US prepared to weather Europe’s gathering storm

Recapitalized banks can withstand euro breakup

Euro in peril image via Shutterstock.Euro in peril image via Shutterstock.

Deep breath. This morning’s news of a better job market has pushed 10-year Treasury yields from 1.63 percent to 1.73 percent overnight, and intercepted the mortgage move below 3.50 percent. Stocks of course to a new high, Dow above 15,000.

Breathe again. The job market is not really better, just not as poor as could have been — markets were looking for worse and didn’t get it. We did add 165,000 jobs in April and revised up the two prior months, but the average workweek and overtime declined.

Wages are rising at a 1.9 percent annual pace, below even diminished inflation, and another 278,000 people looking for full-time work could not find it and took part-time.

The twin ISM surveys both fell in April, manufacturing barely positive at 50.7, down from 51.3, and the service sector to 53.1 from 54.4. The Fed’s post-meeting minutes changed tense: in March it noted “a return to moderate economic growth.” This month, the numbers suggest that “economic activity has been expanding at a moderate pace.” Nobody wants to be a has-been.

The Fed also noted, along with everyone else: fiscal drag. One would hope so, given the Cliff tax increases and dequester, although it’s astounding that we can meat-ax $85 billion out of Federal spending and not notice until the FAA tried to make airports uncomfortable on purpose.

Austerity is a calibration deal: we have to do enough of it, and we’d better not do too much. But the austerity dial has no level-indicator.

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It’s like living through the winter with a thermostat equipped with an arrow-pointer but no temperature marks, and a heating system that responds to the thermostat in a random lag of two to 24 hours. That’s how life feels to the Fed.

The job market is not really better, just not as poor as could have been -- markets were looking for worse and didn't get it.

That’s the run-down here in the U.S. — slowing a bit, but okay, housing producing smiles. But the most powerful forces on the U.S. economy, affecting everything from jobs to mortgage rates, lie overseas.

All data show slowing in China. Japan’s inflation-inducing experiment is going to take months to evaluate, at the outset doing nothing but pushing down yields on non-Japan bonds. The emerging world churns its way forward by sucking jobs from the West, the means visible in Bangladesh.

Europe is back in the forefront of overseas trouble. The soap opera over there has overstayed its welcome. Each new episode the same plot as the last, just shuffling the cast, and endlessly foreshadowing conclusions but no end to it.

Thus we lose feel for the magnitude of the disaster and its progress. Unemployment across the south is now uniformly above 25 percent, in Germany 5.4 percent. Southern bond yields are down from 7 percent to 4 percent, but German ones today fell to a new all-time low 1.16 percent, and business credit in the south is all but unobtainable.

South is moving north. French unemployment is 10.8 percent and rising, and in Holland up to 8.1 percent, double two years ago.

Standard & Poor’s this week reported on housing in Europe: French prices are off 5 percent, expected to fall another 5 percent this year and the decline “gaining momentum.” Spain’s prices are off an official 28 percent since 2008, but no one knows what will happen when its bad bank dumps foreclosed inventory. Dutch prices are off 18 percent, expected to fall another 5 percent this year and again next, 25 percent of Dutch mortgages underwater now. German home prices rose 3.5 percent last year, trend continuing.

Apparent German health conceals a fatal illness. Its banks and central bank assume that debt owed to Germany by the others will be paid, in euros, when it could not be more clear that the deutschemark-calibrated euro has crushed all the others.

Political stability is holding among the others for now, it seems because having German money in your wallet is worth any amount of damage to your children’s future. Anything but go back to the unreliability of the lira, peseta, or even franc.

We have all looked to the weak as the most likely to leave the euro, but it could be someone like Holland, making its way in the world for hundreds of years with a reliable guilder.

Mercifully the U.S. has made great progress, especially bank recapitalization, so much so that we can make it through even a euro-breakup. Meantime, pain there keeps rates low here and assists our own recovery. Quite the world.

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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