Premier Mortgage Group

During the Inquisition, the first step in extracting a confession or recantation of heresy was to show the accused the instruments to be used in the next stage. A glance at tongs, or the rack, and many would sing on the spot.

So it was this week. The Fed inflicted no pain at all, just talked about the potential decision ahead, not yet made, considering at some point, maybe, depending, and if made, whenever, just a little pinch.

You’d have thought every bond trader on the planet had been hanged upside down by precious body parts. However, even their shrieking was hard to hear though the yammering by the alternate-universe mobs.

First reality, then the choirs of confusion.

Perfesser Bernanke, visibly exhausted, did very smart things this week. Talk of tapering QE exposes any parties excessively leveraged, deflating the bubble potential in QE. And some are: a group of REITs has a couple-hundred-billion bet on MBS levered with short borrowing, and junk bonds are too hot. Stocks… all you need to know about silliness: today marks the first three-day decline in stocks in all of 2013.

NYFed Prez Dudley laid out specifically how the Fed will exit the emergency. First: taper buys of Treasurys and MBS (and he said tapering is even-money with buying in bigger quantity). Second: stop reinvesting payments received on bonds. Third: begin to raise the overnight Fed funds rate. Fourth: maybe, if the economy really runs hot, sell some Treasurys, but in almost all events hold MBS until they mature.

Most professional observers chewed on the Fed all week long for sending a garbled message. Look back a ways. Mr. Greenspan was famous for obfuscation except when he really had something to say, and ran a one-man band, all others at the Fed forbidden to speculate on policy. And in his last three years of an over-long 17-year stay failed to listen to others about a credit bubble that damned near killed us. Perfesser Bernanke introduced faculty-club style, everyone allowed to argue opinions and to vent, and far too many Fed-watchers still chase around the outlying speakers the way dim hunting dogs can’t lay off rabbits.

The Fed did nothing more this week than to acknowledge new doubts lying in plain sight. Nobody knows the slope or durability of recovery. At best, the economy might be entering the outer edge of self-sustainability. In prior periods when the economy ran away from the Fed, the absolute precondition was a surge in credit, which today without QE is still contracting. Inflation appears to be falling for several reasons, but Bernanke was careful to say this week that long-term expectations are not declining.

Doubt creates volatility — true, up-down-up-down. The 10-year T-note, stabilized by QE in the second half of 2012 in the range 1.60%-1.85%, took three months this year to blow up to 2.05%, then 50 days to run all the way back down to 1.65%, then just 20 days to zip back to 2.05%. Expect more short-cycle wockety-tong. Still, mortgage rates have yet to cross 4.00%, even though MBS/10T spreads have widened. You can be certain the Fed does not like that widening, a sign of ongoing distress in markets still preferring ultimate safety, and will trade to keep that spread narrow.

Making all of this so difficult to process: the expensive-suited, highly-regarded, and well-connected, so seriously interviewed on the telly, but who may as well be standing behind your head slamming a ladle into a skillet. They’ve just about worn out the money-printing-inflation line, so now ooze to arguing the inevitable failure of central banks. Another group intones the failure of austerity and the need for stimulus, although the world is drowning in the deflationary excess production and debt born of runaway stimulus. One top twit after another imputes Japan’s situation to ours, or to Europe’s, or to China’s, or vice-versa, while all four are very different.

The US economy is uncertain enough without adding imaginary threats from overheating or Fed tightening. Or by offering fantasy prescriptions. More volatility, yes, but slow recovery and low rates probably for years ahead.

10-year T-note:

Everyone points to the rapidly weakening yen as a result of BOJ end-game QE:

However, a longer view provides context. The BOJ thus far has only part-way weakened the yen from wildly over-strong, caused by its status as safe haven during the Great Recession. If the yen blows through 120, then we may have something to worry about, but not now:

10-year Japanese Government Bonds (JGBs). This chart has an especially good time scale, but updates only quarterly and misses the run in the last month to .94% yield. The rapid reversal is concerning, but the cause is the same as the yen move and not a worry unless runs above 1.50%:

S&P500 (thx to Hussman Funds), vertically compressed. Got too hot, cooled off, looks like three times. Where it goes next or why, nobody knows, but exciting to watch:

Interest rates on long-term bonds and mortgages have stopped their May rise, a little above the halfway mark of the low and high for the year. The tilt seems to be upward, but the trading pattern has been chaotic and artificial, trading on guesses at the Fed’s intentions to continue, trim, or stop QE3 bond-buying.

Bond markets everywhere always trade on central bank intentions to ease or tighten money in the future — nothing artificial about that — but the central banks themselves have for five years engaged in artificial, full-scale-emergency-experimental action to prevent a re-run of the 1930s, or worse.

Trading on central banks is once-removed from the real drivers: inflation and economic growth. Every interest-rate analyst is always caught in this loop: what does the Fed think of incoming data, and how will it react, right or wrong? Complicated today by this wrinkle: in normal times the Fed attempts pre-emptive action, knowing that its moves take six to eighteen months to have effect; but these times are unprecedented, and no one in or out of the Fed has decent predictive tools. This is a pure, seat-of-the-pants deal, and the Chairman in those pants will retire in seven months.

PIMCO has been the largest and most successful bond investment manager of the last generation. This week its CEO, Mohamed El-Erian intoned (condensed): “The global economy will give way to one of two stark alternatives: either sustainable growth, or shortfalls, instability, social tensions, political instability, and debt traps.” Wow. El-Erian usually talks like the Oracle of Delphi, murky thought free of specifics.

Buried in the thread: “…in the next three to five years.” Translation: the world’s central banks still can buy time and have room for more heroics. Spitball from the back: “three to five years” means you don’t have any damned idea. El-Erian was joined by PIMCO’s Bill Gross, modern god of bond trading, saying the Fed has “12-24 months” of QE still ahead. Fire another sloppy wad at that guy.

Meanwhile the financial press publishes in bold any investment manager with a theory, or political angler, or boondocks Fed official (KC’s Ms. George, Dallas’ Mr. Fisher, and Philly’s Mr. Plosser belong in SNL skits) — a stream of confetti blinding civilians and professionals actually trying to figure this thing out.

Avoid analysis, and review as much hard data as you can. In a seat-of-skirt deal, yours is as good as anybody’s.

The Fed would like very much to pull back from QE, if only to reduce its political exposure. But it must err on the side of slow exit for fear of an accidental economic abort, and not enough ammunition to reverse it. To pull back, the Fed must be content that the US economy has entered self-sustaining recovery.

The job market is obviously not in such recovery. Housing may be, but did not find ignition until the Fed drove mortgage rates to 3.50% only ten months ago. Technology is a strength, and some manufacturing, but the only other general sector doing well is actually a ruinous burden on households: health care. In a spectacular accident, void of leadership, we have achieved the largest fiscal repair of any advanced nation, the Federal deficit cut in half in just two years and falling (the “out-years” are not pretty, but we have time for that). The Fed is justified in easing against that fiscal drag.

Inflation is sliding by every available measure (CPI, PCE, chained-mean…), the “core” versions very close to the danger zone below 1%. Gold has dropped 25% since last fall, $1365 today, regaining its position as one of the worlds worst investments. Falling prices are grounds for Fed easing, not tightening.

Total bank credit outstanding has just now regained the level of 2008. The US GDP has grown 14% since then, credit support provided entirely by QE. Consumer credit is contracting 1% every 90 days, mostly in mortgage accounts (capping housing recovery), and shrinking despite the hideous explosion in loans to students.

There will come a time for QE pull-back and higher rates, but the data say this is not that time.

You can either over-regulate banks OR have enough credit.

Small business may be the best single indicator of a self-sustaining turn. Not yet.

10-year T-note. The vertical scale is greatly exaggerated, the whole top-bottom covering less than one percentage point, making narrow movement look wild.

Gold:

In a week without economic news, markets very quiet, take time for the foibles, flights, fantasies, and filberts of public policy and human nature.

Whenever the hard right and hard left agree, duck and cover.

One example: the right and left both want to intervene in Syria. The right confuses war with video games, and hasn’t learned a thing since Vietnam. The left is oblivious to contradiction: violence is good if for humanitarian cause, exit optional.

On another front, left and right are joined in shouting, one-up competition to see who can do the most damage. To banks, credit, and the economy.

The right despises modern banking because it’s a government scheme. The Fed is a conspiracy. Government won’t allow losses, the punishment that keeps people in line. Won’t break up big banks and go back to the good old days of small-town bankers saying “yes” to the right kind of people. And the right hates all those mister-fancy-pants and electronic money. Even the right wearing fancy pants hates the fancy-pants.

The left hates banks and bankers because they have money and won’t give it to people who don’t have any. The left has exactly the same fondness for the safe, small-bank world which didn’t supply enough credit, and wasn’t safe. Left and right agree that taxpayers should not bail out bankers. Bankers should pay. And the left hates fancy proprietary trading, securities underwriting, and derivatives, which neither left nor right knows from prostates, undertakers, or dirigibles.

No, we’ve got an agenda and we’re stickin’ to it.

Fannie and Freddie are now earning profits at a $50-billion annual pace. Shut them down. They will repay the Treasury within three years, and with FHA and VA provide 90% of new mortgages. Shut them down.

We don’t like big. Little banks we could let go. Two problems with that: in 1929 we had a lot of little banks, all caught the same disease, and 75% of them died before we thought to stop it. Taxpayers who might have saved everything just by promising a back-stop instead lost everything. You still want to bust up the big guys? Wells, Citi, Chase, BofA, and Goldman (not so big, but everybody hates Goldman)? Want to just dump the pieces on the market? Want another crash? Who is going to buy the pieces?

The French. Maybe the French will buy the pieces.

Okay, okay… than make them stop doing dangerous things. Like making money? You give deposits to a bank and expect a return, both interest and principal. To make money with your money your bank has to invest in something that you don’t know how to or are scared to or should be. “Make loans,” right and left say. To whom? Safe credits sell their own bonds. Safe stuff — Treasurys — doesn’t pay anything. Every other investment or loan entails risk that must be managed with sophisticated tools.

Forcing banks to raise more capital is wise, but in the hands of right and left any good idea gets overcooked. “Risk-based capital” is today such piling-on that banks are forced to shed useful businesses. Both wings are fond of “bail-in,” the European plan for assisted suicide: demand that banks simultaneously raise capital from investors and tell those investors that in the next systemic run they’ll get the Cyprus Haircut.

The joint assault on banks misses the one worthwhile target: CEOs, directors and chairmen. Could we import some new, ethical, and polite ones from Canada, where giant banks have worked very well? The new governor of the Bank of England is a Canadian recruit. Send the casino-ego boys packing.

Fed governor Tarullo published a paper on the Fed’s site that’s hard to read, but describes the extraordinary and real progress made in reforming banks since 2008, and the exceedingly careful pace. Careful not for benefit of bankers, but depositor-taxpayers and the society. Haste makes new bank runs. Net of huge losses and paying back TARP, US banks have raised $400 billion in new capital in just four years.

Never mind. From left and right, Rand Paul to Elizabeth Warren: break them up and shut them down. Business starved of credit hides under desks, eyes wide at the scene.

Red and amber bars, certain foreclosures, are still five times normal, and…

concentrated in states which have allowed judicial proceedings to freeze foreclosures and prolong the healing process. The non-judicial states are in recoveries, only benighted Nevada and Rhode Island still beyond any remedy:

Deep breath.

This morning’s news of a better job market has pushed 10-year Treasury yields from 1.63% to 1.73% overnight, and intercepted the mortgage move below 3.50%. Stocks of course to a new high, Dow above 15000.

Breathe again. The job market is not really better, just not as poor as could have been — markets were looking for worse and didn’t get it. We did add 165,000 jobs in April and revised up the two prior months, but the average workweek and overtime declined. Wages are rising at a 1.9% annual pace, below even diminished inflation, and another 278,000 people looking for full-time work could not find it and took part-time.

The twin ISM surveys both fell in April, manufacturing barely positive at 50.7, down from 51.3, and the service sector to 53.1 from 54.4. The Fed’s post-meeting minutes changed tense: in March it noted “a return to moderate economic growth:” this month “… has been expanding at a moderate pace.” Nobody wants to be a has-been.

The Fed also noted, along with everyone else: fiscal drag. One would hope so, given the Cliff tax increases and Sequester, although it’s astounding that we can meat-ax $85 billion out of Federal spending and not notice until the FAA tried to make airports uncomfortable on purpose.

Austerity is a calibration deal: we have to do enough of it, better not do too much, but the austerity dial has no level-indicator. Like living through winter with a thermostat arrow-pointer but no temperature marks, and a heating system responding to the thermostat in a random lag of two to 24 hours. That’s how life feels to the Fed.

That’s the run-down here in the US: slowing a bit, but okay, housing producing smiles. But the most powerful forces on the US economy, affecting everything from jobs to mortgage rates, lie overseas. All data show slowing in China. Japan’s inflation-inducing experiment is going to take months to evaluate, at the outset doing nothing but pushing down yields on non-Japan bonds. The emerging world churns its way forward by sucking jobs from the West, the means visible in Bangladesh.

Europe is back in the forefront of overseas trouble. The soap opera over there has overstayed its welcome, each new episode the same plot as the last, just shuffling the cast, and endlessly foreshadowing conclusions but no end to it. Thus we lose feel for the magnitude of the disaster and its progress. Unemployment across the south is now uniformly above 25%, in Germany 5.4%. Southern bond yields are down from 7% to 4%, but German ones today fell to a new all-time low 1.16%, and business credit in the south is all but unobtainable.

South is moving north. French unemployment is 10.8% and rising, and in Holland up to 8.1%, double two years ago. S&P this week reported on housing in Europe: French prices are off 5%, expected to fall another 5% this year and the decline “gaining momentum.” Spain’s prices are off an official 28% since 2008, but no one knows what will happen when it’s bad bank dumps foreclosed inventory. Dutch prices are off 18%, expected to fall another 5% this year and again next, 25% of Dutch mortgages underwater now. German home prices rose 3.5% last year, trend continuing.

Apparent German health conceals a fatal illness. Its banks and central bank assume that debt owed to Germany by the others will be paid. In euros. When it could not be more clear that the deutschemark-calibrated euro has crushed all the others.

Political stability is holding among the others for now, it seems because having German money in your wallet is worth any amount of damage to your children’s future. Anything but go back to the unreliability of the lira, peseta, or even franc. We have all looked to the weak as the most likely to leave the euro, but it could be someone like Holland, making its way in the world for hundreds of years with a reliable guilder.

Mercifully the US has made great progress, especially bank re-capitalization, so much so that we can make it through even a euro-breakup. Meantime, pain there keeps rates low here and assists our own recovery. Quite the world.

10-year T-note. Today’s job data just took us back where we’ve been, before markets overdid their worries about an economic slide. Also pushed lower by overseas lunacy noted above.

The ISM is the old Purchasing Managers’ Association, its manufacturing series one of the longest-running surveys available (early ’70s). We are moving forward, but may or may not be self-sustaining. Still need the Fed.

And Bill McBride’s all-time great visual. The world as we knew it 1945-1990 has passed into history, and we don’t know enough about the new one to describe any part of it as “normal,” new or otherwise.

A lot of movement under the covers. Although few sounds, nobody talking, most of the lumps are recognizable.

Long-term rates have fallen here and everywhere since late March, and have taken a new leg down today, US10s to 1.67% for the first time since December. Some of today’s move may be “event risk” bond-buying to protect against Syria. If they’ve really used Sarin, in a region vastly more dangerous than, say, North Korea….

More likely: wrestling under the sheets is economic action. Starting with today’s GDP report, Q1’13 at 2.5% versus expectations of 3.1%, and dreams of 4% and even 5% before March data turned down. March data have been so poor that odds favor a downward revision from the 2.5%. The Chicago Fed’s index whipped to minus .23 in March from plus .76 in February, and new orders for durable goods tanked 5.7% versus expectations for a decline half that size — even stripped of volatile orders for transportation, durables were down 1.4% versus hopes for plus 0.5%.

China’s purchasing-managers’ equivalent in April slid by surprise (why is anyone surprised?) to breakeven 50.5 from 51.5 in March. Global commodity prices continue to follow China’s track.

The Bank of Japan’s ultimate stimulus is thus far leaking yen out of Japan, aiding the global drop in long-term rates but not appearing to do anything for Japan itself.

Europe has found new cans to kick, but only after concluding a new deal with Mephistopheles. It is now painfully clear that non-German economies cannot recover under current policies (tied to the over-strong German-euro), nor can they continue current austerity. Spain bolted today, announcing 3% budget deficit target in 2016, which might as well be 2061. The deal with the Devil: just keep on borrowing past the point of no return, Italian and Spanish 10-year sovereign yields falling from the 7% tops in 2011-2012 now to 4% under the protection of the ECB. Which is expected to cut its overnight rate next week from 0.75%, a band-aid on a traumatic amputation.

Footnote on “point of no return.” Rogoff and Rinehart, the great researchers of past financial crises, were caught in an error two weeks ago which questioned their sovereign debt tipping point at 90% of GDP. Global Krugmanites leapt on the flaw: “Hah! See! We can borrow forever.” No, you can’t. You can get away with it for a long time if your central bank helps, and far beyond 90% of GDP, but if you pass the hazy horizon in which your economy will never be able to generate enough tax revenue to pay the interest due… one day, someday, you will default. The Devil smiles.

To move eyes from overseas to here is a great relief. Our own austerity is probably responsible for our spring slowdown, but interest rates are falling accordingly, the Fed has no inflation fear except too low, and can and should continue QE. Most amazing, budget deficits are falling at all levels of government, especially Federal, which may make it below 3% of GDP within a year. If the economy does not plotz, just mashes forward, we could stumble into a Clinton-accidental balanced budget.

Housing is central here and badly misunderstood. Everyone in healthy markets (land-scarce, inbound-migrating, global-plugged economies) sees auction conditions, and thinks the economy will surge immediately.

It’s a big country. March sales of existing homes actually slid slightly, and sales of new ones are consistently below forecast. The usually reliable FHFA has home prices up 7% year-over-year, and that overstatement is testimony to everyone’s struggle to measure prices during the transition from high levels of distressed sales to low.

MGIC, the mortgage insurer, just released its April run-down on 73 metro areas: 15 are “weak,” 26 are “soft,” and 32 “stable” (which in MGIC terms means “moderate” price appreciation, “balanced between buyers and sellers”), and still not one, single “strong” market. 26 of the 73 are rated as “improving” (in the process of moving to a better category), but given wildly overtight credit and little growth in incomes even among those with jobs, housing-led recovery is going to take time. But will come.

I hate to argue with inspired Bill McBride (www.calculatedriskblog.com) using his own charts, but his sooner-stronger housing-led recovery is not visible. Yet.

We have since the Great Recession began in 2007 been buttonholed by commentators of all kinds arguing about what is happening to us, and debating risks and remedies in a situation without precedent.

Perhaps the dominant thread has been those insisting that inflation will be the inevitable consequence of central banks’ efforts to save the global economy from implosion. The inflationistas have also hijacked the language, describing central banks working to prevent collapse of stocks and housing and bank portfolios as creating “asset inflation.” Joining the inflators, always: the gold bugs.

By this week’s end, the sky is black with buzzards circling the remains of these arguments and their progenitors, not just here in the US but everywhere.

In the US too much attention is paid to CPI; the Fed watches dozens of price indicators, led by “personal consumption expenditures.” PCE peaked in 2011, briefly almost 3% annualized and has fallen ever since, now barely 1%. The “core” PCE, stripped of energy and food costs, since Lehman in 2008 has never made it above 2%, and is today synchronized with nominal PCE at 1%. Both falling.

When inflation falls below 1%, some components of the economy are already in deflation, a very bad thing if carrying debt which must be paid back in dollars more valuable than those borrowed in the first place. And the world today is more debt-soaked than ever in history.

The investment darlings of the inflationistas have cratered. The immediate impetus is a matter of debate among vultures and victims alike, but this combination did the deed: new US job weakness, Japan in last-ditch printing, China slowing fast while trying to convert from an excessive-investment economy to consumer-based, and confiscation in Cyprus.

TIPS — Treasury Inflation Protected Securities — have fallen as never in their history. Gold peaked at $1800/oz last October, stumbled slowly to $1600 by April Fool’s Day and now trades — sort of — at $1400. NYMEX crude has topped at $100/bbl repeatedly in the last year ($150 in 2008), now $87. 10-year T-notes are 1.70% and looking more likely to fall than to rebound.

Major crises often change course because of last-straws in odd places. Little Austrian banks in 1930. Archdukes in Serbia. Cyprus.

On Wednesday Jens Weidemann of the ECB and Bundesbank gave an interview in which he confirmed the German reputation for flexibility, diplomacy, and sensitivity to others. The European crisis will “remain a challenge over the next decade,” which means he has no idea. Then, “The Cypriot case shows that it is possible to wind down banks… taxpayers don’t always have to step in to bail out.”

The plan imposed by Germany on Cyprus involves confiscating about a quarter of its bank deposits. Some are Russian (as everywhere in the euro zone), but the rest belong to taxpayers. Used to. The Cypriot economy will collapse by a like percentage, or more. Sparing harm to “taxpayers”? Hardly. Adding heat to the gold meltdown: the forced sale of Cyprus’ central bank’s gold reserves. (If you buy gold to protect against the end of the world, in the moment do you really think you’ll be able to get to your hoard — or if you begin to spend it no one will notice?).

The NYT reported this week, confirmed by Unicef, that across the Aegean from Cyprus, Greek children now go hungry in large numbers.

The greatest bank run of all time began in July 2007, and still we argue about “letting banks go” versus “taxpayer bailouts.” Charlatans have pretended there is someone else available to take the loss, but in a bank collapse taxpayers always will take the hit one way or another. The same phony-theorists claim that preventing financial collapse will inevitably bring inflation.

I hope that the deep losses taken in the last few weeks, afflicting both the guilty and innocent, will help us to move off dead center. Here and a lot of other places.

More soggy data have confirmed the poor jobs report for March, and so we’ve held on to the interest rate improvement set last week. However, some good news is on the way, one of the few kinds that will tend to hold rates down, legitimate good news.

The NFIB survey of small business fell in March, breaking a three-month up-trend, but overall the same, going-nowhere pattern since 2009. Big business thrives in global trade, but small fry are undercut by the same trade, especially wages. Today’s word of flat retail sales in March (down .4% ex-autos), had even the stock market drunks closing the bar for a while this morning.

The good news is in two odd pieces, first the US budget and debt projections. President Obama has at last delivered a budget. The miracle is not so much the mouse birthing an elephant as how little there is to argue about. In 2023 the President would spend $5.66 trillion versus revenue of $5.22, and the Republican alternative in Congress today would achieve balance at $5 trillion.

Perhaps the most important lesson of Bowles-Simpson’s report in December 2010: the mathematics of Federal spending and revenue leave little room for wiggling. Both parties have wrestled in the net ever since, but reality wraps them ever-tighter. Of course the Democrats want a perpetual deficit, and the President’s proposal has back-loaded the discipline (Do bears conduct some bodily functions in the woods?), but $400 billion apart in 2023? That’s an accounting error. Cut a deal and move on.

If the economy out-performs, we’ll be in surplus again, just like the Clinton accident. If it under-performs we’ll be back in austerity irons. So, might you all think of ways to grow the show? NoooOOOooo. Bi-partisan snarling is too much fun. For voters, above all. Thus in grand, traditional American form, our economy will repair, adjust, and progress by accident, gridlock a greater benefit than if — saints preserve us — either party got enough control to have its way.

The second batch of good news is a bit backhanded, but take it. I don’t know who started this line, but it’s a good one: “The US economy is the cleanest dirty shirt in the laundry basket.”

The WSJ reported this week that Sanofi, the Paris-headquartered pharma giant, has tried to lay off and/or reassign workers at its Toulouse research facility. The 2,300 workers there have not come up with a new drug in 20 years. The French government is outraged, now considering a ban on any layoff by any profitable company.

In another report, Chilean mining of copper has gradually become uneconomic versus US production, despite the US 10-year environmental approval process. A Chilean miner driving a truck makes well over $70,000 per year; in the US $60,000. Here we have endured a grinding, 20-year wage freeze, undercut by global competition. We may now reap the benefit of that sacrifice, competitive once again.

China has for almost 30 years tried to out-do Japan’s bridges to nowhere (and the central tenets of Krugmanism) by forcing investment into its economy. China’s approach may be more destructive, as continuous excessive investment in production capacity has created ruinous oversupply which harms itself and the economies and wages of its trading partners. As it nears a conclusion (see www.mpettis.com) its fibbing about actual conditions has reached the Baghdad-Bob stage.

This week China’s authorities released new and soaring export figures, a pattern suspect for years. Analysts were ready this time, crossfooting China’s numbers with the import numbers at corresponding nations, and exposed the sham so painfully that the chief customs statistician, Zheng Yueshing had to apologize.

Here in our rumpled and egg-stained shirts, we chew on each other, we spin and fume about what to do, but government statisticians do not lie about the facts. While our leaders focus on zero-sum grabbing from each other, the rest of us in the most disorderly and undirected ways adapt and compete. Not bad at all. But imagine if we actually tried to compete, top down, as government’s central purpose?

More stuck than weakening:

Not a good trend:

A very nice trend. By this time last year, looking back at another false recovery, we had also seen the interest-rate high for the year. Much as I wish well for the economy, might be so again.

Well, well, well.

All week long, anxiety on several fronts had suppressed optimism and rates, but news of faltering job creation in March has produced a case of the quaking bejabbers.

Four weeks ago the 10-year T-note traded above 2.05%, presumably headed moonward, today 1.69%. The mortgage move has been smaller, but fears of 4.00%-plus have been replaced by hopes for 3.50%.

The stock-market guys joined by housing boosters had talked themsleves into a sustainable flow of 250,000 new jobs each month, and the Fed nearing the QE exit. The 88,000 jobs reported today for March were half the forecast, but these forecasts are notoriously useless, and the error range in the report is as wide as the miss itself.

Those two fell-better thoughts cannot offset the worry that the good numbers last winter were the error, and this March report is the real deal. The ECRI’s Lakshman Achuthan has taken a fearsome beating for a recession call 16 months ago and published a defense last month — which predicted exactly today’s pattern, a yo-yo economy not really going anywhere. The Fed and some others fear a yo.

Most other data softened, led by the twin ISM reports for March, manufacturing to 51.3 versus 54.0 forecast, and the service-sector to 54.4 versus 56.0. New claims for unemployment insurance jumped at the end of March, confirming today’s weak data.

But there is good news, a lot of it, some straightforward but most bizarre. Straight: our trade deficit is shrinking because oil imports are falling, and every attractive housing market is in full-go auction conditions. I still don’t think housing can pull the economy very far or fast, not in these credit conditions, but the improvement is relieving fear, lots of stunned and pale people crawling out of bunkers they’ve been in since Lehman.

Treasurys began to do better in late March for other reasons: Europe and Japan.

Europe’s next step, if it holds together, will be the ECB entering a QE phase over German objections. Europeans facing haircuts at banks, or money-printing with greater inflation risk there than here, or a free-falling euro, move cash to dollar assets. Which supports our markets, the dollar, and further reduces our inflation risk.

Japan announced QE-cubed yesterday, as everyone knew was coming. The Bank of Japan will buy the US-economy equivalent of $200 billion in its own bonds every month until it flips deflation to inflation and ignites its economy. The issue is the nature of the torching. If it wins, it keeps its bond yields low, inflation above those rates (as here); gets the economy going fast enough to generate tax revenue; gets GDP growing faster than borrowing, and in another 20 or 40 years has sustainable finances.

If Japan fails in this miracle… If? Monetary stimulus does nothing to fix a demographic disaster, nor a rigid economy, nor a leadership structure resembling 12th century feudal Europe. Yen assets are moving to dollar ones, and may flood this way.

This week’s last anxiety: North Korea. It pushed some money here, but it doesn’t belong on the Top 20 list of US worries. China’s problem. Your idea, your potato.

For the time being emergency action by the ECB and BoJ help us. But we’re on Fed life-support ourselves. Many wise voices rise now to say that we can’t do this forever, QE already a diminishing return. What are we going to do for fundamental repair?

Might begin by paying attention. Control of firearms is not a top priority. Do not waste time and energy by using economic issues to angle for political advantage.

“Infrastructure investment” is a dead end, a euphemism for good ol’ pork barrel waste. Investments must have measurable returns. We’re stuck with austerity, demand-stimulus no longer available, and must calibrate and allocate ever-so-carefully.

Be smart and cheap at the same time. Get going on health care cost control. Don’t wait for ObamaCare to founder. Same for higher education, and education reform. Not just “more money.” How best to deliver — in an IT world — the skills necessary at all levels of the workforce and talent? And have a sense of urgency. Please.

10-year T-note from early January to today:

Participation rate reflects a mob of Americans dropping out. Not so bad for a year or two at 20 in 1967. Now? We need every citizen to contribute. At work. www.calclatedriskblog.com

Long-term rates fell this week to the lows of 2013, mortgages stickier than 10-year T-notes. Although long Treasurys made it to 1.85%, mortgages are still 3.75% or so — the mortgage market frightened to death that any loan it buys today will live until its 360th payment.

Trading everywhere has ceased in the every-spring, four-day, Passover-Good-Friday-Easter pause. Next week brings a flood of brand-new information for March, capped on Friday by employment data. Thus a good time to reflect.

I do not recall a moment in which so many economic elements at the same time have been at points of inflection. In the old days (five years ago) nothing much mattered except US data; in global markets the world is more important than the US.

1. Rates are down because of Europe. Period. Euro elites are secure looking down their noses: “Cyprus is unique, the euro-zone will be fine, just a little austerity and economic reform ahead.” Au contraire… bank funding costs in March everywhere except Germany rose by 25% (who wants a haircut at shoulder-level?); French and Spanish 10-year yields are opening versus German; nobody is making fiscal progress, the combination of austerity and euro-shackles making recovery impossible. Yet everyone who has cried euro-failure “Wolf!” has been premature. Or wrong: maybe there is no wolf at all. Or, if the wolf finally does arrive, the bigger the shock.

2. The stock market set a new high yesterday, greeted by no exuberance. Usually a technical “breakout” like this is followed by a big run. Not. This new high is a half-inch above the same top in 1999 and 2007. Whee. And yet… stocks could really run and bring back the wealth-effect.

3. That wealth effect may already be here. This morning’s news: personal incomes jumped 1.1% in February and spending with them, up .6%.

4. More. Home prices are rising in every desirable market nationwide. Discounting for fewer distressed sales, the 25% drop making prices appear to rise faster than they are, the national move is 5%-10% annualized. The most attractive markets are now in auction conditions, multiple offers the rule. Still, ordinary markets are flat.

5. The absence of housing inventory is weird. Even big, production builders are having a hard time with credit, impeding construction. Maybe inventory is low because people have no place to move to. But, maybe, household conditions are weaker than we think, beyond the underwaters, and we’re enjoying a spurt from the fraction of households making it through the Great Recession unscathed.

6. Remember the Fiscal Cliff, tax increases, the Sequester? Are we suddenly so healthy that none of that mattered?

7. Japan. Gross national debt (Japanese Government Bonds = “JGB”) now 245% of GDP. Excluding the portion held by the Bank of Japan, 145%. 10-year JGBs pay 0.55%, that yield down by half in one year. The BoJ will within weeks begin to buy JGBs (and a lot else) with the intention of reversing 1% deflation into 2% inflation. This is the ultimate extreme of the central-banking project: ignite Japan’s economy and generate tax revenue (today adequate to fund less than half of government spending; more than half of that interest alone), or suffer the most spectacular default in history.

8. Perfesser Bernanke is going to retire at year-end. Vice Chair Janet Yellen is in the lead to replace him, and this week NYFed prez Bill Dudley began his campaign. Both are very able, both deep believers in a strong-intervention Fed. Whoever gets the Presidential nod at about Labor Day will then face confirmation hearings in the Senate, and the most ignorant and undignified philosophical combat since dinosaurs were placed in a museum beside Adam and Eve. Markets will be a tad uneasy.

We have all wished to escape the mire of the last five years. This way?

Do enjoy the long weekend. Stuff in the fan at dawn Monday.

What to you call an anaesthetized rabbit? The ether bunny. What to you call a row of rabbits jumping backward? A receding hare line.

The yen weakening faster than ever before, the BoJ printing Weimar-style, and JGB 10s headed for 0% yield. Go figure.

After debt, the biggest questions of our time: Why has the top 20% succeeded so much more than the bottom 60%? How much (more) to take from the top 20%? How to help the 60% succeed? Until we figure out some answers and get moving on them, recovery will be distorted and in question.

Long-term rates, the 10-year T-note and mortgages, are approaching their lows of 2013 because of Cyprus — which could disappear in a volcanic explosion (as did nearby Thera) and do no particular harm to the global economy.

New US data is all housing and debatable, although optimistic voices drown all others. The builder-opinion index (NAHB) actually fell a few points in March, and rising measures of prices are distorted by the drop in distressed sales and rise in normal ones. There is no question that housing has now turned upward, but Morgan Stanley’s caution is dead on: “The uptrend is likely to be shallow… credit is still hard to get.”

Buried in the Cyprus story is one terribly important matter, but it’s deep down. The news on the surface has been mangled all week long: those mean Germans want to skin Cypriot depositors before giving aid to Cypriot banks, and the precedent means trouble for any other Europeans sporting a tan.

Upon excavation, it seems that Cypriot bank deposits are about seven times the GDP of Cyprus, roughly $41 billion, of which about half have been misplaced in unfortunate loans in Greece. However, most of the deposits — estimates as high as two-thirds — are not Cypriot. They belong to Russian oligarchs and gangsters. Since the time of the Czars, and then the Soviets, nothing has so annoyed Russian nobility as someone stealing from them something that they had already stolen. Vladimir Putin’s howl of protest at a depositor haircut is comedy as black as his heart.

Even if North Europeans refuse to bail out the Cypriot banks, and over this weekend they close for good, contagion to the rest of Club Med is remote and no precedent will have been set. But Europe’s real situation is precarious and deteriorating, and any euro-zone accident reminds markets of the overall sham.

Now, the important part. Ever since the summer of 2007 the West has been caught in the greatest bank run of all time. In the crisis still underway, the idiot Left and idiot Right have agreed on only one policy prescription: don’t bail out banks. Let ‘em fail. Bust up the big ones and then let the pieces fail. No taxpayer money. Elizabeth Warren and Rand Paul, all aboard. (Oh, to watch them share an office!)

But, as satisfying as let-’em-fail revenge could be, “No bailouts!” has been too rough on academic and European ears, thus the nouveau term, “bail-in,” meaning losses to be taken internally. Everyone agrees that bad-bank stockholders should lose all, and so it was with Lehman, et al. The argument begins with holders of bank bonds, long-term IOUs of the banks. The bail-inners think they should be wiped out, too.

Yet, sensible bank regulators know that banks are safer the more their liabilities are long-term, not just “hot money.” Long-term money can’t run. Since 2007 in the US we have protected bondholders as we have depositors, on the theory that if we wipe them out, we’ll make the run worse, and nobody will again take banks’ long-term IOUs. If you want to stop a run, you make depositors — and bondholders — feel so safe by government guarantee that they won’t run. Either stop the run by throwing-in new money and guarantees, or risk losing the system altogether.

The bail-inners and let-’em-failers are certain that if we punish bondholders, then they’ll take IOUs only from solid banks, moral hazard will be restored, and we won’t have any more failed banks for taxpayers to worry about. These hardheads cannot understand that banks so sound will not generate credit for taxpayers, either.

Denmark has engaged in bail-ins, and the jury is out, credit imploding. The Netherlands is fiddling with bail-in, led by Finance Minister Jeroen Dijsselbloem, who is also president of the euro-area finance ministers. He insists — with company — that bondholders should take a haircut in any bank failure, and he is the leader of the barbers of Cyprus. Along with the Germans, shears always at the ready.

That is precedent. Not Cyprus. The European trail of self-deception is also precedent and threat to all. Cyprus will find a solution, and our rates will slide back up, anticipating US economic strength, but the ka-boom in Europe lies ahead.

Thanks to www.calculatedriskblog.com. Sales of existing homes are already in a normal range, but still at least one-third distressed in some way and heavily bought by cash investors — I think confirmed by the still-flat chart of purchase loan applications.