Capital Markets Update

By Louis S. Barnes Friday, April 27th, 2012 On the surface all is quiet. Since the first week of April the 10-year T-note has not traded above 2.05% or below 1.93%. 1.95% this morning. Thrill-a-minute. Low-fee mortgages have been 4.00% for three weeks (depending on down payment and credit.) The Dow has had 100-point days, but is just yo-yo-ing below the 13,200 top. In widely scattered patches of exuberance, innately good housing markets are turning — not bottoming, turning. In attractive places with scarce land, in-migration, good economies (global, IT, government, healthcare…), and looking back at their distress curves, the dead-drop in listings last year has resulted now in competing offers and modest increases in price. However, do not confuse these places with the rest. New data are disquieting, but nothing scary. March orders for durable goods fell hard, down 4.2% even excluding volatile categories, and the multi-year chart shows gentle but unmistakable weakening. New weekly claims for unemployment insurance have departed the 350,000 range for 385,000, but historically it’s a jagged chart, not necessarily marking trend-change. Q1’12 GDP arrived at 2.2% annualized versus the 2.5-3.0% forecast, but consumers came in on target, plus 2.9%. The one figure in the GDP report that hinted at sub-surface conditions: the Fed’s favorite inflation measure, the “personal consumption expenditure core deflator” jumped from 1.2% in Q4’11 to 2.2% in the first 90 days this year. That’s “core,” excluding the gasoline pop. Enter the Fed’s post-meeting comments. Lost in misunderstanding Fed politics (the distracting regional-Fed country-hawk bird-brains), and in suspended hopes for QE3, and in a meaningless collection of long-range forecasts, and in guessing at what the Fed will do after 2014…, lost was this: “Inflation has picked up somewhat….” Then Perfesser Bernanke was asked about new stimulus, including the Fed’s interest in inducing higher inflation, the darling proposal of Paul Krugman and his loyal propeller-heads. “That would be very reckless.” Thank you. As hammered at here last week, the Fed has neither the intention nor capacity to inflate-away our debt burden. Nor in the presence of 2%+ core PCE will the Fed even embark on something as mild as QE3. Here in the US a frozen Fed is not so bad. The greatest single strength of the US economy is its adaptability, based on national acceptance of Schumpeter’s “creative destruction,” no matter what pain it brings. With the possible exception of German-hive collective adjustment, no other economy on Earth approaches US tolerance for the pain of changing course. We do get on with it, and today’s improvements in labor, manufacturing, exports, and housing — no matter how tepid — are testimony. Elsewhere, disturbance on the surface understates the roiling trouble deep below. Only 90 days ago, Frau Merkel seemed to have dragooned the rest of Europe into a new austerity treaty. This austerity has not even begun (Spain and Italy have already extended deadlines), but non-German economies have fallen out from under forecasts. Euro-zone PMI (just like ours, the descendent of the “purchasing managers’” survey) went negative in March at 49.1, deeper to 47.4 in April. We used to refer to the European “periphery.” Now it’s just Germany and non-Germany. Even the Dutch government collapsed last week under budget and recession pressure, and the next president of France will not be seen in Merkel’s lap. The non-Germans groveled last winter, desperate for German-allowed ECB bailouts. Now, like so many excessive borrowers who have discovered that they own the bank, Europe is refusing austerity and demanding growth measures. However, welded to the euro while in desperate need to devalue, there are no growth measures available except for the ECB to take on even more junk sovereign paper and/or reflate in the same manner Bernanke called “reckless.” The ECB and the Bank of Japan are near the end of their supply of cans to kick, one thing clear: hope like hell that US inflation subsides, so that the Fed can prevent a US stall while worst comes to worst elsewhere.