The Independent Market Observer

Yesterday’s News: Things Fall Apart

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Jul 23, 2012 12:24:46 PM

and tagged Politics and the Economy, Yesterday's News

Leave a comment

There were no significant single financial events over the weekend, but there was continued fallout. The Financial Times (FT) led with “Deteriorating outlook drives Spain’s borrowing costs near euro-era highs.” Despite the bailout, bond yields are well above 7 percent—an unsustainable level—and appear likely to stay that way, according to the story on page B16 in the Wall Street Journal (WSJ), “Bailing on Spain’s Bailout.” Greece is also back in the news, on page 3 of the FT with “ECB raises pressure on Athens over debt collateral” and on page A8 of the WSJ with “ECB Adds to Pressure on Greece.” The European story is not over yet, and it may erupt back into the headlines in short order.

The U.S. picture in the press is a bit more mixed. The WSJ ran “Unemployment Rises in Six of 10 Battleground States” on page A3 on Saturday and “Price Check: Drought May Hit Grocery Tab” on page B1, but on Monday, page B1 had “As Homes Go, So Do Pickups,” which pointed out a recovery in truck sales and home sales. The weight of the coverage is still negative—note “Bleak jobs outlook raises heat on the Fed” on page 1 of Monday’s FT—but some nuance is creeping into coverage of the U.S. Maybe it is a leading indicator.

A major difference between the two continental currency areas—the U.S. and the euro—is, of course, the relation of the regions to the whole. We fought a terrible war to determine, once and for all (I hope), that the center holds the regions, not the other way around. In Europe, that structure is still being determined. A large part of Spain’s problems have resulted from semiautonomous regions that have spent as they pleased. For Spain to meet its goals, the regions need to be brought under control. On page A4 of Monday’s New York Times (NYT), the article “As Its Debts Mount, Sicily Risks Becoming the Greece of Italy” suggests that these regional problems are not limited to Spain. Besides Spain and Italy, Germany itself is made up of multiple smaller regions that once were independent countries, and we can see this scenario playing out in the political process of all three countries, making decisions at the national level more complicated, slower, and more constrained than ideally would be the case.

The problems at the region/country level are also being replicated at the country/eurozone level, with the same effects. What this means is that, while the U.S. had two levels to deal with, in Europe there are many more. I have written before about the enormous political and economic incentives in place at the national level to make the European project continue to work. As the process evolves, it seems to me that, more and more, these incentives do not necessarily apply at the regional level. If the European project does break, then the gap between the regions and the countries may well be culprit. We may be looking at the wrong places when we look at the country level to determine the future of Europe. Maybe we should be looking more at the regions.

One final point, also relating to the center versus the constituent pieces, is an opinion piece from page 7 of the weekend FT that I found extremely interesting: “Conservatives must fall back in love with the state.” Can you imagine this headline in a major financial newspaper from the 1980s? The 1990s? Even the 2000s (pre-2008)? I can’t. I have written before about the changing political incentives in place for both parties, and this may be another harbinger of things to come.

Subscribe via Email

Crash-Test Investing

Hot Topics

New Call-to-action



see all



The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.


Please review our Terms of Use

Commonwealth Financial Network®