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Mainly Dark Clouds, Few Silver Linings

Written by Brad McMillan, CFA®, CFP® | Aug 24, 2012 4:03:07 PM

Gloom covered the front pages of the papers today. (If it bleeds it leads!) But this time, there were relatively few silver linings to help brighten up the darkness. Perhaps all the problems we saw in the spring aren’t quite solved yet.

Economic weakening was the big meta-story. For Europe, it was reported in the form of increasing disputes about how to resolve the ongoing financial problems of Greece and Spain, among others. The Financial Times (FT) led with “Athens and Berlin in public spat over funds,” which is just what it sounds like, following with “Dutch socialists catch scent of victory” (p. 2). This is important because Holland, which is one of the few remaining AAA credits in Europe, has been a key German ally in demanding fiscal austerity from debtor nations. If Holland changes sides, the European balance of economic power shifts, too. Moreover, the socialists are eurosceptics and have opposed the fiscal rescue pacts and funds; take away the rescue mechanisms, and the euro would most likely have already failed. The Dutch election and the pending ruling by the German Constitutional Court are therefore both potential deal breakers for the euro. It should be an interesting early September. The New York Times (NYT) also weighed in with “Europeans to Debate Further Aid to Greece” (p. A4) and “European Officials Meet as Signs Point to Recession” (p. B3).

China got hit as well. The front page of the NYT had “China Confronts Mounting Piles of Unsold Goods,” and the FT ran “Trillion questions hover over Beijing’s economic stimulus” on page 2. A slowdown in Chinese growth also led an Australian government minister to declare that the boom there was over. He was, of course, made to “clarify” his statement, as reported in “Minister clarifies Australia ‘boom over’ talk” (FT, p. 3). All of this smacked the financial markets, with the Wall Street Journal (WSJ) going with “Markets Shudder on Global Weakening” on the front page.

The other meta-story was the failed SEC vote on money market fund regulation, which we also mentioned yesterday. The situation made the front page of the NYT business section with “In an Effort to Curb Money Market Funds, a Plan B Is Considered” and got not one, not two, but three articles in the WSJ: “Straw That Broke SEC Vote” (p. C1), “Action on Money Funds Could Still Be in the Cards” (p. C2), and “Toothless SEC Caves on Money Market Funds” (p. C10). The FT also weighed in with a global perspective in “Money market funds face threat of global joint action on reforms” (p. 13). Clearly this story is growing; look for more to come.

Other individual gloomy stories worth noting include the front-page story in the FT, “Republicans to push gold standard back into center of public debate,” which discusses a significant reform that would create at least as many problems as it would solve. It’ll be interesting to see if this gets any traction. “Shifts in Asia Fuel Flare-Ups Over Islands” (WSJ, p. A12) has a good primer on that whole issue and is worth a look. Finally, “Creditors of Stockton Fight City Over Pension Funding While in Bankruptcy” (NYT, p. B3) may point to the future. If creditors can reach into pensions, which up until now have been considered off limits, this will be a big change. If the court rules for the creditors, expect to hear a lot more about this.

To close, we do have one silver lining: the pickup in housing. As I have been saying for a while, the housing market looks to have bottomed, and with sales of new homes up—see “Sales of New Homes Climb Sharply” (WSJ, p. A2)—this will be a foundational component of continued growth. Nice to see something going right.

Have a great weekend!