The Dow Jones Industrial Average is currently at 12,908, down about 130 points on the week.  Crude oil spot prices are currently at $95.93 per barrel, down over $2 per barrel on the week.  The Dollar strengthened versus the Euro and Yen on the week.

Next week look toward Tuesday’s Consumer Price Index (CPI) and Retail Sales, Wednesday’s Housing Starts and Industrial Production, and Thursday’s jobless claims and Philadelphia Fed Survey as potential market moving events.  Also, the Fed releases the minutes from its last FOMC Meeting on Tuesday.

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

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

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

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

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

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

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

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

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

The Dow Jones Industrial Average is currently at 13,083, down over 140 points on the week.  Crude oil spot prices are currently at $100.64 per barrel, down about $4 per barrel on the week.  The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Thursday’s International Trade and jobless claims along with Friday’s Producer Price Index (PPI) as potential market moving events.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Dow Jones Industrial Average is currently at 13,063, down slightly on the week.  Crude oil spot prices are currently at $103.58 per barrel, up slightly on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Next week look toward Tuesday’s New Home Sales, Wednesday’s Durable Goods Orders and FOMC announcement, Thursday’s jobless claims, and Friday’s first look at Q1 GDP as potential market moving events.

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

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

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

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

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

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

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

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

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

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

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

The Dow Jones Industrial Average is currently at 12,913, down about 150 points on the week. Crude oil spot prices are currently at $103.41 per barrel, up slightly on the week. The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Monday’s Retail Sales, Tuesday’s Housing Starts and Industrial Production, and Thursday’s jobless claims, Existing Home Sales, and Philadelphia Fed Survey as potential market moving events.

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

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

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

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

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

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

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

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

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

Housing is the polar opposite of Cool Papa Bell.

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

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

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

The Dow Jones Industrial Average finished the week at 13,060, down by about 150 points.  Crude oil spot prices finished the week at $103.31 per barrel, up slightly on the week.  The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Thursday’s International Trade, weekly jobless claims, and Producer Price Index along with Friday’s Consumer Price Index as potential market moving events.