The Independent Market Observer

3/22/13 − Good News, Bad News

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Mar 22, 2013 11:02:11 AM

and tagged Market Updates, Politics and the Economy, Yesterday's News

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In the absence of a single overarching theme today, I thought I’d hit a bunch of smaller points that are important but don’t warrant individual posts.


The discussion has shifted from whether Cyprus will default to what will happen when it does—and, more important, from whether Cyprus will leave the eurozone to how that really isn’t important. I disagree with the latter point; Cyprus’s departure will change the narrative completely. If Cyprus leaves, the zone will no longer be irreversible—a big reason why so much money was spent to support Greece. As I said the other day, the major economies have decided that the eurozone is no longer worth holding together at any price. At some point, when the price gets too high for the major economies (in cash) or for the peripheral economies (in the political pain it takes to qualify for the cash), the eurozone will fail. Per the George Bernard Shaw quote, we know the final answer; now we’re just talking about price.

On the flip side, the argument is that, if Cyprus does leave, the consequences, televised around the world, will be so horrific that other countries will submit to whatever requirements are imposed without protest. From this viewpoint, it actually would be good to force Cyprus out pour encourager les autres.

I doubt that will happen. The short-term effects will surely be very bad in Cyprus. But, if a couple of years from now, the country recovers—which it could—then the case for leaving the euro will be much, much stronger for all of the peripheral economies. Iceland is a good example of how things could play out. This, however, is a story for a couple of years from now. In the meantime, we can expect to see more turmoil and quite possibly a Cypriot exit—with unpredictable effects on the financial markets.

Washington, D.C.

Here, the news is more positive. In an unexpected sign of cooperation, Congress has passed bills funding the government through September. The Obama administration, in a similar overture, is spanning a philosophical gap by negotiating with states to allow Medicaid funding to purchase private insurance. The immigration debate is moving toward a centrist solution. All of a sudden, the parties are actually trying to find solutions rather than just yelling at each other. This is a good shift.

I’m a big believer in mean reversion, and we may just be seeing a sustainable move by both parties back toward the center. As the rest of the U.S. economy improves, Washington becomes an increasingly big part of what’s holding it back. If the government can actually stop making dysfunctional headlines, that would be very good news.

Health insurance

As the clock ticks down to full implementation of the new health care law, the consequences are becoming clearer—and, as expected by everyone except the government, there are costs as well as benefits. Because of new requirements for what plans must include and cover, premiums are expected to increase much more than the government was projecting. The law of unintended consequences won’t stop there, of course. Among other things, we can certainly expect to see some companies decide that it’s cheaper just to drop insurance and pay the fine. Costs and coverage will definitely be in flux, affecting both business hiring and investment decisions, as well as consumer spending. In the face of the good news from Washington, this is an area of concern.

Quantum computing

Lockheed Martin has announced that it will start deploying this powerful new type of computer commercially, using it to solve problems that have stumped traditional hardware. A very difficult technology to perfect, quantum computing promises to open a whole new world of information and should have significant effects across a wide range of science and engineering problems.

Science and technology will be the core of growth opportunities going forward, and it is just this kind of development of fundamental science into commercialized technology that drives that growth. Nice to see we aren’t quite out of innovation yet.

More good housing news

I covered this yesterday but wanted to share a couple of quick data points. According to today’s Wall Street Journal and New York Times, existing home sales hit a three-year high, and plywood prices are up by 45 percent—both of which support my ongoing argument that the housing recovery will continue.

Have a good weekend!

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