Overconfidence and the recovery

Commentary: 'Now is not the end. It is not even the beginning of the end ...'

Long-term Treasurys and mortgage rates at last broke out of a half-year-long trading range centered on 2 percent for the 10-year Treasury note, and 4 percent for mortgages.

On the upward trend: 10-year Treasurys rose to 2.33 percent today, with lowest-fee mortgages pushing 4.25 percent. The verdict first, then the evidence: This move is not the start of a bigger one, and is likely to reverse.

Silly things have pushed this rate run to extreme. The markets oohed and aahed at successful stress tests of 15 of 19 too-big-to-fail banks (the failure of four would crater our system, again); and "inflation knee-jerks" flipped at today’s 0.4 percent February Consumer Price Index reading (the core at 0.1 percent is fine, with gas prices compressing other spending and prices).

Ten-year Treasurys had for six months stayed tight to 2 percent because the Fed began to buy long Treasurys in its Operation Twist, because Europe was on the edge of its own Lehman moment, and last fall the U.S. appeared near new recession. Twist is still under way (and you can bet the Fed hates this mortgage-rate rise), but a European banking collapse and new U.S. recession are off the table.

One year ago the 10-year paid 3.75 percent, and mortgages cost just over 5 percent. The magnitude of European futility and risk came clear last August, with 10-year Treasurys in one "swell foop" dropping to 2 percent.

We will have to wait for memoirs, but in early December the European banking system was only days away from failure, intercepted by the European Central Bank’s Dec. 8 Long Term Refinancing Operation — then insurance taken by the second version, "LTRO2," last month.

Those who last fall predicted U.S. recession — the respected Economic Cycle Research Institute, especially — were dead wrong. But, have we now entered the even-longer-predicted self-sustaining recovery? No, but closer.

There is a Churchill quote for every occasion, this in November 1942 after Britain’s first victory of World War II, at El Alamein: "Now is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."

Several signals say that we are not yet in self-sustenance, the most important at the Fed. Many overread a word in Wednesday’s post-meeting minutes: the substitution of "moderate" for "modest" as the modifier for economic growth.

The replacement is accurate, but … modest. More important, the Fed stuck verbatim to its commitment to "exceptionally low levels for the federal funds rate at least through late 2014."

Another marker: The small-business surveyor, the National Federation of Independent Business, found another small improvement in its index of optimism.

Although rising to the second-best level since 2007, it is no better than one year ago, and still below the bottom of every business downturn since 1982. The NFIB did confirm some small-business participation in hiring.

Europe is anything but over. Its banks protected, it has become a slow-roller, waiting to see what "Club Med-nation" depressions do to local political stability and overall unity. The best long-term hope: an orderly demise of the euro, then a short global recession.

As many readers know, Greg Smith resigned from Goldman this week, and The New York Times printed his resignation: a condemnation for the ages.

A prior chief of Goldman, the legendary Johnny Whitehead, in 1970 issued these 10 points as a guide to the firm:

1. Don’t waste your time going after business you don’t really want.
2. The boss usually decides — not the assistant treasurer. Do you know the boss?
3. It is just as easy to get a first-rate piece of business as a second-rate one.
4. You never learn anything when you’re talking.
5. The client’s objective is more important than yours.
6. The respect of one person is worth more than an acquaintance with 100 people.
7. When there’s business to be found, go out and get it!
8. Important people like to deal with other important people. Are you one?
9. There’s nothing worse than an unhappy client.
10. If you get the business, it’s up to you to see that it’s well-handled.

Some on today’s Wall Street regard this guide as quaint. The tragedy, hardly limited to Goldman people: the vastly larger Street mob in Armani who have no conceptual framework with which to comprehend Whitehead’s thinking at all.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.

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