Premier Mortgage Group

In a double surprise, the job market may at last have begun to revive, but the double-the-forecast, 243,000-job surge in January has done little harm to mortgages. We are still near 4.00%; 10-year T-notes up from 1.82%, but holding nicely at 1.95%.

Ordinarily a payroll jump like this would have killed us, especially in combination with strong results in the two ISM surveys for January: manufacturing to 54.1 from 53.1 in December, and service-sector way up to 56.8 from 52.6 last month. Some of the calm reaction in markets is suspicion — few other data confirm a big economic turn. Europe is a continuing cause of deep anxiety, but quiet this week, nothing but the muffled clanking of picks and shovels in the bottom of its ever-deeper hole.

And housing hangs over everything in the US economy, all measures of prices in continuing decline through December. But, to his great credit, Mr. Obama devoted a speech this week to housing, including new proposals. “This housing crisis struck right at the heart of what it means to be middle class in America: our homes.” Right!

The proposals will be without effect, but that’s not Mr. Obama’s fault. That two years have passed without proposals or priority or even mention, that is his fault, but give him full praise for saying out loud: “Hey, there’s an elephant in this living room!” Why there are no effective proposals, and why it’s beyond even the President’s power to put them forward is a tale of human nature. We know perfectly well what to do, but several things in ourselves and our political process prevent action.

Federal housing finance agencies created in the Great Depression were by far the most effective aspect of the New Deal, perhaps more so than all the rest put together. Aside from restoration of credit, the miracle of government guarantee made mortgage lending easy as apple pie. Guarantee and uniform underwriting standards — sound ones! — made previously illiquid and expensive mortgages as easy to transfer as shares of stock, and cheap, long after the Depression was gone.

For good or ill, as early as the end of WW II our homes became the stores of our national household wealth. Got to put it someplace. Stock market guys would like it to be their market, but it has its own epic instability. Houses it was. The original stop-the-Depression charter of the mortgage agencies became ordinary everyday-everybody utilities. We let them bloat, 1985-2004, for the interest of their stockholders, an inherently unstable situation. Even before mortgage credit went bonkers, ca. 2002, and the push for home ownership ran beyond qualified candidates, the ease of mortgage finance had likely over-fed housing wealth.

Here in the aftermath of the Bubble it is convenient to have someone to blame for our pain. “Fannie and Freddie” have become curse words. Profanities. They were NOT responsible for the $2 trillion in toxic loans, but they are big, fat targets for the Right, hating all government, also oddly the agencies’ boosters on the Left. Hell hath no fury like a social engineer scorned.

The truly culpable parties — Wall Street bankers — have made a clean getaway. John Dillinger and Clyde Barrow would still be in business if they had gone to Princeton, gotten MBAs, and learned to lie properly.

The result is self-inflicted paralysis. The plain-sight truth: for housing to recover we must re-activate Fannie. In a time of falling collateral value, private lenders cannot lend, and we must rely on government guarantee. That’s as certain as the Pope’s religion and behavior by bears in woods. However, reactivation is impossible without leadership to explain what happened and what did not, and that rhetorical task might be beyond FDR himself. In every financial crisis, senior bankers have been available to explain and structure recovery, but this time the bankers’ conduct before, during, and after has been so without conscience that it may be another generation before financial-market Pooh-Bahs can earn back trust. If they tried, which they have not.

The politicians are prisoners of a homicidally angry people, and we’re going to stay in this pickle until we get over it.

The turn in these ISM surveys may be even more important than the often-revised payroll survey.

“‘Stranger and stranger’, said Alice,” and so it was this week at the Fed, in Europe, and Mr. Obama’s State of the Union.

Some brave souls thought the Fed would surprise by rolling out QE3, and begin to buy more MBS, driving mortgage rates down. Everyone expected a pair of meaningless inside-Fed jokes (more transparency, and an inflation target) and we got those. Nobody expected this: to extend its zero-percent rate from 2013 to the end of 2014.

Bonds have rallied, the 10-year T-note back down to 1.92% and mortgages close to 4.00%, markets still adjusting. Bernanke’s term expires a year before the end of the new zero-rate period! 2014 is so far off in the economic future that nobody can know its conditions, but you can bet — bet a lot — that the Fed would make a three-year commitment only if it is seriously worried. That anxiety has penetrated even the stock market, which has sold off for the first time in years after a new easing by the Fed. The Fed’s concern was justified by today’s weaker-than-looks Q4 GDP report.

Europe… the ECB will NOT allow a bank to fail. Those dominoes are off the table. The ECB may or may not play the ultimate card, buying or second-stage monetizing Club Med wallpaper, but banks will not be the trigger for ultimate euro collapse.

However, the underlying disaster is still rolling along. Christine LaGarde, French Minister of Finance until last summer, now Managing Director of the IMF, this week delivered a speech worthy of the White Queen. “Why, sometimes I’ve believed as many as six impossible things before breakfast.” In grand French style, her speech soooo important, soooo without consequence: demand European growth measures simultaneous with cutting spending and raising taxes; a larger financial firewall but no source for the money; and deeper integration among cultures farther apart every day. Banks not in play, European economies will determine the next stage there.

“The state of the union is getting stronger.” Uh-huh. Fifteen hours and fifteen minutes after the President spoke those words, the Fed announced an economy in such peril that its previously unprecedented aid would extend over the horizon.

Okay. All Presidents have the right to use lipstick. However, forty minutes and 58 paragraphs into his words, words, and words, the President first mentioned “homeowner.” Gave it three sentences to describe a refinance proposal that does not exist and will not. Three weeks after the Fed Chairman, a Fed White Paper, and four other Fed governors and regional presidents identified housing as the most serious risk to the economy, why it is, and what to do about it… three empty sentences in the SOU.

The 12th and 69th paragraphs (only) contained the word “deficit” in self-congratulation for last year’s painful mini-cut. Nowhere in the speech was a reference to a domestic spending cut or planned spending discipline of any kind.

We are entering the second year of an inert White House. Blame the Tea party, rightly, but a second year with no meaningful, Congressional pass-able economic proposal? At all? When in modern times has the White House been so dormant?

FDR was active, heaven knows. Some still argue about what he did, but not that he tried with mighty invention. Harry Truman let no grass grow in a deadly time and with a hostile Congress. Ike knew how to use staff better than anybody; it got him time for golf, but he got stuff done, and ornery Democrat Sam Rayburn ran Congress. JFK’s two years had questionable result, but action! Statues of LBJ would be common had he not become entangled in Vietnam, as any President might in 1965. Odd, brilliant Dick Nixon was plenty productive until the last six months, and never had a Republican Congress. Gerry Ford restored faith and fought inflation. Jimmy Carter never connected, and micromanaged his way to oblivion, but was anything but asleep. Anything Ron Reagan got done in eight years had to be negotiated with Tip O’Neil. Daddy Bush faced nothing but Democrats, and Bill Clinton had to make deals with the Mad Hatter. Newt.

These last 11 years… I find no parallel except the emptiness of Harding and Coolidge. Hell, even Herbert Hoover tried hard.

Fourth Quarter GDP arrived plus 2.8%, but consumer spending rose only 2.0% (after all that media jive through the holidays), and the savings rate fell below 4%, leaving little slack in household budgets. Inventory rebuilding aside, GDP rose only 0.8%, and that was boosted by an improbable 10.9% jump in residential construction, likely to be revised closer to Q3′s 1.3% gain.

More positive US data and relaxation of European frights have combined for higher interest rates and support for Wall Street’s warm-fuzzy machine.

One week ago, downgraded credit in Europe and another failure in Greek debt negotiations had taken the 10-year T-note to 1.85% and big-equity refis a hair below 4.00%. Today, nothing is resolved in Europe, but nothing is falling, either, so 10s are back to 2.02% and even a 20%-down low-fee mortgage is near 4.25%. Adios, refis.

The mortgage spread to 10s — 2.25% — is very wide, now opened in part by the new-mortgage surcharge inflicted by Congress and the White House to pay for part of the payroll tax cut. Which the public doesn’t know, because mainstream media can’t be bothered to cover the madness, and the Fed every day trying to close the spread.

The most striking US data is the decline in weekly claims for unemployment insurance, which seem decisively to have dropped below 400,000 (352,000 last week) where we had been stuck for most of 2011. Fewer layoffs is not hiring, but it is good news. Regional Feds report up-ticks in manufacturing. Inflation is receding from its commodity push last year, overall zero change in December CPI.

Then a data-interpretation argument, this time housing. The consensus is very optimistic that housing is past its bottom and 2012 will mark beginnings of recovery for construction and resales. I wish… oh, how I wish. The optimists assert pent-up demand, household formation, lower listed inventory, and faith. Halleluiah, brothers and sisters.

Always-suspect NAR has reported a 5% gain in sales of existing homes in December. Also a balmy, La Nina split-jet December, northern-city NFL finales and playoffs in dry 30-degree sunshine. Economic data is adjusted for season, but not weather. NAR also reported that one-third of contracts failed, its members correctly blaming mortgage underwriting and appraisals.

There is some legitimacy to hopes for new construction because builders are agile in shifting location and price point, and some places really are short of housing (North Dakota). However, new delinquencies are not improving, there is no work-off of distressed inventory, and all major measures of prices resumed their declines early last fall. The household-formation argument is based on recent historical pattern, but a hard look contradicts: we have a 1930s-style decline in birth rate, and for good or ill a sharp drop in illegal immigration. Pent-up demand is offset by pent-up caution about prices.

The void in political leadership continues, and among economic thinkers of all stripes the widening, hysterical scatter of what-to-do-if-you-were-king.

Heaven help moderates: Democrats were thrilled this week by Mitt Romney’s exposure as wealthy (who knew?) and paying completely legal taxes, if low in some parts. This guy tithes, 10% of his considerable income to his church. Lefty Democrats think that tithing is taking 10% of somebody else’s income, and Righty Republicans are in a 16th century argument about what a church is, and whose is acceptable.

Economic policy has two centers of confusion: stimulus versus austerity, and the central banks. Ordinarily sensible people chant: short-term stimulus, then austerity. Pardon: when is then? Less sensible people demand spending on infrastructure. Maybe we could avoid Japan’s bridges-to-nowhere, but even nifty new bridges to somewhere add what multiplier to economic growth? Governor Moonbeam’s California bullet trains are the most questionable public investment since the projects at Pruitt-Igoe.

The central banks. I hear more and more center-thinkers drifting toward the Libertarian posse. A good guide for 10 years has been the www.hoisingtonmgt.com quarterly, but the newest issue demands “a five-year moratorium on all new Fed actions.” A bright, studious investment manager and friend (better nameless) refers to Fed “meddling.” As we enjoy better US data, and no new recession, please understand that the Fed and ECB are holding open our living space against crushing deflationary pressures. And until accidental healing, or somebody finds the support to do useful things, the issue is in doubt and central banks are playing for time.

Big questions for spring: is the decline in inventory a good sign for prices, or a sign of demoralization; and what happens when distressed inventory is released to market?

The one bright spot in the world is the resilience of the US economy, not re-entering the recession so widely forecast last fall, and so far impervious to events in Europe.

However, the failure of leadership in Europe, and here — hell, everywhere — seems to be coming together in another chaotic moment. There is no dominant thread to events, instead a tangle rather like the first time the kids helped to take down the Christmas lights. Find the end of one string, then another….

Here in the US: a surge in consumer credit (10% annual growth rate in November) may or may not indicate consumer and banking revival, or survive revision, but beats contraction. Consumer confidence numbers are in a sustained rise, sometimes correlating with a better job market. Tempering that enthusiasm, the ballyhooed holiday retail sales did not take place: fibbers on the stock-market channels oversold a mere point-one percent gain in December sales. Small-biz surveyor NFIB found a fourth-straight monthly gain, but shallow- slope, net index no better than last January.

On concern for the rest of the world, 10-year T-notes have fallen to 1.85% today, but there is no mortgage follow-through, largely because of the unspeakably stupid mortgage-rate surcharge imposed to pay for part of the Social Security tax cut.

Outside the US, in approximate order of importance:

The flame is rising under long-simmering Iran. Sanctions imposed to halt their nuclear program may produce unintended blowback in Hormuz, and today’s news of US troop and naval movements add to the burden of already jumpy markets.

Consensus today has S&P downgrading the credit of most of Europe this weekend. Ordinarily downgrades would have no more effect than the downgrade of the US last summer; however, the European rescue funds (EFSF and ESM) are dependent on AAA ratings for contributors, especially France. No bailout funds… dawn of reality.

Greece faded in importance last fall as Italy and Spain came into play. The debt forgiveness that Greece needed seemed trivial by comparison, and nobody would be silly enough to tip the Greek domino by withholding pocket change. Right. Talks broke down today, and default is again imminent. Most exposed: the ECB and its holdings of $150 billion in Greek debt. You want that in 100,000-drachma notes, or 1,000,000?

Time out for ethics in financial leadership. During a sustained effort by the Swiss National Bank (its “Fed”) to weaken the too-strong Swiss franc versus all other currencies, the wife of the SNB Chairman, Philipp Hildebrand, placed long-dollar trades with the family banker, who confirmed the trades with the Chairman. Upon exposure the Chairman attempted a cover-up with that banker, who refused (there are honest bankers). Philipp and Kashya Hildebrand met while working at a US hedge fund (dang, what kids learn in those places!); he has resigned and accepted a $1 million severance.

The largest Italian bank, Unicredit, attempted to raise capital in accordance with suicidal instructions to banks everywhere, and very nearly succeeded. In suicide. Its stock is now wallpaper; a good bet for the first of the nationalization dominoes.

The ECB flooded Europe two weeks ago with $700 billion in liquidity to banks to stop a run. A similar sum has returned to the ECB for safety. Its Chairman, Mario Draghi yesterday said, helpfully, that the returning cash was not from the banks who borrowed. Got it. The banks who borrowed paid back the banks from whom they had previously borrowed, and those banks are not going to loan money to anybody, sending it back to the ECB, where it now sits safely in mayonnaise jars under the ECB’s porch. The ECB stopped the run for a while, but brought no economic or credit relief.

Yields on short-term Danish and German government bills have gone negative. In a phenomenon seen here in the 1930s, and very briefly in the current crisis, investors think it wise to pay 101 kroner or euros for the right to get back 100 ninety days later.

Financial people have been asking each other since last July, “What’s the European endgame? What’s the trigger?” At the moment, it looks as though the whole stack of procrastination, half measures, and self-deception is crumbling at once. But we’re okay.

Progress since summer, but…

Hard to call this progress:

It is an election year. In addition to the distorted economic “analysis” offered by the ever-cheerful stock-market channels, CNBC and Bloomberg, all year long this year political interests will add their garbled gabble.

Today’s reports of 200,000 new jobs in December and unemployment down from 8.7% to 8.5% were greeted with happy bugles from the usual suspects. Ignore that and watch the markets themselves. Interest rates rise on legitimate good news; today’s 10-year T-note yield has fallen to 1.94%, and mortgages are near 4.00% again. The stock market rises on good news, and today it is flat to down.

200,000 jobs is good news, but year-over-year earnings have risen only 2.1%. A few back to work, but not the job that it was. And even if employment growth persists at that level, and new unemployment claims stay down as they were in December from 400,000 weekly, it’s not enough to dent the job losses since 2007.

Part of the tepid response from markets today is derived from ongoing concern for Europe. Perhaps the best indicator for markets this winter will be the pace of recession onset in Europe. But, here, genuine economic turn depends on housing. Many self-deceiving financial-market types in the last weeks have announced discovery of a housing turn; although there is none in the actual market, there is one in public policy.

The Fed is very reluctant to lecture politicians (because of its perpetual political peril), but has done so this week. Mr. Bernanke shot a very well done paper at Congressional committee chairs, laying out damage by insufficient credit, by pinched and self-destructive attitude at the regulators of Fannie and Freddie, and by exposing the total absence of administration policy. www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf. Today Bill Dudley, Prez of the NY Fed fired off another: www.newyorkfed.org/newsevents/speeches/2012/dud120106.html.

The President and Treasury Secretary have been so completely detached from housing that even a blast from the Fed may not get their attention. But I can hope.

We have 4.2 million homes in terminal delinquency, not yet foreclosed, and another 600,000 REO. The annual rate of sale of existing homes is a little over 4 million, one-third of that distressed resales, barely moving the newly distressed, no net gain. That absorption conundrum is bad, but masks a tough and unusual phenomenon in the ordinary non-distressed market, an odd freeze descending.

Here in my Denver backyard, the listed for-sale inventory dropped by one-third last year, ordinarily the precursor of rising prices. Maybe that will happen here — we led the nation in foreclosures way back in 2004 — but there is another force in play.

Down payments. Where to get one? The most common source is rolling over the equity in a current home to buy a new one. Right. Roger that. Although we do not have the under-water inventory that silly-Zillow fantasizes, with local prices roughly the same as 2001, price-appreciated equity a memory, there are fewer and fewer owners both wanting to move and with equity to roll, thus fewer and fewer listings.

Other than appreciating value, nothing but loan amortization builds equity. See entry for “glacial”, and kids google Rip Van Winkle.

If you’re not an owner, down payments come by saving money. Good, healthy discipline. However, in prior times your savings earned something. Even in a bank. In the 1990s the stock market might have doubled your savings every other year.

Another reliable source of down payment: bonuses. As I ask clients about that, today I get a lot more wry chuckles in response than happy answers. Same for stock options, proceeds of IPOs, or growing commission income. And sad answers to the prospect of help from tapped-out families.

If mortgage credit began to flow on reasonable terms, and somebody running for office told the American people that modestly rising home prices are in the national interest, and we got a 5% or 10% rise in prices, we would unlock the entire economy.

Might ask a nearby politician about that.

Rate of home sales.

Long way to go:

The most painful part, those forced to take part-time survival jobs:

A New Year begins next week, and it is time for my annual dodge. Peter Drucker, one of the world’s few worthwhile business theorists: “Nobody can predict the future. The idea is to have a good grasp of the present.”

This year, no flinching from predicting. Why such foolish courage? In several econo-political arenas we have dithered and fiddled so long that things are going to happen, and all I have to do is guess what. In order from easiest to hardest….

Interest Rates. Nothing big. Maybe nothing at all. The bond market is behaving as though the Fed intends a 2.00% cap on 10-year T-notes. Why argue?

US Economy. As is. The fantastic stimulus in the pipeline should keep it afloat, but the housing drag will hold it low in the water. More people will find jobs, but paying less than the old ones. The primary risk: if the foreclosure engine resumes without an adequate mortgage supply, it will undercut home prices (again). All other risks to us are from overseas. Upside surprises will be limited to regions first-in to the housing bust, first to recover, my home state Colorado a fair bet. Don’t look for a general economic improvement, if only because fiscal austerity lies just over the horizon.

China. Got this one right last year, so double down. It had to fight inflation in 2011, and did, and is slowing as a result. Other than that, nobody knows what will happen there, not even China. Too big, and too preoccupied by power transfer under way. For the time being these leadership transfers are non-violent, but behind all the black suits, white shirts, and bland ties lies a contest that would impress Corleone and Capone.

Inflation. Just forget about it. Year after year after year people have worried about it, and it’s not in the cards. Forces of deflation are still far too strong.

Europe. Toast. Said so last year, and nothing has changed. The ECB will prevent an immediate banking collapse, so timing will depend on Clinton’s Law: “It’s the economy, stupido.” When austerity bites, economies shrink, tax revenue falls, and budgets get worse, then we’ll see about political stability versus suicidal clinging to the euro.

That was the easy stuff. The Hard Three are related (ain’t they all?).

1. Modern central banks date to Walter Bagehot’s concept of “lender of last resort” in 1873. That entire project is on trial, doing well but not getting anywhere. Inventing non-inflationary cash with which to put down waves of global bank runs, cushioning but unable to stop an asset-value disaster, and creating a starvation-level credit supply. Bernanke has been inspired, now guiding Draghi at the ECB, but they cannot reach the root issues. Without a root-fix, the credit house of cards just gets bigger, more vulnerable to some ron-paul idiot tying the hands of one of the central banks.

2. The Fed and ECB in their desperation to prevent a replay of 1930-’32 are buying time not just for the financial system, but have become unwilling co-dependents of the local politicians who are wasting every second provided (UK excepted). I thought last year that the frustration and exhaustion of the American people would force a budget deal and a big one. Wrong. Both political parties are engaged in lies so big that they seem to believe themselves. Shrinking government and regulation will not balance our budget. Taxing rich people will not do it, either. The middle class has promised itself benefits that it cannot afford, and neither party is willing to say so. Yet, I cannot believe that the tombstone of the United States of America will say, “Liked Being Lied To.”

3. Tuesday, November 6th. A bunch of Tea Party yahoos will be sent home, elected in frustration with the President, not to misbehave. Neither party will have a working majority in Congress. Just as well. Twelve-straight years of Presidential failure have consumed all margin of safety, and we will either fix our budget within the next Presidential term, or see “tombstone,” above.

Maybe, just maybe, this mix will enable the next President to know what to do for us and to us: a stiff, bad-hair Michigander/Utahan Republican Governor of Massachusetts (wow) who, as he says, has signed both sides of paychecks.

2012 is make or break. Simple as that.

“Marley was dead; to begin with. There is no doubt whatever about that… Marley was dead as a doornail. Scrooge knew he was dead? Of course he did.”

“Scrooge! A squeezing, wrenching, grasping, scraping, clutching, covetous, old sinner! Hard and sharp as flint, from which no steel had ever struck out generous fire; secret, and self-contained, and solitary as an oyster.”

Very little real news this week, markets lurching to no account, trading so thin that the landing of a snowflake avalanched 300 points of Dow. Uphill.

The issue at hand: the debt and austerity trap. We must stop borrowing, but to stop we must cut spending or raise revenue or both. If we do that, and our economy or the ones over there or there slow down, then we will have less tax revenue and more need — or wish — for spending and borrowing.

How to escape? Devalue currency, stimulate exports. However, not everyone can be a net-exporter. There’s no future in devaluing the dollar because we’ve been beaten to it by the Brits and the Euros (just begun), and China will soon switch from phony appreciation to very real devaluation, as Japan would do if it could figure out how.

On the Brit plan, devalue, cut spending, raise taxes, central bank prints, tolerate 5% inflation, force banks to lend and reform at the same time. Then kneel and pray.

On the Euro plan, pretend. The Japan plan:____ .

China “Plan A”: sell until customers can no longer buy, their wages undercut and debt too high, but by then China’s domestic economy will be self-sustaining. Too bad: its customer-victims are tapped out a couple of decades too early. No “Plan B.”

Caught in the ever-tighter mathematics of austerity and debt, what can we do to escape? That doesn’t cost any money?

Ethics.

Simple as that. Start anywhere.

In boardrooms… if your CEO does not begin every day by considering the health of the markets and society in which the venture makes its money, and the contribution or damage the venture makes to the outer world, get another CEO. If commerce degenerates to cops and robbers, as it has, ultimately there will be too many rules and cops to conduct commerce.

The National Association of Realtors announced this week that it had over-counted sales of homes by 650,000-800,000 in each of the last four years. NAR, the voice of a million mostly hard-working brokers, which claims also to speak for homeowners, did not care enough to get it right. Or to say that it was guessing. Shame on you. Booooo.

New Fed rules require an independent committee of directors of large banks to be responsible for risk management. Wow. Directors to know what management is doing. Small banks, too, maybe? Might businesses other than banks take hint and heart?

We who feel disenfranchised, wondering if our silent Congressmen and Senators are still alive… we wish the spirit of Dickens gives them courage to speak blunt truth.

If you inhabit a wing of either political party, acknowledge daily to yourself and out loud to friends: “I know that my wishes will never prevail on the other three-quarters of Americans. Further, demanding my ideal will not increase my chances of getting part of what I want, and instead will lessen my chances and hurt my country.”

Democracy and citizenship are easy: majorities may not oppress minorities, nor minorities paralyze majorities. Nothing to it except thinking about it once in a while.

Do not engage with fairy tales. 99.9% of the web does not have the benefit of an editor. Do not believe as fact anything that you see, forward it, or say it until crosschecked and verified. Goes triple for the economic realm, on the web or off.

If you have not discovered that your cell phone disturbs others nearby, or makes you drive as though stoned and lobotomized, work on it. Ditto singing in ear-buds.

One no-cash way out: Ethical behavior enhances civil society and its productivity.

Merry!!

Aside from incompetence and embarrassment, NAR’s revision calls into new question the ability of the market and economy to absorb the 5 million homes now in terminal dis12tress, but held since last year in mothballs by the robo-foreclosure scandal last year.

Optimism about the US economy has actually crowded Europe off-screen from time to time this week.

The center of US happy-talk: an abrupt decline in new filings for unemployment insurance. Stuck near 400,000 each week for 18 months, last week’s figure dropped to 366,000. As in all things economic, changes in trend are more important than absolute numbers, and it will take a while to verify this one. If accurate and durable, fewer layoffs is a good thing, but it is not hiring. Might just be running out of people to lay off.

Optimists point for confirmation to the NFIB small business survey, whose overall index has risen four months running. However, it’s a hair weaker than a year ago and statistically unchanged since the post-pit summer of 2009. However, the employment sub-index is slightly in positive ground for the first time since 2007. Maybe it’s a turn, or maybe over-cut small biz has enough confidence in stability to staff an empty slot, but it’s no rocket. The sub-index of sales has weakened steadily since April.

One of the best overall indicators is Federal tax receipts, cutting through analytic fog and spin: Federal receipts last month were $13 billion ahead of last year. Ain’t nobody payin’ taxes on income they didn’t really get.

Inflation is a non-problem, CPI flat in November, and as the rest of the world slows, inflation is more likely to be a too-low problem than too high. Industrial production slipped .2% after a strong month. Wizards of forecasting think GDP will have grown 3.5% this month, and we’ll see. Feels more like a number than a sidewalk reality.

Europe. Mainstream media last week trumpeted Merkel’s great success in gaining agreement for pan-European fiscal enforcement, and pilloried David Cameron for his UK no-thanks. Now we know: bullied by Merkel in her pickelhaube and Kaiser Bill moustache, nasty little French poodle in her lap snapping at passersby, several of the others gave polite “Ja” without any agreement at all. European banks are imploding again. Desperate efforts at fiscal discipline to support sovereign bonds are undercutting economies and tax revenue, hurting European bonds by other means.

The fear-effect here: the Treasury this week auctioned masses of 10- and 30-year bonds, and bidders over-subscribed 3.5:1, two-thirds from overseas. The 10-year T-note today is 1.84%, last so low on October 1, unfortunately with no follow-through to mortgages stuck above 4.00%. That absence of mortgage buyers is yet another signal that financial markets here are still deeply impaired.

Lest European governments get all the credit for mangling the public interest, consider the newest adventure here, transcending dysfunction. The President took time out from his pre-campaign snit to demand an extension to the payroll tax cut, and even this free-spender insisted that new revenue would be found to “pay” for the cut. Predictably Republicans wanted to cut spending in alternate “payment.”

No serious person thinks the extension even if not paid for would do anything for the economy except to waste another couple of hundred billion bucks. However, the “pay for” mania no matter how done will convert the whole exercise into cutting a foot off of one end of a blanket and sewing it on the other end.

Except. None of the pay-fors propose replacing the revenue lost to Social Security, a high cost to pay for political posturing.

And except. I’m not sure that it will pass, but there has been bi-partisan support to pay for part of the payroll cut with a Fannie-Freddie mortgage surcharge, adding a tax on the weakest component of the US economy in the form of higher rates. Meanwhile, of course, the Fed’s “Twist” is trying to push down mortgage rates, and at any crack in economic optimism the Fed will deploy QE3 focused on mortgages.

Few people expect much from government, now, except two minority parties each content in its corner to glare at the other. Finding agreement only in the idiocy of a mortgage surcharge transcends black comedy. If we get some action out of the Ghost of Christmas Present this year, I hope it’s to awaken and embolden the political center.

Maybe, maybe… fingers crossed.

IP gains are flattening.

As commodities unwind with Europe and emerging-nation exporters to Europe, inflation will head back down to the reactivate-QE zone.

The newest European maneuvers have trigged a stock rally, but credit markets are not buying the deal. The small upward pressure on US yields today is preparatory to a big borrowing binge by the Treasury next week, not anything fundamental.

Through the fog of Europe, dominating and concealing everything, one pattern is clear: the US economy is doing better than forecast 90 days ago, and the rest of the world is in some stage of sinking.

The two surveyors of US consumer confidence have each reported November-December gains. New claims for unemployment insurance last month were the lowest since February, and the small-business org, NFIB, has also found the first up-turn in small-business hiring since 2008. The Fed’s Z-1 reported a couple-trillion-dollar drop in US household net worth in the 3rd quarter; however, all of it was attributable to stock market losses then, all of which have been recovered.

The perma-optimists say that emerging economies will carry the globe. Uh-huh. China’s 18-months of inflation-fighting has dampened prices, but also hosed down its economy. Brazil’s GDP grew 7.5% last year, but went negative in the 3rd quarter.

The European predicament has been a source of amusement while markets there and everywhere for two years have tried to anticipate whatever new system will follow euro-folly. As of last night, it is no longer funny.

Germany has no answer to anything except to force unsustainable austerity on the weak dozen of the 17 nations in the euro currency. In their frailty, they dare not object. Feckless France for 150 years has asserted power that it does not possess, now coat-tailing German dragoons. Beyond the currency zone lie another 10 nations together comprising the European Union, a fantastic bureaucratic boondoggle based in Brussels.

Today minus one, the UK.

Once applying force, Germany has never known when to stop. Germany and France have long envied the City of London, second only to New York as a financial center. Among the fiscal-union treaty changes jammed at the EU-27 last night, the UK would lose protection from EU regulations which would dismantle the City and reassemble it in Paris and Frankfurt. To UK PM David Cameron’s great credit, despite the risk to UK exports, half of which go to Europe, he told Merkel and Sarkozy to bugger off.

Financial markets have been wagering on euro-breakup since July, one Friday after another guessing the precipitating event. First we expected sovereign-debt default as a catalyst for collapse, but just enough aid has been provided to the weak to prevent it. In July began the greatest bank run of all time, transcending even post-Lehman here, and markets bet on a banking collapse as endgame. European banks have indeed collapsed, but the husks are held open by ECB funding alone (example: in November US money-market funds pulled 68% of their money from French banks), and the absurd notion that all sovereign debt will be repaid at face value and in euros.

German muscle will prevail until European economies are crushed by austerity, and tax revenue falls out from under budgets. That will take a while. Marking the absurdity of this blockheaded pursuit: several sources report authorities in Ireland, Greece, and others inquiring about capacity to print new local-currency banknotes. Every investment house is handicapping the values of local currencies post-breakup. Emails circulate discussion of the lex monetae rules governing who-owes-what after currency change.

There is nothing holding Europe together except a political superstructure which will be thrown from power when the unified Europe project fails. Thus no matter how transparent the folly and failure, the harder that class tries to preserve the project.

The lesson for us, far more powerful than caution against financial profligacy: the more your political structure detaches from economic reality, the greater the danger. That hazard is masked here, now, by European distress. Cash flows to us for safety, keeping interest rates low, and global weakness inhibits inflation. We’ll take that as long as possible.

“Improvement” in confidence is relative.

… as in unemployment claims.

Everybody struggles now to find guideposts in the thicket of new economic information. Two old ideas may help. First, the time-sense of humanity is more calibrated to getting the bear out of the cave than musing about why bears like caves. Second, a version of frog-in-hot-water: we tend not to notice the gradual onset of lunacy, grasping the insanity only in retrospect.

US data are pretty good — relative to fears of new recession. November payrolls gained 120,000 jobs, and inclusive of all revisions added that many to prior months. If markets had any idea in September that payrolls had jumped by 210,000, double the original announcement, we would not have had that mortgage refinance party.

Reality break: the Treasury borrows and spends about $120 billion each month, and for that stimulus we get 120,000 jobs. Instead, why not just pay each of these people a million bucks and let them stay home? Europe is struggling with austerity, not us. Yet.

Markets liked the rise in the November ISM manufacturing index from 50.8 to 52.7, “50″ a breakeven economy. A major part of that improvement is coming from much better sales of cars, at a 13.6 million annual pace in November, way up from the barely 9 million in 2009.

Retro-perspective: we junk about 14 million cars each year. They wear out, unlike houses. Thus we are just now touching replacement-rate sales. Credit is restored for car buyers, unlike houses, which require rather larger loans and are harder to repossess (state Attorneys General have discovered that it’s cheap to buy votes by stopping foreclosures). Oh-by-the-way, the ISM in China fell to 49, and Europe to 46.

The strength in the stock market is a great thing; Dow 12,000 in new statements will reassure households. Fine, disciplined money-managers (Brad Bickham and Gary Beels in town), as opposed to the drunks on CNBC, point to solid corporate earnings miles above the return on bonds. Some stocks pay dividends beating bond yields.

Fluff, huff and puff… Wednesday’s 500-point up-day was the direct result of global central banks’ rescue of European banks. A run began on European banks 18 months ago, and intensified in July, including huge dollar deposits fleeing home, out of Europe for safety. The ECB can replace euros running, but needed other central banks to replenish dollars. The good-news intervention that caught so many short stocks was actually confirmation of very bad news.

Everyone is exhausted with Euro-soap and its fantastic display of self-deception, but it is more important than any other economic development. The next can-kick is scheduled for December 9, this time fiscal discipline to be enforced by surrender of sovereign budget authority to European Union bureaucrats in Brussels. Once that discipline is established, the IMF and ECB are supposed to ride to the rescue. Joined presumably by the Mounties, Mighty Mouse, and Batman.

Better to kick an anvil than this can. The central purpose of any parliament since the Magna Carta, since Rome, is the power of the purse. In the best lunacy check of the week, Nicolas Sarkozy: “It is not by going down the path of more supranationality that Europe will be re-launched.” Aha. France refuses external fiscal discipline not merely for its immense pride, but because its own situation is so dire that it cannot meet the requirements of the existing treaty. If France refuses, who would accept?

Germany’s unemployment has fallen to a two-decade low 5.5%. Spain’s is 22%. There is no rational basis for these nations to bolt themsleves to a common currency. One needs a much stronger one, and the painful lesson of the cost of beggar-thy-neighbor export mania, and the other desperately needs to devalue to revive exports.

The greatest hazard lies in continuing this charade. The most helpful and hopeful line of the week came from Jurgen Hoffman, finance director at Volkswagen Autoeuropa (from FT): “The overall impact [of leaving the euro] would not be so negative for our company.” The primary impediment to ending the euro fantasy now seems to be politicians trying to preserve themselves; the commercial world is more than ready.

Thanks to www.calculatedriskblog.com for this most-descriptive chart.

And for the next one, “involuntary part-time.” 8.5 million people, going nowhere.