The Independent Market Observer

Politics in America, Economics in Europe, “Politics” in Asia

Posted by Brad McMillan, CFA, CAIA, MAI

Find me on:

This entry was posted on Sep 6, 2012 12:30:26 PM

and tagged Europe, Politics and the Economy

Leave a comment

The big story in the U.S. papers was the Democratic National Convention, and this time, Bill Clinton took his turn in the spotlight. The Wall Street Journal (WSJ) led with “Clinton Makes the Case for Obama,” and the New York Times (NYT) went with “Clinton Delivers Stirring Plea for Obama Second Term.” Not sure this counts as news—that the Big Dog is for the Democrat—but whatever.

The real news of the day, in the sense of something that might make a difference, is the announcement of the European Central Bank’s (ECB’s) plan to support the market for European government bonds. The Financial Times (FT) covered this story in “ECB resists capping bond yields in debt plan,” the NYT in “Fear of More Austerity Fuels Greek Unrest Ahead of Crucial Talks” (p. B1, the front business page), and the WSJ in “Europe Outlook Dims as Bank Meets” (p. A9) and “Moment of Truth for Draghi’s Plan” (p. C12). To get ahead of the news cycle a bit, the actual plan announced by the ECB, which will be in the papers tomorrow, is the most aggressive to date. The bank proposed the open-ended purchase of government bonds at short maturities (up to three years) for countries that are in one of the eurozone economic support facilities. In other words, if countries in trouble are willing to commit to an approved plan to balance their finances, the bank will make sure their interest rates don’t spike.

This is a big deal. The open-ended nature of the proposal, the fact that countries have to sign up for fiscal responsibility, and the fact that the ECB has targeted the most visible component of fiscal failure—the higher interest rates demanded by the markets—all combine to make this a powerful plan. In fact, market participants have said that this may well be as far as the ECB can go at all. The Germans are reportedly not on board, but they are unable to stop the plan.

The plan has cheered markets around the world—and just in time. Spain looks like it will need a bailout in the next month or so, and the FT’s “Mounting woes force Italy to weigh EU bond-buying support” (p. 2) suggests that Italy is next in line. The plan certainly does not solve all of the problems, but it does at least mitigate them and make them less immediate. It also signals, in my opinion, a willingness to move beyond what the Germans will commit to doing. The removal of the German veto may end up being the most significant component of this announcement.

The other story that made all three papers is Secretary Clinton’s meetings in Beijing. “Clinton struggles to reassure Beijing” (FT, p. 3), “No Movement on Major Disputes as Clinton Meets with Chinese Leaders” (NYT, p. A12), and “US and China Yield Little Ground on Talks” (WSJ, p. A10) all say that China is not going to back off despite U.S. pressure on a variety of issues. China is a big country that feels it owns its neighborhood, and there isn’t much the U.S. can do about that. We will be talking about this again, I am sure.

One final point on resource constraints: food and energy are the two major needs for modern civilization. What happens when they conflict? Even in the U.S., this is starting to happen, as discussed on the front page of the NYT in “Option for Drilling Pits Farmers Against Water Thirsty Oil Wells.” Fracking companies are buying up water rights previously used by farmers, and the conflict is getting starker. We have already seen this conflict in another form, between the use of corn for food or for fuel, but the drought and the growth of the fracking industry are making the contrast even more explicit. If this kind of conflict can show up in the U.S., it will certainly be an even bigger deal elsewhere in the world.

Have a great day!

Subscribe via E-mail

Crash-Test Investing
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Archives

see all

Subscribe

Disclosure

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 into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) 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.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at 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.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®