Premier Mortgage Group

In the early ’70s we used to say to each other, especially when embarking on a questionable adventure, “When the going gets weird, the weird get going!”

Get going out there.

The dominant economic/financial commentary has us in strengthening recovery, and a serious minority says we are near new recession. Both are correct and mistaken. Begin at the very beginning, circa 1990, when the entrance of China into global markets began to undercut Western wages. We were still so rich that we didn’t notice. A dozen years ago we found it easy to borrow to maintain our standard of living, until the whole shebang hit the wall from Anaheim to Athens.

In the last five years the Fed and European Central Bank have prevented a collapse of the financial system, buying time until we get our affairs in order by other means, which we have not gotten around to. We are in Central Bank ICU, and all the beeping and hissing and hoses and lights and dials has us confused and forgetful about how we got here, and no, we’re not just going to hop out of bed and jog five miles.

It is very good news that new unemployment claims have fallen near normal at 350,000 last week, but that is not the same as hiring (next Friday we get that). Our twenty-year decline in real wages may have concluded, and maybe not; new jobs when they come may pay better, likely not. Consumer confidence reached the highest level since March 2009, but it hasn’t been a fun three years.

Orders for durable goods had a terrific Nov-Dec, and then tanked 4% in January. Auto sales had a terrible January and red-hot February. The ISM manufacturing index was supposed to continue a positive run from January’s 54.1 and instead plunked to 52.4 in February. January personal income rose a tepid .3%, and spending only .2%.

An astounding number of “analysts” see a housing recovery (NONE at the Fed). Case/Shiller’s newest home price index stone-dropped 3.8% in the last 90 days of 2011. CoreLogic reported yesterday that 27.8% of mortgaged households are under water or nearly so, no progress at all. Connecting the two stories in a miracle of arithmetic, falling prices create more underwater households. Got that, cheerleaders?

Nothing above describes self-sustaining recovery, or new recession. Just ICU.

To escape — get our affairs in order by other means — requires our own concerted action by public policy. No part of our political process (except the Fed) got anything done last year, or the year before, or will this year. This is an election year. Oh, boy.

By mid-year 2011, Mr. Obama had lost by 2:1 the confidence of the independents who put him into office. Then, Tea Party misbehavior in the budget battle, and six months’ revelation of the Republican underbelly in all its nomination-season glory, and independents now favor Mr. Obama 2:1. Still, Mr. Obama sees the world through a golden haze of self-congratulation. Saved the country from Depression II. (The Fed had that done before you sat down). Now uses Ron Reagan’s “America is back!” (Pardon, sir; but back where, exactly?)

Hard Lefties are a pain: Nanny-State intrusion, and grabbing at wallets not their own. But, from William Jennings Bryan forward, given a choice between a guy with too-bright eyes and a special pipeline to the Almighty, and anybody else, we’ll take anybody. The doubtlessly capable Romney lacks the charm of Richie Rich and will have to drag a Hard-Rightie ball-and-chain wherever he goes, even though they hate him.

We are a democracy, and the next nine months’ circus will be about us. Foolish partisanship among candidates is a reflection of us. Candidates who will not speak to real issues in authentic ways… they won’t until their focus groups and polling say we want them to. There is nothing wrong with our system, just us, and our refusal thus far to acknowledge that twenty years ago the world moved on without us.

Compete in the world, and live within our means: if we look interested in that discussion, there is no telling what competition of ideas might break out among candidates.

This week’s charts mark the overall confusion, first a pair from the deeply respected ECRI. The first is disturbing, showing the “descending tops” of recovery since 2009, the cause of ECRI’s new recession call.

Then again, the ECRI may be nothing more than a proxy for the stock market, which is doing okay, and so may be the economy.

This one is “chart 2″ in a series otherwise omitted, and shows a surprising thing: government spending IS falling, private sector not so bad (index = 100 as of recession’s end).

Worry about inflation all you wish, but it is actually trending lower than the Fed’s 2% target (Personal Consumption Expenditure Deflator, chart from Prof Tim Duy). QE3 is still a high probability.

Markets are quiet, volatility gone, waiting for something to happen. Not calm, plenty tense, a lot happening but not concluding.

The overriding influence near-term: The Battle of 1370. What, Europe again? The English and French refighting some unpleasantness between Crecy and Agincourt?

Nah. Every stock trader on the planet is mesmerized by S&P500 1370. Go above it, and stocks should rocket if only because so many buy the chart. One problem: the S&P since mid-December has already run straight from 1200, and been stuck between 1345 and 1365 for three weeks. As vulnerable on downside as likely to explode upward.

Fed-managed long-term rates no longer react to anything: the 10-year T-note since the end of October has traded 90% of the time between 1.90% and 2.05%.

Europe has pulled back from another Greek brink, but not resolved a thing. Austerity in the big dominoes — Italy, Spain, and France — has not begun, each promising fiscal tightening about 4% of GDP this year. In US equivalent, imagine a $600 billion tax-hike spending-cut combination during the onset of new recession.

The ECB will next week expand bank rescue funding toward infinity. However, the ECB firehose will have little economic effect, just preventing weak banks from failing, strong banks disinterested in risk-taking, no matter how much cash the ECB sprays.

So, the world admiring its navel, what’s up with the long-slow-roller, housing?

Finance types have amused themselves in the new year by announcing housing recovery. Merrill Lynch’s newest report concludes: “The housing recovery would support an even bigger commitment to equities in our portfolios.” Right. Merrill would find sunrise or Joe Stalin’s birthday good reasons to buy more stock.

Home sales data had been talked this winter into optimistic anticipation, and the flat reality misreported: a ballyhooed but minor gain in January sales of exiting homes was reversed by a downward revision for December. Sales of new homes were just the reverse: off .9% in January, revised up a little in December. And this winter was one of the mildest in a long time. New applications for purchase loans have been unchanged all through the winter into February.

Home prices have flattened. The FHFA Home Price Index wobbled weakly through 2011, and recovered in December to a decline of .8% from where it started. The Newest Case-Shiller data is a hair weaker, through last November off 3.7% year-to-date, the last two months showing new declines in 19 of 20 cities. Stock hawkers see these trends as a happy turn to price stability. If I have been dragged to the bottom of a swimming pool, holding my breath, is my situation stable?

There are genuinely positive trends, and one big puzzle. The true positives include some big drops in overall mortgage delinquency: in the last year, 18.9% in Nevada, 14.3% in Michigan, 21% in California, and 24.5% in Arizona. Total mortgages delinquent or in foreclosure have dropped by almost 900,000 in the last year.

Don’t get carried away just yet. Nationally, 12.3% of loans are still delinquent. 3,856,000 loans are 90+ days late or in foreclosure, down only 8% last year (LPS).

The puzzle: a nationwide drop in listed inventory for sale, down 21.5% last year, 11.5% of that in December alone. This is National Association of Realtors data, which given both hands and a mirror could not count both sides of its fanny and get to “two.” However, the decline is real and large, and normally a precursor to rising prices. This time we can’t tell how much is instead due to exhausted sellers, others fearful of discounts too deep, or with too little equity to hire a broker and have a down payment for the next home. We’ll hope, and see.

On the public policy front, the Federal government immobile and annoyed by Fed pleas for housing help, some states are moving. Florida has legislation pending which would make foreclosure easier. In the seventh year of fiddling and loan-mitigation pretense, there is no better sign than local governments wanting to get on with it. That’s a true marker of moving into the back half of this mess.

Poor graphic, but great data. The sort is based on column three, “Non-curr %”, highest top left, carrying to center column and then right. “Non-Curr %” includes all loans late to any degree.

Gradually improving US economic data and a Greek deal of some sort have relieved immediate financial fears, and so bond and mortgage rates have risen.

The rate increase is proportional to the relief. 10-year T-notes have moved from 1.92% to 2.02%, and mortgages from just under 4.00% to just under 4.125%, roughly like your kid’s fever dropping from 105 to 104.5.

However, the kid here is in a lot better shape than the kid in Europe. The most reassuring news here is the up-trend in the small business survey by the NFIB. Although its overall optimism is little better than the bottom of recessions going back 25 years, it has been improving each month since August, and only two months since 2007 have had better readings. The weakest internal component has been sales, now the worry fading fastest.

Another legitimate breakthrough: weekly claims for unemployment insurance have dropped again, to 348,000 last week. Wobbling near 350,000 in the last couple of months has been a straight-line decline from the 400,000+ range of the last two years, and is only about 25,000 weekly above what anyone would consider normal. However, everything about this cycle is so abnormal that nobody knows if normalized layoffs will translate in to normal hiring.

More good news: inflation is not a problem. CPI arrived for January +.2% both overall and core, and in the last year overall +2.3% core and +2.9% overall. The numbers don’t seem to do much for inflation anxiety, most of which is based on conspiracy theories of one kind or another.

With us always is the cooked-books crowd. Nevermind the impossible complexity of getting the dozens of inflation reports from Bureau of Labor Statistics, Commerce Department, and Fed all to tell the same false story. People who believe in rigged reports also invariably believe that government is incompetent; if so, how is a pack of fools to run such an elegant conspiracy?

A branch of this bunch objects to updating the “market basket” of goods and services to reflect current consumption. This subset also loves the horror stories of atypical consumers: a family putting a kid through college feels price pressure that a retired couple does not. There is no arguing with those who want the world never to change. Today, keeping a horse in New York City is unimaginably expensive; 100 years ago in that city a horse was the common possession of a lower-class merchant.

A serious concern, historically, is the tendency of government to print its way out of debt trouble — especially when so many authoritative voices (responsible and not) say that the Fed is “printing money” right now.

Of all the things that I discuss with my ceiling at 3:00AM, US money-printing is the least. For three reasons. The Fed is printing money to replace money that frightened banks and investors are withdrawing and burying in their back yards. If new money is in balance with money withdrawn, no inflation; the new money prevents deflation.

Second, take on faith that the Fed is deadly serious about a 2% target for core inflation. As an institution it saw the 1960s-1980s consequences of “a little inflation,” and it will not repeat — no matter what Left-side economists propose today.

Third… the third reason is so powerful that we will wish it were not there. When the Fed tolerated a little inflation, and it went from 2% to 12%, there was so little debt in the world that its owners could not protect themselves. Too few “bond vigilantes” to form a posse. Today there are mountains of IOUs all over the world. Any effort by any government to inflate its way out of debt will be met by massive selling, and the instantaneous and pre-emptive rocket in rates will demolish the offending economy.

Vigilantes grown to army-size now cause the austerity predicament. Only Greece, Ireland, Portugal, and the UK are in its grip. Italy, Spain, and France have promised austerity but not begun. In the US we have not even promised.

Improving trend in retail sales is now sliding… or just choppy?

If the small business trend is real, and not just getting used to a new and thin normal, the next step will be hiring. I hope, I hope.

The game of Grecian Chicken flaps and clucks on, Greece near default and leaving the euro, which would ruin its economy; and Europe withholding new money until Greece agrees to austerity that will ruin its economy.

The 10-year T-note yield needs no scary help from Europe to stay low. The Fed’s “Operation Twist,” swapping short Treasurys for long ones, has since November 1st kept the 10-year between 1.82% and 2.05%, and mortgages close to 4.00%. Zzzzzzzz.

Economic news didn’t amount to much this week, except the encouraging drop in weekly unemployment insurance claims, now below 375,000, half the worst of 2009.

Public policy follies and heroics dominate everything, economies and markets still in one ICU or another. For slapstick it’s hard to beat the mortgage servicing settlement with states’ attorneys general, a tasteless joke on people in trouble, and housing.

Eighteen months ago state AGs discovered they could hold foreclosures hostage to infinite litigation by accusing servicers of procedural shortcutting — true, but not material error. Servicing banks have bought their way out for $26 billion (0.00251% of mortgages outstanding), which might as well be extracted directly from taxpayers (the banks’ customers will pay) and deposited in the AGs’ re-election campaigns. The only real effect of settlement, and question: now released by the protection payment to AGs, what will be the new volume of foreclosures and how soon?

The second policy matter is genuine good news: clear evidence is mounting that the Fed’s extraordinary interventions are beginning to have effect. The Fed’s rescue measures since 2008 are three times removed (maybe three orders of magnitude) from actual historical experience, supported only by theory… but working.

1. When Lehman failed, the Fed flooded the banking system with reserves, trying to keep credit flowing and to prevent an asset fire-sale — the theoretical should-have-done in 1930, but never actually done. Brief injections at the ’87 stock crash and 9/11 were hardly comparable. The $1 trillion injected in a week after Lehman… did nothing.

2. Four months later the Fed began “quantitative easing,” buying MBS and Treasurys, another $1.2 trillion. QE is the measure that Japan theoretically should have adopted in 1990 but did not. QE1 did knock down mortgage rates, but the idea was to create credit: pull safe investments from the market, and thereby force investors to take risk. Didn’t work. The world went to cash and stayed there through QE2.

3. Beginning in 2011 and through today, the Fed has “walked out the yield curve,” a theoretical antidote to asset deflation described in a Bernanke speech 10 years ago. Translation: after holding cash yields at zero for three years and watching you idiots stay in cash, now we’re telling you we’ll hold them at zero for three more years. If you still stay in cash, we’ll pull more of your safe investments and promise to stay at zero until somebody younger and smarter takes your job or inherits your assets.

This theory-based offensive has opened pot-shot season for every other theorist, and fear, and who-took-my-cheese. Please pay no attention to the inflationists, the shut-the-Feds and gold bugs, and the bond-fund managers and wealthy coupon-clippers who feel entitled to good yield on cash and no-risk investments.

To make some money you’re going to have to take risk. And now we can see the first pin-stripers crawling from muddy bunkers, squinting into sunshine.

Consumer credit since November has rocketed at a 9% annual pace. Bankers in action! Paul Kasriel at Northern Trust has been one of the very few to understand the Fed’s ops, and his newest analysis finds a sudden net increase in bank loans and securities held. Credit! The MBS/10-year spread is the narrowest in a year, fear fading for holding super-low mortgages. Yield hunger has junk bonds in a huge rally, and corporate finance of all kinds is cheap. New home equity lines of credit had rate floors at 5.00% and 6.00%, banks fearful of Fed reversal and rising deposit costs. No more! We see two-year specials just above 2.00%. Even mortgages — halleluiah! — collateral circulation is opening around throttled Fannie and FHA, banks actually making loans.

The Fed set out to cap the 10-year T-note, and capped it has been. Don’t fight Mother Nature.

It’s early, but this is the first solid increase in consumer credit in four years.

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.