As I told Larry Kudlow on CNBC Monday night, the employment recovery will be poorer than the market appears to expect, for reasons I’ve posted on this site during the past two weeks. The yield curve is at record steepness. I think that’s an overreaction. In fact, the steep yield curve in the present environment is NOT a harbinger of recovery — it’s a brake on recovery because it encourages banks to own Treasuries rather than risky assets (see below). Here are my top ten reasons to expect the yield curve to flatten.

10) The Treasury is shifting issuance to the long end of the curve, and the market is front-running the Treasury in anticipation of higher issuance. This effect is temporary.

Citigroup insiders bought a remarkably small amount of their own stock during the past six months–virtually nothing, in fact. Managers have bought stock on only five occasions during the past six months, and only 2.7 million shares’ worth (by contrast institutions bought 3.7 billion shares in that period). In fact, the bank has offered all-cash deals to mid-level hires, which bespeaks a very low confidence level. I sold my entire position late last summer after the preferred conversion–between March and July it had been the biggest play in my portfolio–and missed the stock’s brief dalliance above $5. But I also netted well over $4. I was an early advocate for a bounceback in bank stocks and an early profit-taker. The stock is around $3.20 this morning after shareholders bridled at massive dilution.

CIti (C) is a pig in a poke. With its massive book of structured product, the bank itself will be hard put to project its future cash flows. Structured product based on mortgages, for example, can have radically different cash flows with a few percentage points of variation in default rates in some cases. But I have thought all along that it’s a $4 stock, and it does look cheap at these levels, despite the dilution.

My disagreement with Deutsche Bank chief economist Joe Lavorgna over future job creation–which we debated last week on Larry Kudlow’s CNBC show–lies in the crucial role of small business in job creation. The process of job destruction (from big companies) and job creation (from small companies) are two sides of entrepreneurial “creative destruction.” The problem today is that we have the destruction without the creation.

Companies with less than 50 employees predominated in job creation during the great economic expansion that ended in 2007.

Two-thirds of job creation in postwar recoveries came from small business. And small business is in terrible shape. The only comprehensive poll of small business sentiment is the Discover Small Business Index. Its most recent poll shows a collapse of confidence between October and November, with a majority of small business owners having cash flow problems.

Learn more about the research methodology for the Small Business Watch.

The prospective collapse of sovereign borrowers is deflationary. Nothing, in fact, is more deflationary. You can’t pump more air into the balloon if the balloon starts to leak. A Fitch table of “implied credit ratings” for sovereign borrowers published yesterday in the FT’s Alphaville blog is worth a second and third look:

One of the comments in response to my Sunday post on BLS data referred to the Shadow Government Statistics website. John Williams adds long-term discouraged workers to the BLS broadest measure of unemployment. This yields a 22% broad unemployment rate.

Over at Asia TImes Online, I take apart the Friday BLS report. Market reaction was amusing: every hedge fund in the world appears to have been offsides, and forced to liquidate gold and commodities. Central banks will be happy, particularly the ones who want to accumulate gold. The last thing they want is for hedge funds to run in front of them. Weak hands will be shaken out, but I think there is a buying opportunity here: the US economy remains extremely weak.

Here are my Top 10 Reasons to scrooge the BLS report:

10. Nearly 300,000 people disappeared from the labor force, yet the BLS reports no increase in “discouraged workers” or workers forced to take part-time jobs for economic reasons.

Odd that the BLS numbers are so strongly at variance with the ADP data earlier this week, not to mention the purchasing managers’ service industries report. I wouldn’t open th champagne just yet.

Hmmm — the “unemployment rate” is down to 10% from 10.2%, eh? The BLS notes that (seasonally adjusted) the number of working age adults “not in the labor force” rose by almost 300,000, that is, from 82,575 to 82,866, so that the labor force participation rate actually fell, to 65% from 65.1%. In other words, there are more “discouraged” workers and fewer “unemployed” by strict definition.

Outside the bubble, it’s still cold and dark.

Dec. 3 (Bloomberg) — Service industries in the U.S. unexpectedly contracted in November as companies lost confidence the recovery will gather strength.

A senior executive of one of the world’s largest shipping companies told me recently that there has been no pickup whatever in business, and that shippers continue to lose money hand over fist. The Baltic Dry Index of freighter costs confirms this dour view.

The Fed keeps adding MBS to its portfolio (click to enlarge).

A trillion dollars' worth of support for the mortgage market should have given housing a bit more of a kick, on top of the first-time homeowners’ tax credit scheme. Given the staggering level of federal support for housing, it is very hard to be impressed by the dead-cat bounce of the sector.

On Tuesday, Japan joined the US, Europe, and China in monetary stimulus:

TOKYO — Japan’s central bank unveiled a surprise monetary-easing effort Tuesday that could inject as much as $115.68 billion into an economy facing deflation and a soaring currency, but the move failed to impress financial markets or economists eager for bolder action.

And I don’t mean Dubai or the other prospective basket cases: all of them have come in sharply. But with Japan trading at +62 and the UK at +70, there’s a rattle in the motor which one day could turn nasty. It’s not possible to shove central bank money through the system without generating some metal fatigue.

Except for Greece, whose credit protection trades +72 basis points wider than it did a month ago, market response to the Dubai default is surprisingly muted, as the table below from Markit Partners makes clear:

Worst Performing Sovereign Credit Default Swaps

Yesterday morning’s news that housing starts “unexpectedly” dropped by 11 percent month-on-month is consistent with my grim view of the American economy. The crystal-meth monetary policy at the Fed makes everyone feel better, until they don’t. The nonstop rise in the price of dollar hedges tells us that it can’t last forever. Large balance sheets attached to the Fed’s money pump can show profits, and the price of spread assets (as PIMCO’s Bill Gross keeps emphasizing) is stupid rich. But at the capillary level, through, the economy is dying and gangrene is setting in.

Here’s year on year growth in commercial and industrial loans from weekly reporting banks in the US (click to enlarge):

If conventional wisdom applied–namely that the stock market is driven by prospects of economic recovery–we never, never would see this kind of weirdness:

Prof. Reuven Brenner of McGill University and I offer a solution to the global economic crisis. This article in the National Post was condensed from a longer essay in First Things. An extract:

We have had the longest winning streak on the S&P in three years, and gold hits new records every day — and the 10-year yield has fallen in the course of the week. That’s not a dog that didn’t bark, but a dog that did an Elvis impression.

The simple explanation is: dollar devaluation. All US assets are cheapening to foreign investors, including Treasury securities. With unemployment at umptysteenth percent (17.5% of the workforce by the comprehensive measure) American prices simply won’t move at the rate at which the dollar is devalued. Labor will remain cheap. That’s why Treasury securities look cheap to foreigners. The Fed has effectively placed a giant wealth tax on America by devaluating the dollar.

Readers of this blog have been following the dollar equity correlation since Aug. 21 when I first wrote about it (and to my knowledge, I was the first analyst to publish about it — if you know of others please let me know).

Now the dollar-equity correlation issue is top of the financial blogs, for example this summary of views at FT’s Alphaville blog: