My Mortgage Blog

The stock market provided an ambiguous gift for the birthday of our nation. Astonishingly, the Dow Jones Industrial Average rose by 5.4% last week, ending the week at 12582.77.

You are probably not asking what could be ambiguous about this—since you have been experiencing the fact that interest rates tend to rise when the news for the stock markets is good. And indeed, they did. The important 10-year Treasury note was up by 0.33% over the course of the week.

But it seems to me important not to get all wrapped up in this news. It doesn’t necessarily mean that rates have turned around, nor does it suggesting that stocks will continue to climb. As always there are further economic indicators on the horizon, and they could turn this past week’s crop of interest rates and stock indices on their heads in a moment, given the chance.

It seems that the strong ISM numbers, suggesting that the manufacturing sector is pulling out of its relative small trough, were one of the key stimulants for higher stock prices. The Wall Street Journal quoted Peter Cardillo, chief market economist at Avalon Partners, declaring, “This is a great indication that the manufacturing sector is turning around. I expect manufacturing will take us out of the soft patch and lead economic growth in the second half of the year.”

Hope he’s right. But the sober—and therefore mildly cynical—among us know all too well that disappointing employment figures this coming Friday could throw a wet blanket over the stock market gains of this past week. And we don’t have much reason for serious hope regarding the next set of employment figures.

Further, supporting the economic optimism this past week was the fact that the Greek Parliament somehow voted in a set of extremely unpopular cost-cutting and tax-raising measures. It seemed as if most of those who weren’t voting were out in the streets, throwing rocks at riot police. In some polls, as many as 87% of Greek voters were very much against the austerity package. If anything, that number could grow as the effects of the measures are felt.

The measures were voted in, though, because the next loans to Greece would not be forthcoming without the austerity measures voted for. And this raises a great deal of concern in most observers, rather like watching pets behave because they are being kicked. Pretty soon, the pets turn on the kickers.

In its analysis, The Economist newsweekly continues to predict that this game cannot go on much longer—and that the longer it goes on, the more expensive it becomes for all concerned…for those whose investment in Greek debt may never be fully repaid, for the international banks whose balance sheets could be thrown into doubt and disrepair by a sovereign default, and for the Greeks, whose social fabric is ripping at the seams and who could face a horrendous depression as the result of a default. And I should add this: For us, as we watch our credit markets take a series of hits.

Against these possibilities, a rise in the ISM Index seems small stuff, to say the least. We have a dying elephant in the living room. The markets still seem prepared to ignore it whenever they can. It looks increasingly certain that they won’t be able to ignore it—even for brief times in which the stock markets rebound—much longer.

The Economist suggests an orderly restructuring of the Greek debt while that is still possible. It’s a persuasive suggestion.