Wait, Ben Bernanke, Did You Say 2014?

Europe teased us with an on-again, off-again solution to the Greek crisis with the PM announcing early in the week a rejection of the life raft floated to them. The rejection was in the form of a referendum to happen in 2012. This was followed by some back and forth political posturing in Greece, some ineffective threats from the G20, and finally by a return to accepting the handout during the week. The chart at the right shows the impact on US interest rates with the US 10-yr Treasury dropping from last week’s 2.30% to 1.98% temporarily and then settling in at about 2.05%.

Over the weekend, the Greeks added to the drama with a compromise between the current PM and the opposition announcing the formaition of a new consensus government. The new government will not be led by PM Papandreou. So far the markets are not taking any comfort in the Greek solution and rates are staying right at 2.05%. The problem will be heightened or enlightened tomorrow when Italian PM Berlusconi faces a parliamentary vote on a budget. Why do we care so much about Europe?

The crisis in Euro finance and the possible implosion of European banks causes huge sums of “safety money” moving into US markets. Safety plays inevitably flow into US Treasury securities and into Mortgage Backed Securities, causing interest rates to fall. Greece has been high drama, but by comparison to Italy and Spain, Greece is a drop in the bucket, just the first drop. Watch for news on the budget vote in Italy. But that isn’t the only financial news.

Jobs reports were actually a bit better than the mixed reviews in the week. The true jobs created number, including some revisions to prior, under-reported amounts rose by 180k, a good amount. The undemployment edged downward to 9.0%. Granted the disaffected giving up on the job search affects the surveyed number to look favorable, but it is edging in the right direction.

The new claims for unemployment was below 400,000 for the first time in 4 months. This number comes out weekly and watch for it to be at 400,000 again this Friday. The depth and breadth of the jobless crisis in the US is indicated by this chart on the left.

Ben Bernanke’s midweek FOMC announcement was a wet blanket on the economy. I listened to a part of his press conference and can say that I was shocked to reality when the poor projected performance he was talking about had a 2014 date attached to it. I know we are into this economic malaise well into 2012, and I know that Bernanke has indicated the near-zero interest rates will continue into 2013, but discussing 2014 is disappointing.

One “back-handed” piece of good news is that inflation is expected to stay in check through 2013 as well. Inflation is the key driver of interest rates. The reason this is “back-handed” is that the only thing keeping the evil, inflation genie in the bottle is the poor performance of the US economy. Another unfortunate parallel is that the deficiency, foreclosure, REO sales world of the residential market is seen to grow in the next year and not get back to 2011 levels until 2013 and continue into the next number of years.