008.