Premier Mortgage Group

In the absence of any meaningful economic data or market changes, Europe holds the stage. If this were burlesque — and of course it is — the audience yelling, “The hook! The hook!”, the impresario with the shepherd’s crook would long since have yanked Europe by the neck off-stage and dumped it in the alley.

Why, oh why is this dragging on, the euro such an obvious and total failure? Three reasons. Somebody who has kicked a can for years cannot be convinced that one day he will meet his wall. Second, this elaborate denial is a European specialty, today with less fatal consequences than 1900-1914 and 1933-1939, but the same show.

Third: culture. (Not that #1 and #2 were not.)

A lot of people from academia to commerce today are trying to understand changes in national and global leadership. The comfortable and predictable post-WW II and Cold War and post-Cold War structures have weakened and shifted greatly since 2000, and it is not at all clear what form of stability — or if — will replace the old.

Culture is a dangerous thing to talk about. The concept is easily twisted into racism, or the notion of “cultural Darwinism” (since I am superior, I can and should do to you as I please). Yet, any understanding of government and civilization must begin with who we are — our “nature.” Modern biology and genetics roil in nurture-versus- nature argument and discovery. Although those hardest of sciences can see the durable interplay of genes and environment, they and all of us are still just guessing at the rules and full impact on societies.

Ian Morris’ new “Why the West Rules — For Now” is a great read and starting place. It begins the human nature discussion a couple of hundred thousand years ago in a comparative history of East and West, and has a striking insight about Europe. Gifted with physical riches, Europe has for as long as we can detect received massive and violent migrations from the East. Morris suggests that Europe has survived because of unique geography — a collection of defensible peninsulae — which has also led to several unique and durable cultures in those natural forts. However, in his conclusion he flinches from culture as determinant, and defaults to Jared Diamond’s insistence that we are all the same people everywhere, and nothing matters but geography.

Francis Fukuyama’s newest, volume one of “Origins of Political Order” is a great study, beating to death all of the various structures of government, but hardly touching the natures of the governed peoples, and how those different natures complicate government. When we talk about government, types and options, we are really talking about civilization and its progress, a thought lost on those who oppose government. Steven Pinker’s newest, “Better Angels of Our Nature,” describes the profound decline in violence in human society, perhaps the greatest achievement of our civilizations.

Fukuyama does get to “legitimacy” as central to government, but solely on a tidy line of thought. Robert Caro’s newest on LBJ gets to a center of human nature with which we are all uncomfortable: power. Which individuals have power, what groups have it, how they got it, defend it, use it, lose it… that raw, elemental conflict is at the heart of civilization and attempts at government. And at the heart of culture. Durable and different in nation-states everywhere.

The euro has failed because to succeed would require three-quarters of Europe suddenly to behave as Germans for the first time in the industrial age. More: each local, cultural power structure must surrender its authority, and while doing so must inflict a falling standard of living on its own people. Further: the new supra-national power center in Brussels, enforced by Germany, would operate without any democratic legitimacy. Which leaves nothing but German enforcement.

Europe may stagger for quite a while longer, the euro “surviving” as abject failure solely because all fear worse if it were abandoned. The local economies will settle the fate of the local power structures. Beyond the global economics of the thing, the prospect of “failed states” and martial law is… um… daunting.

On the first Friday of each month comes the elephant: fresh jobs data from the immediately prior month. No other indicator — maybe not all others combined — has the power of payrolls to move other markets, to describe the economy and the prospects for inflation, and to alter the course of public policy.

The headline is “non-farm payrolls,” today’s report a meager April gain of 115,000 jobs, about the same as March, but only half the figure in the three prior months, gains that made us think we were at last getting somewhere.

One generic problem with elephants, especially at close range: shades of grey. Another: estimating size. The inherent inaccuracy in each non-farm payroll report is a couple of hundred thousand jobs. All of the reports in the last six months have lain inside that range of error. Another element writ on wrinkled grey: everybody seems to understand that the official unemployment rate fails to describe anything useful.

So, watch other things: wages last month rose by $0.01 per hour, one whole cent, 1.8% year over year. A sustained increase in inflation is impossible without a wage spiral. Same for GDP. The average workweek in April — unchanged. The percent of the 24-54 age cohort at work is stuck at early-’80s levels, about 7,000,000 below the 2000 peak. Of those at work, another 8,000,000 are part-time because they can’t find full time, the U-6 measure at 14.5%, improved a bit in prior months, stalled in April. Demand for labor has improved, but remains very, very thin.

10-year T-notes today at 1.87% have cracked long-term resistance at 1.90%, bets going down that the Fed will ease again. Not until core inflation fades back below 2.00%, but the odds are up. Stocks are having a hard time despite Fed prospects, and today’s sinking-before-Fed is out of prior pattern. There is little follow-through in mortgages, a ten-day drift near 4.00% anticipating today’s going-nowhere report.

A story follows, typical of our overall predicament. Charlie Rose on the topic of fiscal hazard on successive nights interviewed Paul Krugman and senator Tom Coburn, R-OK. Krugman has debased his profession and his Nobel by pushing inflation as the free-money solution. The surprises were from Coburn, widely regarded as a nut case, who opened by saying, “Of course the wealthy should pay more.”

After 30 minutes as the soul of reason (one of many in Congress in both parties now acknowledging the need for Bowles-Simpson’s harpoon-all-whales), Coburn returned to his native, anti-government soaps, announcing that “Everything after 1929 was because the Fed did too much.” To which Rose nodded and replied with a Krugman line: “The Depression ended only because of war spending.”

Americans have always been able to select media tilted to their preference, but it’s a hell of a lot easier now. Every big city used to have newspapers offering competitive political leaning and fibbing, but nothing like the instantly available Fox and MSNBC, and acres of websites ginning up partisan lies. Thus citizens — even those trying hard to stay informed — are at risk to “silo” their information and corrupt their perspective.

Coburn and Rose were perfect examples, repeating silo fables. After 1929 the Fed did nothing as the US banking system collapsed, the primary factor making the Depression Great. And it remained inert. Deposit insurance, reflation via gold price, and Federal lending agencies combined by 1935 to restore GDP to the 1929 level. Coburn, bright and adaptable on the fiscal issue, is a captive parroting the Right’s endless effort to discredit the New Deal. His own jailer!

The Depression did double dip, but because of fiscal zeal, trying to balance the budget too soon, too fast. We didn’t know any better, then. We adopted Social Security, but raised taxes to fund it for three years before paying any benefits. The Depression ended because if state spending, but not ours, Europe’s, on war orders placed with our factories, not some free-money spigot from the Treasury.

Soapbox: It is the duty of each of us to stay out of silos, listen to the other side, and snopes everything we think we like.

With thanks and full credit to Bill McBride’s www.calculatedriskblog.com:

On the surface all is quiet. Since the first week of April the 10-year T-note has not traded above 2.05% or below 1.93%. 1.95% this morning. Thrill-a-minute. Low-fee mortgages have been 4.00% for three weeks (depending on down payment and credit.) The Dow has had 100-point days, but is just yo-yo-ing below the 13,200 top.

In widely scattered patches of exuberance, innately good housing markets are turning — not bottoming, turning. In attractive places with scarce land, in-migration, good economies (global, IT, government, healthcare…), and looking back at their distress curves, the dead-drop in listings last year has resulted now in competing offers and modest increases in price. However, do not confuse these places with the rest.

New data are disquieting, but nothing scary. March orders for durable goods fell hard, down 4.2% even excluding volatile categories, and the multi-year chart shows gentle but unmistakable weakening. New weekly claims for unemployment insurance have departed the 350,000 range for 385,000, but historically it’s a jagged chart, not necessarily marking trend-change. Q1’12 GDP arrived at 2.2% annualized versus the 2.5-3.0% forecast, but consumers came in on target, plus 2.9%. The one figure in the GDP report that hinted at sub-surface conditions: the Fed’s favorite inflation measure, the “personal consumption expenditure core deflator” jumped from 1.2% in Q4’11 to 2.2% in the first 90 days this year. That’s “core,” excluding the gasoline pop.

Enter the Fed’s post-meeting comments. Lost in misunderstanding Fed politics (the distracting regional-Fed country-hawk bird-brains), and in suspended hopes for QE3, and in a meaningless collection of long-range forecasts, and in guessing at what the Fed will do after 2014…, lost was this: “Inflation has picked up somewhat….”

Then Perfesser Bernanke was asked about new stimulus, including the Fed’s interest in inducing higher inflation, the darling proposal of Paul Krugman and his loyal propeller-heads. “That would be very reckless.”

Thank you. As hammered at here last week, the Fed has neither the intention nor capacity to inflate-away our debt burden. Nor in the presence of 2%+ core PCE will the Fed even embark on something as mild as QE3.

Here in the US a frozen Fed is not so bad. The greatest single strength of the US economy is its adaptability, based on national acceptance of Schumpeter’s “creative destruction,” no matter what pain it brings. With the possible exception of German-hive collective adjustment, no other economy on Earth approaches US tolerance for the pain of changing course. We do get on with it, and today’s improvements in labor, manufacturing, exports, and housing — no matter how tepid — are testimony.

Elsewhere, disturbance on the surface understates the roiling trouble deep below. Only 90 days ago, Frau Merkel seemed to have dragooned the rest of Europe into a new austerity treaty. This austerity has not even begun (Spain and Italy have already extended deadlines), but non-German economies have fallen out from under forecasts. Euro-zone PMI (just like ours, the descendent of the “purchasing managers’” survey) went negative in March at 49.1, deeper to 47.4 in April.

We used to refer to the European “periphery.” Now it’s just Germany and non-Germany. Even the Dutch government collapsed last week under budget and recession pressure, and the next president of France will not be seen in Merkel’s lap. The non-Germans groveled last winter, desperate for German-allowed ECB bailouts. Now, like so many excessive borrowers who have discovered that they own the bank, Europe is refusing austerity and demanding growth measures.

However, welded to the euro while in desperate need to devalue, there are no growth measures available except for the ECB to take on even more junk sovereign paper and/or reflate in the same manner Bernanke called “reckless.” The ECB and the Bank of Japan are near the end of their supply of cans to kick, one thing clear: hope like hell that US inflation subsides, so that the Fed can prevent a US stall while worst comes to worst elsewhere.

Long-term interest rates have stabilized safely in the Fed-controlled zone,10-year T-notes 2.00% and mortgages 4.00%. Stocks and other markets hope for QE3, perhaps as early as next week’s Fed meeting, but that move will likely wait for either weaker global economic data, or inflation falling toward deflation, or both.

US data is softening — not anywhere near a new double-dip conversation, but not accelerating to self-sustenance, either. March retail sales did okay, up .8%, but the housing recovery ballyhooed since winter has been exposed as a promotional feature: new starts fell 5.8% in March, new permits rose (but nobody gets a paycheck for one of those), and sales of existing homes fell 2.6%. One theory: diminished inventories of listings have crimped sales. Uh-huh. “Saudis Buy, Destroy Science For 200MPG Cars!”

Inventories are down, but prices in many markets are firming, and the combination encourages sales. Local is local, but Colorado Front Range listings year-over-year are down 40% and sales are up at least 15%. In an unquantifiable development, beneficial for the moment, some 5.5 million distressed homes sit in formaldehyde, embalmed by new state and federal impediments to foreclosure and sale. This inventory is concentrated in Sand States. Instead of rapidly selling and clearing these markets, it may be a long-term benefit to convert them into National Sacrifice Zones… park rangers, tours, T-shirts, postcards and all.

While we all wait on the Fed, and to see if Club Med peoples will overthrow their ICU physicians, intent on hooking patients to more maintenance machinery while standing on their oxygen hoses, a moment for — BOO! — inflation.

The financial Right and many long-cycle thinkers (who still don’t understand the 1970s) are certain that the Fed’s QE inevitably will cause inflation, executing the perpetual conspiracy of government to inflate away debt. Meanwhile the Left says economic recovery would be easy if only the Fed would induce 4% or 5% inflation.

In simplest terms, a central bank’s job in a too-hot economy is to drive interest rates far enough above inflation to cool it off; and in a too-cold economy, far enough below to warm it up. The Fed’s normal tool is the ultra-short-term, “Fed funds” rate; however, at 0% since 2008, and core inflation at 2%, the Fed can’t get “far enough below” to induce recovery. Standard far-enough models today say the Fed should be 6%-8% below zero. Short-rate policy frustrated, the Fed has instead in the last three years pulled long-term rates below inflation: that’s been a partial effect of QE, assisted by the Fed’s commitment to keep the Fed funds rate close to zero at least through 2014, and as of last September further assisted by “Operation Twist,” letting short-term Treasurys run off its balance sheet and buying long-term ones.

Hence the 10-year T-note at 2%, at least 1% below CPI, when its yield in an ordinary economy should be 2% above. To have that effect, the Fed has had to buy all new long-term Treasurys — some argue more than the new issuance.

The economy depends on a lot more IOUs than Treasurys. Suppose markets saw the Fed allow or induce an inflation run-up. If the Fed continued to buy long Treasurys, those rates could stay under control. However, other long paper — corporates, munis, mortgages — would begin to roar in yield and soon become unsalable at all.

The Fed for the moment has the “yield curve” under control. Partly because of its low-rate assurances and purchases, but every bit as important because it promises to keep inflation in bounds. Both Right and Left are wrong. In the debt-soaked modern world, completely unlike the 1970s, owners of IOUs will defend themsleves. By selling. At the first whiff of tolerated inflation, fists will pound on Mr. Sell Button, and rising rates will choke the inflation that would rob IOUs of value. Deflation and default ensue.

Losing control of the yield curve is the ultimate nightmare. That is what has happened to Club Med. One day you can sell only short paper, and later even that only at a discount, no matter what the central bank does. Inflation is neither help nor direct hazard; the hazard is failure to live within means, all else is consequence.

Not a normal market: this picture is a Fed-controlled 10-year.

The Fed watches lots of things. However, QE1, QE2, and Twist came in response to the two dips of PCE to 1%. The drop underway I think is too shallow for the Fed to QE3, but the danger in Europe (and possibly China) may be grave enough for premature trigger.

Another week in these odd times, public policy and theoretical economics completely dominating markets….

Fed leadership, Vice Chair Yellen and NY Fed prez Dudley, gave same-day speeches which clarified the following: 1) the do-nothing, hawkish regional-Fed presidents’ club is alone in its treehouse; 2) if anything, the Fed has not done enough since 2009; and 3) the Fed’s commitment to ease through 2014 is more likely to be longer than shorter.

The Fed takes cover under its Congressional mandate, saying “unemployment is too high,” which is true. But the greatest danger lies overseas: industrial production in the EU had the worst month in two years, China’s economy is slowing faster than expected, and Japan is… who knows. The Fed cannot risk a US stall now.

Bonds already had the hint, the March spurt in rates fizzled-out last week. Stocks got the more-easing message, too, a mid-week rally pulling the thing out of an incipient trench. There is some perversity in this stock market response. The Fed would be this easy only if badly worried about domestic and global risks, and a risky economy is unfriendly to stocks. Yet stocks still responded happily to the Fed’s promise of action. Nice to know somebody still has faith in the Fed.

New domestic data tentatively confirmed the weakness in March payrolls. Weekly claims for unemployment insurance have risen from a sustained stretch sub-350,000 to 367,000 and then 380,000 in the last two weeks. Short term, not big, but not good. And the NFIB’s small-business survey in March unwound months of gains, following the pattern of the 2011 spring swoon.

Housing. Kick any Wall Streeter today, and he’ll say, “Housing has bottomed. Hit me for something else.”

What would the turn look like, if really underway? My own back yard has turned in just the last 60 days. The Front Range of Colorado never had a housing bubble: we danced with the Technology Fairy 1999-2001, afterward built too many houses, and made too many stupid loans, but all of that was over by 2004 when we led the nation in foreclosures. Long time ago. We have the 6th-lowest level of mortgage delinquency of any state in the US. Our rental vacancy rate spiked to 12%, now below 5% for the first time since ’99 (0% in Boulder!). Rents are moving up quickly. State population in the last dozen years has risen from 4.1 million to 5 million, and we’re short of land to build (you could drop Rhode Island in here and never find it, but we are maniacs for “open space” reservations). Building permits have been off 85% since ’07. Unemployment is down to 7%-ish. Our listed inventory of homes evaporated by 40% since last year. Buyers have lost their fear, the only problem finding something to show them.

Does your local market look like that? Mister housing-has-bottomed? Eh?

As perfect as our set-up, are prices rising? In rich, government- and tech-payrolled, land-starved Boulder County, yes. At last. Enough to unlock sellers? Ummmm… later.

Two philosophers have remarked incisively on speed. Stephen Hawking: “Time is what keeps everything from happening at once.” Then, Satchel Paige’s description of Cool Papa Bell: “He was so fast he could flip off the light switch and be in bed before the room got dark. One time he hit a line drive right past my ear. I turned around and saw the ball hit his ass just as he slid into second.”

Housing is the polar opposite of Cool Papa Bell.

Here in Colorado, the 1980s were tougher than this patch, and in Boulder we had all the same, lovely conditions as above by the spring of 1990, and the first, timid price increases in nine years. It then took 18 months for prices to begin to rise on the far side of town. Bottom is one thing, better another, recovery something else entirely.

MGIC’s newest guide to their underwriters described 73 metro areas this way: 26 of them “stable,” 25 “soft,” 22 “weak”, and not a single one “strong.”

Even if bottoming, and if surviving the release of held-back foreclosures, it will be a long time before recovery takes the brake off the economy, and puts heat on the Fed.

Since mid-March markets have assumed a better US economy, moving to self-sustaining ground, the 10-year T-note spiking from 2.00% to 2.35%, mortgages up almost the same amount.

The primary basis for the improved attitude: the Fed’s announcement in March that QE3 was on hold. Then this week’s release of the Fed’s March meeting minutes again plunked the bond market, rates rising, an odd reaction to the same news, like a couple of guys losing five bucks on the instant-replay of a Kentucky kid dropping a 3-pointer.

Never mind. Today’s payroll figures for March arrived at half the forecast, only 120,000 jobs. In thin, Passover-Easter trading, the 10-year is back to 2.05%, mortgages near 4.00%, some even below. Analytical cautions: it’s only one month’s report in a guesstimate series often revised. Some observers found optimism in the stability of government payrolls last moth for the first time in two years. There is no double-dip evidence: the twin ISM reports for March arrived as-had-been, 53.4 manufacturing and 56.0 service sector; and auto sales are the best in four years.

I have no hard-data proof, but it is clear in sidewalk conversations with civilians that we are less afraid — less concerned that there is another bottom to fall out. I think stronger economic activity is flowing from those not badly harmed by the Great Recession at last tip-toeing out of their bunkers.

Enough with the positives. This is only one poor payroll report, but the strength everyone was happy with was only three months’ worth, and warm-winter months at that. Local government payrolls face deeper cuts as pension and benefit promises hit reality walls, and jobs lost in this sector have been among the very best. We have austerity ahead at the Federal level, no matter what, no matter who in November.

The effect of austerity on already rocky economies is plain in Spain, trying to cut its budget by the same GDP percentage as the US at the end of 2012 (US equivalent, $500 billion). Even before these cuts take effect, Spain’s economy is spiraling toward implosion, unemployment so high (officially 23% and rising; youth near 50%) that tax revenue is falling out from under budget cuts, and adding to loan defaults.

The US is not in a euro-trap; although we cannot devalue, we can QE.

Fed politics bore hell out of everyone, but here’s a little help in decoding Fed-speakers, sorting media scare headlines from actual news of Fed policy.

In the last month media have had a blast quoting minor Fed officials saying it’s time to raise rates, no more stimulus necessary, economy’s fine… and so on, whipsawing the stock market, which wants both stimulus and a better economy.

Here is the de-coding tool. The Fed has seven “governors” including the Chairman, appointed by Presidents and confirmed by the Senate; and twelve regional Fed banks located in places proportional to the US economy in 1912. I mean no disrespect to the cities involved. Not much, anyway. The governors all have a vote at every meeting, as does the president of the New York Fed, and four regionals rotate voting privileges.

The over-covered Fed yappers in the last month have all been presidents of regional Fed banks. If you see a headlined Fed statement, look to see if given by a governor, or a regional prez. If regional, ask yourself, big-city, or boondocks? Regional presidents are selected by regional-bank boards of directors (also selecting themselves); the farther into the weeds, the more narrow and remote to today’s global economy.

Thus if you hear from Lacker (Richmond), Plosser (Philadelphia), Bullard (St. Louis), Kocherlakota (Minneapolis), Lockhart (Atlanta), and Fisher (Dallas), know their pinched, insider-promotion, hard-money bias. Kansas City’s Hoenig became the most famous regional blowhard, but his replacement (George) has yet to say anything at all. It is not an accident that the big, coastal-city presidents support an active Fed: their boards are much closer both to centers of US commerce and to continuing global hazard.

The governors and New York, San Francisco, Chicago, Cleveland, and Boston all are all on the Chairman’s page, “far too soon to declare victory.” QE3 odds rose today.

An update of www.calculatedriskblog.com extraordinary, descriptive graphic:

Another view, a study by Jaimovich/Siu (via Tim Duy and Mark Thoma):

Déjà vu all over again. Another spring, another housing-recovery chorus. Grass turning green, another turning of economic corner. Days longer, oil higher, a new fatal shortage nigh. Vernal equinox, Fed easing must be overdone, bond yields rising, the easing propelling inflation trading and the stock market.

Spring, and the sweet scent of horse manure.

Birds are chirping, leaves and blossoms bursting open, but the economy is still largely where it has been since bouncing off bottom in the spring of 2009. Home sales are not rising, new or used; prices may have flattened, but are not going up; and the distressed housing pig in the python still threatens to depart the pig in alarming mass, volume, and velocity. Oil is fooling around a hundred bucks, but it’s impossible to square a dangerous shortage with substitutable natural gas one-seventh its price at the decade peak ($15.38/MBtu in December 2005; $2.29 this week); US oil imports falling from 60% of consumption to 50%, on the way lower; and global coal un-doing its entire run from 2007-2011, $165/ton to $65. The jump in bond yields began to reverse this week the instant that Perfesser Bernanke said, “It’s far too early to declare victory.”

The biggest deal, of course, is jobs. While waiting for next week’s Good Friday release of March payrolls, consider more from Mr. Bernanke this week:“Importantly, despite the recent improvement, the job market remains far from normal; for example, the number of people working and total hours worked are still significantly below pre-crisis peaks, while the unemployment rate remains well above….”

Alternate to the drivel that passes for economic news on CNBC, Fox, and Bloomberg (and the opinion pieces of WSJ and NYT), please try to read the few pages of the Perfesser’s full speech. It’s in English, and a model for how to suspend your biases and hunches and mull evidence while the hopes of the world depend on your judgment.

All seems normal: pain evident among some friends and many strangers, but cars and trucks move as always, lights come on at night, shoppers and goods in stores, but all a mask covering US government absent as never since the 1920s. Maybe the 1850s. Congress too afraid of constituents to speak truth. This poor man, President, soon may endure Supreme Court overthrow of his sole domestic achievement (no matter at whose hand: it would have collapsed of its own over-complication and expense).

Want a hero? Someone to hold up to your kids as an example? Somebody above and beyond in public service? Selfless? Wishing only to be inconspicuous, but pushed forward by events? Leading as few ever have before? Leading decisively through chaos, but including his opponents, and even encouraging their public disagreement?

Have you given up, that there are such people in public life? Excoriated every day by blimps not half his intellect, not a tenth his understanding, yet treating all with dignified firmness? And in private — his actions always in private — as decisive as any Napoleon, and more aware of the consequences of error than any captain of arms?

Ben S. Bernanke. Annual salary $191,300. Maybe a rich-making book at the end, like his failed predecessor, maybe quiet passage to retirement like Paul Volcker.

Mr. Bernanke blew it as Greenspan’s understudy 2002-2005, and in his first year as Chairman, 2006. He missed the credit bubble, which he knows more deeply and painfully than anyone else alive. He was slow to grasp the extent of emergency in July, 2007, but he got it in the following January and ever since he has carried this nation on his back. He has been the singular effective executive in US government, holding the night at bay, two Treasury Secretaries and two Presidents in over their heads.

The Perfesser knows better than anyone that his utterly experimental measures to stop the greatest bank run of all time risk an inflation disaster. And he knows that no matter how hard and inventively he tries, he may be unable to prevent a re-run of the 1930s, especially with no help from the rest of government.

One man, a quiet academic, embracing disciplined doubt, clear-headed and willing to act. Warm, glowing Spring hiding emergency. Do tell the kids someday.

A group of colleagues asked me two weeks ago what interest rates were going to do. I answered in an authoritative voice, “They’ve been in the same place for seven months — it’ll take an earthquake to move them.”

Ahem. The opinion was correct, but I was clueless about the proximity of the quake. An “F” for that. In one week the Fed announced no MBS-buying QE3, US economic data improved, and Europe re-re-floated Greece. Until one or more of those three things change, technical analysis is the usual guide, looking for chart-pattern “support.” There is none of that, either. The 10-year T-note fell from 3.00% last August to 2.00% in a single, straight-line month, and spent very little time north of 2.15% in the next seven months. Having now blown up near 2.40%, 10s are in Never Never Land, likely to wander in a wide range until something happens, mortgages 4.25% or more.

So, while waiting, explore what is really happening in Europe, and why it will remain defiant of solution. The real problem is not profligacy by Club Med, or tax evasion, or even too much debt. The real problem is trade imbalance among nations locked in the equivalent of a gold standard.

All civilians’ eyes glaze at technical descriptions of currency movements, and the interlocked European thicket. But we have a new single-nation example — Brazil — to use for a non-technical explanation.

Brazil has enjoyed a red-hot economy for two reasons: resource exports to China, and manufacturing highly stimulated by government-induced credit. By part of government. To prevent red-hot growth from turning into inflation, Brazil’s central bank by last summer raised its interest rate to 12.5%, the highest among modern nations.

With an interest rate so high — Brazil’s 9-year government bonds pay 11.40% — investment money has poured into Brazil to take advantage. Which in turn pushed the real to stratospheric levels versus the low-interest-rate rest of the world.

As the real rose, it began to harm Brazil’s exports, especially its new and booming manufacturing. So Brazil’s leadership has tried to limit the flood of cash into Brazil, two years ago installing capital controls to reduce the in-flow, foreign cash to earn less (net of fees and penalties) than domestic cash. Money came anyway, the interest-rate differential overwhelming.

Brazil’s economy has begun to slow — almost to zero — under the weight of rates set to stop inflation, and the sky-high real. The central bank has cut its rate to 9.75%, but cash is still pouring in. So, last week Brazil announced new measures, every one a violation of some trade agreement or another, to weaken the real while leaving high rates, exports, and manufacturing in place. The basic method: print a mountain of real and see if it can get foreigners to take them, but do no domestic harm.

Right. One nation, trying alone to manage inflation, exports, manufacturing, and economic growth, in a world in which all emerging players (and some emerged: Japan) are trying to get an edge on the others via the same manipulations.

Europe. 17 nations each with one form or another of Brazil disease (or success), but ONE currency. Those with trade deficits cannot print euros to make their exports cheap; those with trade surpluses think it is so because of their special genius, not because the euro is under-valued for them. All have the same central bank, rates and money too high and tight for the weak, too low and loose for the strong.

The only “give” in Europe is wages. The strong feel rich, and are, wages rising in real, non-inflationary terms, economies at risk of asset bubbles. The weak… to make their exports competitive, their wages must fall — throughout Club Med by 30% or more. Cut wages like that, and workers cannot pay debts and taxes.

One could ask why Brazil does not just drop all the shenanigans, play it straight and let the real find an appropriate level. In Europe, the weak have this one choice: become good Germans, no matter what the price. Debt is a sideshow; trade and currencies are the real deal. And I still think Club Med will tire of taking orders from the North.

Long-term Treasurys and mortgage rates at last broke out of a half-year-long trading range centered on 2.00% for the 10-year T-note, and 4.00% for mortgages.

Upward: 10s to 2.33% today, lowest-fee mortgages pushing 4.25%. Verdict first, then evidence: this move is not the start of a bigger one, and is likely to reverse.

Silly things have pushed this rate run to extreme: markets oooo’ed and ahhhh’ed at successful stress tests of 15 of 19 too-big-to-fail banks (the failure of four would crater our system, again); and inflation knee-jerks flipped at today’s 0.4% February CPI reading (the core at 0.1% is fine, gas prices compressing other spending and prices).

10-year Ts had for six months stayed tight to 2.00% because the Fed began to buy long Treasurys in Operation Twist, because Europe was on the edge of its own Lehman moment, and last fall the US appeared near new recession. Twist is still underway (and you can bet the Fed hates this mortgage rate rise), but a European banking collapse and new US recession are off the table.

One year ago the 10-year paid 3.75%, and mortgages cost just over 5.00%. The magnitude of European futility and risk came clear last August, 10s in one swell foop to 2.00%. We will have to wait for memoirs, but in early December the European banking system was only days away from failure, intercepted by the ECB’s December 8 Long Term Refinancing Operation, then insurance taken by LTRO2 last month.

Those last fall predicting US recession, the respected ECRI, especially, were dead wrong. But, have we now entered the even-longer-predicted self-sustaining recovery? No, but closer. There is a Churchill quote for every occasion, this in November 1942 after Britain’s first victory of WW II, El Alamein: “Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.”

Several signals say that we are not yet in self-sustenance, the most important at the Fed. Many over-read a word in Wednesday’s post-meeting minutes: the substitution of “moderate” for “modest” as the modifier for economic growth. The replacement is accurate, but… modest. More important, the Fed stuck verbatim to its commitment to “exceptionally low levels for the federal funds rate at least through late 2014.”

Another marker: the small-business surveyor, NFIB, found another small improvement in its index of optimism. Although rising to the second-best level since 2007, it is no better than one year ago, and still below the bottom of every business downturn since 1982. The NFIB did confirm some small-biz participation in hiring.

And Europe is anything but over. Its banks protected, it has become a slow-roller, waiting to see what Club Med depressions do to local political stability and overall unity. The best long-term hope: an orderly demise of the euro, then short global recession.

As many readers know, Greg Smith resigned from Goldman this week, and the NYT printed his resignation — a condemnation for the ages. A prior chief of Goldman, the legendary Johnny Whitehead in 1970 issued these 10 points as a guide to the firm:

1. Don’t waste your time going after business you don’t really want.
2. The boss usually decides — not the assistant treasurer. Do you know the boss?
3. It is just as easy to get a first-rate piece of business as a second-rate one.
4. You never learn anything when you’re talking.
5. The client’s objective is more important than yours.
6. The respect of one person is worth more than an acquaintance with 100 people.
7. When there’s business to be found, go out and get it!
8. Important people like to deal with other important people. Are you one?
9. There’s nothing worse than an unhappy client.
10. If you get the business, it’s up to you to see that it’s well-handled.

Some on today’s Wall Street regard this guide as quaint. The tragedy, hardly limited to Goldman people: the vastly larger Street mob in Armani who have no conceptual framework with which to comprehend Whitehead’s thinking at all.

10-year Treasurys…

Better, but follow-through?

This week brought a lot of new economic information. Raw data is always spun by analysis, sometimes for reasons of advantage in driving clients to buy or sell things, sometimes to further theories, and often for politics, Lord knows.

But this time is exceptional, cubed. Global economies have never been in situations like these, and thus neither have central bankers, economist/analysts; and reporters cannot tell when sources are spinning, straight, or bent. I vacillate between the anger of a citizen done wrong by political leadership, exasperation with dumbed-down media, and homicidal rage at the amorality of colleagues in markets, utterly dependent on market health but undermining them for the slightest advantage.

Today… compassion, even for those unfortunate branches of humanity.

The biggest news: 227,000 net-jobs created in February, and a 61,000 positive revision to the Dec-Jan sum. That’s good news, and crowing by the party in power is justfied. However, all is relative. The good jobs numbers in the last three months are likely to have been boosted by good weather. The February numbers include a negilgible gain in wages, 0.1% equal to three cents per hour, and no acceleration in hours worked. Unemployment remained 8.3%, and inclusive of “involuntary part-time” improved slightly to 14.9% — both understated by discouraged workers leaving the workforce. You ain’t unemployed if you ain’t lookin’.

Nothing matters more than jobs, because we must have tax revenue before we embark on austerity, and austerity is coming, ready or not.

The ISM reported sustained growth in the service sector, to 57.3 in February from 56.0 (a 50 level is breakeven, 60 is pink-of-health). Econo-political discourse is now polluted by advocacy for manufacturing jobs. Do I hope my 17-year-old son will stand in a production line, competing head-to-head with Asian sweatshops and superbly conceived German mini-lines? Or a career in what Peter Drucker described 50 years ago as “knowledge work,” perhaps at Google, or programming manufacturing robots, or any number of ventures in which his brain might be paid better than his hands?

My friend, who writes Calculatedriskblog says, “…Housing has made its bottom turn.” No it has not — not with prices still falling and distressed inventory unchanged.

Loud hozannahs greeted the Fed’s report of an 8.6% surge in consumer credit: banks are easing, consumers in action! No. Just… not. Credit card debt actually contracted at a 4.4% pace, knocking balances back to November levels. Non-revolving credit roared ahead at a 14.7% pace. Partly good: auto loans — credit is easier (cars are easier to repossess than houses), and the damned things do wear out, and high-mileage new beats the old gas-blazer.

Partly awful: the fastest growth in credit is student loans, now nearly equal to the nation’s total outstanding 2nd mortgages and Helocs, loaded onto the backs of kids to pay the higer-ed racketeers. In this whole Great Recession, the only sectors of the economy to raise prices at a multiple of inflation: the health-care Corleones, and higher ed. A shameful and destructive reversal of GI Bill wisdom.

Overseas: officials say the new Greek deal marks the end of European crisis. Uh-huh. New Greek bond yields already predict certain default. Banks propped, the Euro-story is now the actual economies. Spain: unemployment 22% and rising, 45% among youth; budget out of balance 8.3% of GDP. German-forced austerity the plan. For now.

Back here, bizarre bad-good-bad-good news. In a panic, the Administration and silent, bi-partisan co-dependents in Congress have jacked FHA fees to fill a loss hole which will require bailout after the election. The jack is so high, driving new applicants away, that FHA net revenue may fall instead. The good news: nouveau private mortgage insurers can fill most of the credit gap. The bad news: the highest-quality applicants will bolt FHA, leaving it with net-increased risk and losses.

Election year. Nothing to do but watch the data stream by. The best view: unfiltered original sources. Take gin straight in a Martini. Don’t monkey with it.

Two different price sources from www.calculatedriskblog.com (the lower chart from www.lpsvcs.com), different methodologies, same picture.