The Greenspan Levee
Global stocks and bonds benefited from overly abundant liquidity. For the week, the Dow gained 2.2%, and the S&P500 gained 1.9%. The Transports were on the defensive, slipping 0.8%. The Utilities rose 1.4%, and the Morgan Stanley Consumer index added 1.6%. The Morgan Stanley Cyclical index increased 1.3%. The broader market was strong. The small cap Russell 2000 gained 2.2%, and the S&P400 Mid-cap index increased 1.8%. Technology stocks performed well. The NASDAQ100 added 2.2%, the Morgan Stanley High Tech index 2.3%, and the Semiconductors 3.1%. The Street.com Internet and NASDAQ Telecommunications indices gained 2.5%. The Biotechs rose 1.9%, increasing y-t-d gains to 18.7%. Financial stocks were mixed. The Broker/Dealers jumped 3.3%, while the Banks could muster only 0.5%. With bullion up $4.80 to a 9-month high $449.20, the HUI gold index gained 3.5%.
A little reality returned to the bond market. For the week, two-year Treasury yields jumped 12 basis points to 3.87%, and five-year government yields rose 10 basis points to 3.94%. Ten-year Treasury yields rose 9 basis points for the week to 4.12%. Long-bond yields added 11 basis points to 4.40%. The spread between 2 and 10-year government yields narrowed 3 to 25 basis points. Benchmark Fannie Mae MBS yields rose 9 basis points, in line with 10-year Treasuries. The spread (to 10-year Treasuries) on Fannie's 4 5/8% 2014 note narrowed 1.5 basis points to 29.5, and the spread on Freddie's 5% 2014 note narrowed one basis point to 30. The 10-year dollar swap spread declined 1.25 to 42.75. Corporate bond spreads generally narrowed. Junk bond spreads narrowed, recovering from some of last week's widening. The implied yield on 3-month December Eurodollars rose 12 basis points to 4.08%, and December '06 Eurodollar yields gained 13.5 basis points to 4.275%.
This week's investment grade corporate issuance included HSBC $3.35 billion, Eli Lilly $1.5 billion, Verizon Global $1.5 billion, Nisource Finance $1.0 billion, Monumental Global $600 million, Nuveen Investment $550 million, ERP Operating LP $500 million, Merrill Lynch $400 million, Lennar $300 million, and Realty Income $175 million.
Junk bond funds reported inflows of $84.5 million (from AMG). Issuers included Williams Companies $700 million, Unisys $550 million, and Videotron $175 million.
Convertible debt issuers included Maxtor $325 million and Dobson Communications $150 million.
Foreign dollar debt issuers included Brazil $2.25 billion, Resona Bank $1.3 billion, Inter-American Development Bank $1.0 billion, Philippines $1.0 billion and Korea Development Bank $750 million.
September 8 - Bloomberg (Elzio Barreto): "Brazil's benchmark 11 percent bond due 2040 rose to its highest level ever... The yield to the 2015 call date on the 2040 bond...fell to 8.01 percent..."
Japanese 10-year JGB yields added 3.5 basis points this week to 1.34%. Emerging debt markets more than held their own. Brazil's benchmark dollar bond yields dropped 15 basis points to 7.58%. Mexican govt. yields were about unchanged at 5.17%. Russian 10-year dollar Eurobond yields fell 5 basis points to 5.96%.
Freddie Mac posted 30-year fixed mortgage rates were unchanged for the week at 5.71%, with rates down 12 basis points from one year ago. Fifteen-year fixed mortgage rates slipped 2 basis points to 5.30%, a 7-week low. One-year adjustable rates declined 3 basis points to 4.45%, down 13 basis points in three weeks but up 45 basis points from the year ago level. The Mortgage Bankers Association Purchase Applications Index jumped 6.1%. Purchase applications were 5.4% ahead of the year ago level, with dollar volume up about 18%. Refi applications rose 7.7%. The average new Purchase mortgage increased to $242,900, while the average ARM surged to $371,900. The percentage of ARMs declined to 26.5% of total applications.
Broad money supply (M3) expanded $10.2 billion to a record $9.913 Trillion (week of August 29). Year-to-date, M3 has expanded at a 6.8% rate, with M3-less Money Funds expanding at an 8.0% pace. M3 has expanded $287.5 billon over the past 15 weeks, or 10.4% annualized. For the week, Currency added $0.9 billion. Demand & Checkable Deposits rose $4.6 billion. Savings Deposits dropped $17.1 billion, while Small Denominated Deposits gained $3.4 billion. Retail Money Fund deposits added $1.1 billion, and Institutional Money Fund deposits jumped $15.8 billion (2wk gain of $20.7bn). Large Denominated Deposits jumped $10.0 billion, with a 4-week gain of $66.4 billion. Year-to-date, Large Deposits are up $208.1 billion, or 29.5% annualized. For the week, Repurchase Agreements dipped $3.4 billion, and Eurodollar deposits declined $5.1 billion.
Bank Credit jumped another $31.3 billion last week. Year-to-date, Bank Credit has expanded $612.1 billion, or 13.4% annualized (up 10.7% from a year earlier). Securities Credit rose $20.5 billion during the week, with a year-to-date gain of $169.2 billion (13.1% ann.). Loans & Leases have expanded at a 13.9% pace so far during 2005, with Commercial & Industrial (C&I) Loans up an annualized 17.5%. For the week, C&I loans declined $2.3 billion, while Real Estate loans jumped $11.4 billion. Real Estate loans have expanded at a 15.8% rate during the first 35 weeks of 2005 to $2.812 Trillion. Real Estate loans were up $369 billion, or 15.1%, over the past 52 weeks. For the week, Consumer loans declined $3.1 billion, while Securities loans rose $11.4 billion. Other loans dropped $6.6 billion.
Total Commercial Paper declined $2.8 billion last week to $1.599 Trillion. Total CP has expanded $185.1 billion y-t-d, a rate of 18.9% (up 18.0% over the past 52 weeks). Financial CP fell $5.9 billion last week to $1.454 Trillion, with a y-t-d gain of $170.1 billion (19.1% ann.). Non-financial CP gained $3.1 billion to $144.5 billion (up 16.7% ann. y-t-d and 10.6% over 52 wks).
ABS issuance surged to $34 billion (from JPMorgan). Year-to-date issuance of $513 billion is 22% ahead of comparable 2004. Home Equity Loan ABS issuance of $329 billion is 25% above comparable 2004.
Fed Foreign Holdings of Treasury, Agency Debt dipped $1.7 billion to $1.4665 Trillion for the week ended September 7. "Custody" holdings are up $130.7 billion y-t-d, or 14.1% annualized (up $175.6bn, or 13.6%, over 52 weeks). Federal Reserve Credit rose $1.47 billion to $799.3 billion. Fed Credit has expanded 1.6% annualized y-t-d (up $34.8bn, or 4.6%, over 52 weeks).
International reserve assets (excluding gold) - as accumulated by Bloomberg's Alex Tanzi - were up $610 billion, or 18.4%, over the past 12 months to $3.92 Trillion. Russia reserve assets were up 75% y-o-y to $148 billion.
The dollar index gained less than 1% this week. On the upside, the Indonesian rupiah rebounded 1.2%, the Australian dollar gained 1.2%, the Brazilian real 0.9%, and the Canadian dollar 0.8%. On the downside, the Iceland krona was hit for 2.0%, the Swedish krona fell 1.4%, and the Swiss frank declined 1.0%.
October crude oil fell $3.49 to $64.08. October Unleaded gasoline lost 11%, giving back a good part of last week's rise. For the week, the CRB index dropped 2.4%, reducing y-t-d gains to 13.9%. The Goldman Sachs Commodities index sank 5.0%, with 2005 gains slipping to 41.8%.
September 7 - Bloomberg (Patricia Kuo): "Eric Leung, the chief financial officer at China Gas Holdings Ltd., expected some tough bargaining when he set out to borrow $40 million for the Shenzhen, China-based gas distributor in April. Instead, he got $60 million and didn't have to pledge assets in return. 'We were very surprised,' says Leung... after France's Societe Generale SA, Germany's Commerzbank AG and Singapore's Oversea-Chinese Banking Corp. arranged China Gas's first foreign-currency loan. 'International banks are less conservative than Chinese banks on unsecured lending.' Dozens of international banks are vying to lend in China, undeterred by a bad-loan rate of at least 10 percent at the four largest state-run lenders."
September 6 - Bloomberg (Philip Lagerkranser): "Hong Kong's retail sales growth unexpectedly picked up in July as increased consumer spending offset declining tourist arrivals from mainland China. Sales increased 7 percent to HK$17.4 billion ($2.2 billion) after rising a revised 6.1 percent in June..."
September 9 - Bloomberg (Masahiro Hidaka and Mayumi Otsuma): "Japan's financial system has recovered its health and stability as lenders have gradually written off bad loans, Bank of Japan Governor Toshihiko Fukui said. 'Japan's financial system has finally regained its health and the central bank will continue to support institutions' attempts to improve their businesses through inspections, monitoring and seminars, Fukui said... Bad loans at Japanese lenders fell 28 percent in the fiscal year...the third straight annual decline..."
September 9 - Financial Times (David Turner and David Pilling): "Japan reached another milestone on the road to economic recovery yesterday when figures showed bank lending rose for the first time in seven years. Although it is too early to declare the tide has turned, any sustained upturn in bank lending would indicate that financial institutions had at last recovered their appetite for risk after years of scaling back their exposure to bad borrowers. As well as boosting economic activity, an expansion of credit could have a significant impact on monetary policy by restoring the transmission mechanism by which central bank monetary expansion flows into the real economy... The BoJ, in its monthly economic report, said: 'The lending attitude of private banks is becoming more accommodative.'"
September 8 - Bloomberg (Kathleen Chu and Noriko Tsutsumi): "Office vacancies in Tokyo fell to their lowest in more than three years last month as supply of office space declined... The vacancy rate in Tokyo's five main business districts...declined to 4.57 percent in August..."
Asia Boom Watch:
September 7 - Bloomberg (Theresa Tang): "Taiwan's exports grew in August at the fastest pace in four months as overseas demand for the island's laptop computers and flat-panel displays increased. Shipments rose 7.6 percent from a year earlier to $15.9 billion after gaining 5.3 percent in July..."
September 7 - Bloomberg (Kevin Cho): "South Korean household debt had the biggest increase in almost three years in August as consumers borrowed to buy property and to finance education, a central bank report showed. Bank lending to households rose 4.5 trillion won ($4.5 billion) from a month earlier to 296.6 trillion won... August's gain was the largest since October 2002..."
September 8 - Bloomberg (Laurent Malespine): "Thailand's tax revenue rose a fifth in August, boosted by higher corporate and consumption tax receipts, reflecting rising company profits and personal income, the finance ministry said today. Total tax receipts last month rose 19.9 percent to 181.4 billion baht ($4.42 billion)..."
September 7 - Bloomberg (Anuchit Nguyen): "Thailand's central bank raised its benchmark interest rate by a half-point, the seventh increase in a year, to curb inflation caused by higher oil prices... The Bank of Thailand set the 14-day repurchase rate at a five-year high of 3.25 percent..."
Unbalanced Global Economy Watch:
September 8 - Bloomberg (Theophilos Argitis): "Canada's industrial companies used more of their production capacity than at any time in more than four years in the second quarter... Manufacturers, miners and electric utilities used 86.7 percent of their production capacity between April and June, the highest level since the fourth quarter of 2000..."
September 6 - Bloomberg (Ben Sills): "Retail sales in the dozen nations that share the euro rose the most in at least 20 months in August as retailers cut prices and unemployment declined."
September 7 - Bloomberg (Sam Fleming): "U.K. house prices jumped in August by the most in 11 months after last month's interest-rate cut by the Bank of England spurred demand for property, HBOS Plc said. Prices rose 1.6 percent to an average of 165,967 pounds ($306,167), the most since September 2004, the U.K.'s biggest mortgage lender said..."
September 6 - Bloomberg (Simone Meier): "German manufacturing orders unexpectedly increased the most this year in July, led by foreign demand for goods such as factory machinery, adding to signs that Europe's largest economy is returning to growth. Orders rose 3.7 percent from June..."
September 9 - Bloomberg (Francois de Beaupuy): "France's industrial production fell in July, recording its biggest decline in 11 months... French factories, utilities and mines unexpectedly cut production by 0.9 percent from June..."
September 8 - Bloomberg (Jeffrey T. Lewis and Jim Silver): "Portugal's economic growth accelerated at the fastest pace in almost five years in the second quarter, helped by a pickup in consumer spending and gains in exports... The economy grew 1 percent in the three months ended in June..."
September 9 - Bloomberg (Marketa Fiserova): "The Czech economy expanded at the fastest pace in nine years in the second quarter as new manufacturing plants maintained export growth... The $117 billion economy rose an annual 5.1 percent..."
September 6 - Bloomberg (Eduard Gismatullin): "OAO Russian Railways, which runs the world's second-largest rail network, plans to spend at least 530 billion rubles ($19 billion) between 2006 and 2008 to upgrade tracks, locomotives and cars."
September 8 - Bloomberg (Adam Brown): "Car sales in Romania will rise 50 percent this year to 250,000 units from a year ago, Romania's Association of Automobile Producers and Importers said... Sales in the first eight months of the year rose 60 percent to 168,000 units..."
September 7 - Bloomberg (Victoria Batchelor and Gemma Daley): "Australia's economy grew faster than expected in the second quarter as miners such as BHP Billiton invested more to extract coal, iron ore and copper to meet demand in China. Gross domestic product rose 1.3 percent in the three months ended June 30, the fastest pace since the fourth quarter of 2003..."
September 8 - Bloomberg (Victoria Batchelor and Gemma Daley): "Australian employers unexpectedly hired extra workers in August, extending the longest run of job gains in 10 years and helping drive growth in Asia-Pacific's fifth-largest economy... Employment climbed 32,600 last month, compared with a 12,100 gain in July... The jobless rate remained at a 29-year low of 5 percent..."
Latin America Watch:
September 9 - Bloomberg (Andrew J. Barden): "Brazil's industrial production rose in July at its slowest pace in almost two years, heightening speculation the central bank will cut the benchmark lending rate next week."
Bubble Economy Watch:
September 9 - Bloomberg (Jesse Westbrook): "Hurricane Katrina may cost U.S. insurers including Allstate Corp. a record $60 billion, almost double earlier estimates, as the scale of devastation becomes clear, said storm modeler Risk Management Solutions Inc. Katrina would trump Hurricane Andrew as the most costly catastrophe in U.S. history... Total damages may exceed $125 billion, up from $100 billion, the company said. 'When we think about economic loss and insured loss, there are few events that rival Katrina,' said Kyle Beatty, a meteorologist at...Risk Management."
The ISM Non-Manufacturing index jumped 4.5 points to a robust reading of 65, the highest level since April 2004. And, if my data are correct, April 2004's reading was the only month higher than August's. At 65.8, the New Orders index was the strongest in two years.
September 8 - From Freddie Mac's monthly Economic Outlook: "While lower near-term mortgage rates will continue to fuel nation-wide housing demand, the reconstruction efforts will place additional upward pressure on construction material costs. The most immediate effects will be on plywood and roofing tiles, as many homeowners make repairs in the broader Gulf region. Since construction materials account for about one-third of the cost of a new home, increases in costs for lumber, cement, gypsum board and other materials of only 5% to 10% could add 2% to 3% to new home costs in coming months, supporting existing home values. The net effect (lower interest rates but higher construction material costs) on overall construction is likely to add to new starts in 2006 and existing home sales, relative to what they would have been. Thus, mortgage originations will be slightly greater too, compared to our pre-Katrina projection."
September 7 - Bloomberg (Rip Watson): "U.S. truckers, who deliver 80 percent of the nation's shipments, expect to spend $85 billion this year for fuel, 37 percent more than last year as diesel prices continue to rise after Hurricane Katrina cut production. The American Trucking Association trade group today raised its estimate of annual fuel spending from $80 billion."
September 9 - Bloomberg (Linda Sandler): "Bruce McMahan, a Connecticut-based hedge-fund manager who plans to start a fund in London, bought the pocket watch Horatio Nelson had with him when he died at the Battle of Trafalgar. McMahan, who runs the Argent Funds Group, paid more than 350,000 pounds ($637,000) for the gold watch, made by Josiah Emery in about 1787...McMahan bought the watch partly to mark Argent's expansion into London..."
California Bubble Watch:
September 7 - Bloomberg (Michael B. Marois): "California lawmakers approved a bill increasing the state's minimum wage to $7.75 an hour within two years, the highest of any U.S. state... The state's Democratic-controlled Senate today passed the bill in a 26 to 13 vote. It passed the Assembly in June. The bill would raise the minimum wage from $6.75 to $7.75 an hour..."
Mortgage Finance Bubble Watch:
September 6 - "New Century Financial, a real estate investment trust and parent company of one of the nation's premier full-service mortgage finance companies, announced today that loan production volume for August 2005 increased 91 percent to $6.1 billion compared with the same period in 2004."
The Greenspan Levee:
In light of Katrina's devastation, I have been encouraged to update my "Town by the River - A Derivative Story." I will patiently await changes in the financial landscape before penning the next "chapter." Although I will note that, to this point, the hastily constructed Levees up the river continue to hold the potential cataclysmic flood at bay. What's more, the altered flow of water has induced booms to sprout up all along a world of new lake waterfronts and tributaries provided by the enormous expanding upstream pool of liquid. Risk-taking has been emboldened and, importantly, it has broadened.
Few (in the Town by the River) recognize that the issue of flood management has become immensely more complex, now involving scores of additional thriving communities, markets and policymakers - not to mention the unfathomable amounts of accumulating water! And while authorities in The Town huff and puff about their increased concern for the aged housing boom along the river, the enterprising players in the Bubbling insurance and asset markets have understandably unwavering confidence that timid local politicos will no longer risk more than tinkering with the fragile Levee system. The consequences of a Levee failure and resulting complete system breakdown have become too catastrophic to even contemplate.
I do often contemplate the real world weakness of the flood insurance analogy - that while booming activities in the insurance and building sectors do significantly heighten systemic risk, they at least don't influence weather patterns (make it rain more!). In financial insurance markets, however, rapid growth in derivatives does directly increase the probabilities of a financial crash. If one believes that Credit, leveraged speculation and liquidity excesses pose inevitable serious risks to system pricing and trading mechanisms, and that booming derivatives markets by their very nature spur an expansion of Credit, speculation, leverage and liquidity -- are financial insurance markets not the contemporary bane of system stability?
Are there pertinent financial lessons to be gleaned today from Katrina's devastation? Well, I am again reminded of the notion that "a culture of optimism is a culture of denial." Many argue that this disaster was a very low-probability, unpredictable event. In reality, however, a storm with sufficient force to breach New Orleans' aged Levee system was a near certainty - only a matter of "when and not if." It was also clear that a period of relative tranquility masked the reality that underlying conditions were ripening for a mega-storm.
But as a society, we are simply incapable these days of objectively analyzing potentially devastating scenarios. "Negativism" is un-American. We certainly won't tolerate it from our leaders, and they don't want it from us. Don't worry... Why weren't we better prepared to respond to Katrina's devastation? Because it is virtually impossible to openly contemplate, discuss, plan and mobilize significant resources in preparation for such a catastrophe. Lip service, perhaps, but nothing more. We and our policymakers are conditioned to emphasize potential positive returns, to downplay risks and virtually disregard the potential for disaster. After all, with our nation's vast resources and legendary resourcefulness, why not assuredly exploit all opportunities, ignore perceived low-probability negative outcomes and enthusiastically employ a "mop-up strategy" if things somehow ever run amok?
To acknowledge the possibility of a catastrophic outcome is unacceptable, as it would demand a change in behavior and sacrifice that we, as a society, are simply unwilling to make prior to its occurrence. And, let's face it, the more financially stretched one becomes, the more inclined one is to totally disregard the worst-case scenario.
We see such a mindset phenomenon at work with the manner in which households manage their finances; with government and business management of spiraling healthcare costs and underfunded pensions; with the execution of the war in Iraq; and with the federal deficit and the Current Account. If there is no easy solution, then better to not even address the dilemma. We are conditioned to scoff at warnings of global warming, much to the chagrin of the rest of the world. And evidence of future energy shortfalls is not sufficient to have us question our god-given right to SUVs and our huge new homes a long drive out to the suburbs of suburbia. And while "risk-management" is all the rage throughout the expansive business of finance and monetary/economic management, the financial sector just drifts farther and farther away from having any capacity to effectively manage a catastrophic development.
It has become, these days, increasingly interesting to watch key policymakers (Mr. Greenspan, in particular) and our more attuned pundits jockeying to buttress their reputations in preparation for the inescapable financial storm. The always-ingenious Mr. Greenspan has focused the debate on narrow "risk premiums" and unsustainable liquidity, in the process setting the stage for policymaker finger pointing at overzealous market participants when boom inevitably turns bust. Powerful Market Pundits, on the other hand, would like to fashion the debate around the "Greenspan Put," attempting to walk a very fine line as stalwart supporters of Wall Street finance and general supporters of Federal Reserve inflationary policies. Things have been so good - the Greenspan Fed so successful in fostering "price stability" - that the upshot of low yields across the risk spectrum has been an ironic expansion of risk-taking behavior. Minksy's astute "stability is destabilizing" hypothesis is, today, an all too alluring expedient. It is, nonetheless, decidedly unsuitable analysis.
The Fed's ultra-aggressive 2002-2004 accommodation was an example of policy errors begetting bigger ones, in the process compounding liquidity-induced Monetary Disorder. I simply cannot stomach the "stability is destabilizing" analysis for a period where California home values, energy prices, and our Current Account Deficit spiraled completely out of control. The fact of the matter is that acute asset inflation and speculation are, as always, telltale indications of some degree of underlying Monetary Disorder. Inflationary Disorder was conspicuous throughout the technology sector, including tech stocks, telecom debt and Silicon Valley home prices, in the late-nineties. Later, with Fed prodding and gung-ho Wall Street enthusiasm, Monetary Disorder expanded, broadened, and solidified to the point of encompassing financial asset and real estate markets the world over.
If it were merely a case of years of system stability breeding a bout of risk-taking behavior, the core of underlying system fundamentals would today be sound. They are patently unsound. If a stable financial and economic backdrop were the locus fueling destabilizing behavior, the Fed would not have allowed itself to be hogtied into (ineffective) baby-step rate increases. Indeed, the key dynamic today is financial and economic systemic fragility, and this reality resonates kindly throughout the bond market. The Conundrum is a manifestation of the Powerful Bubble Interplay of Acute System Fragility and Ongoing Rampant Asset-based Lending/Liquidity Excesses (Mega-Monetary Disorder).
I've never been a big fan of the notion of the "Greenspan Put." I am, however, warming to the notion of a Greenspan Levee. The Greenspan Put conveys that there is a market instrument/mechanism always available to right the markets' wrongs - an exercise of "mopping things up." A Levee, on the other hand, works splendidly until it fails. If the water level is sufficiently high, a breach guarantees a catastrophic outcome (only afterwards will the toxic mop-up commence). The Greenspan Levee brooks the massive and unrelenting inflation of Wall Street finance. Worse yet, we have passed the point where our policymakers will dare scrutinize precarious system dynamics or attendant acute systemic risk.
And, quite definitely, there is a moral hazard component to ongoing excesses. But the prominent aspect of today's Credit Bubble and Associated Global Liquidity Bubble is the structural nature of asset-based lending, securitization and securities trading, and derivative risk-transferring Credit systems now prominent on a global basis. The so-called "Greenspan put" is not some pardonable policy error that nurtured extra risk- taking (to be "mopped-up" whenever deemed necessary) that Wall Street would like us to believe. It cannot be defended as a necessary response to systemic risks, "deflation" or otherwise. Rather, the Greenspan Levee became a fundamental aspect of the evolving financial system - a critical facet of The World of Wall Street Finance, with Trillions of dollars of MBS, ABS, CDOs, CLOs, CMOs, and myriad "structured" products; unfathomable amounts of interest-rate, Credit, currency and other financial insurance; explicit and implicit debt guarantees (including the GSEs); and the widespread use of dynamic hedging trading strategies for "risk management."
For Wall Street Finance to remain viable, Greenspan had to guarantee liquid and "continuous" (no panics!) markets. For this, he has to ensure an ever-expanding financial sector. For this, he had to peg financing costs, manipulate financial returns and do so transparently. Because of this, he essentially invited massive leveraged speculation that then had to be accommodated. Because of this, he and Dr. Bernanke had to erect an edifice of marketplace assurances that the Fed would never tolerate system deleveraging and/or Credit contraction - all in the name of fighting the scourge of deflation. These assurances - the "Greenspan Levee" - have worked to this point swimmingly. But the dilemma for the Greenspan Levee is that it has emboldened the Wall Street Inflationary Liquidity machine, along with inflationary Credit systems around the globe, that cannot today be reined in. A breech and a "flood" are anything but low probability events.
Watching the markets' response to Katrina - higher stock and bond prices at home and abroad - I will err on the side of expecting continued economic "resiliency." There will surely be wide-ranging financial ramifications and some economic dislocation. But, for the economy as a whole, I expect activity to continue to be dictated by interest-rates, mortgage rates in particular. And while some point to economic weakness prior to the storm, I will stick with the analysis of a U.S. and global economy demonstrating inflationary boom characteristics. If the inflationary bias is as prevalent as I suspect it is, then expect the major impact of Katrina to be higher prices for things ranging from gasoline and other fuels, to chicken, shrimp and oysters, to lumber and other building supplies. If some of these reside in "core CPI," then we can simply adjust the core, again. To be sure, this catastrophe will ensure that an unsound and unbalanced economy becomes more so.