The interesting story today is the stock market, as it manages to shrug off the worries from Europe, the sequester, and a power higher. The Dow Jones Industrial Average is closing in on its all-time high, set in October 2007. The S&P 500 Index is not quite—but almost—as close to the high that was set around the same time. Are happy days here again?

The numbers I mention above are a bit misleading, in ways both positive and negative. For both indices, if you include dividends paid over the time since the previous highs, we have already passed them. This would be positive. If you look at the indices adjusted for inflation, however, we are further away, which is negative. The key is that, surpassing the previous levels would just be numbers, with more psychological than economic significance.

“Those who can’t remember the past are condemned to repeat it.” — George Santayana

The quote above is often used to describe one of Ben Bernanke’s prime qualifications for his position as chairman of the Federal Reserve. As a student of the Depression, it is said, he has a unique perspective on what happened then and knows what has to happen now to avoid a repeat. Put another way, he understands the mistakes that were made last time so we can avoid them this time.

I was sitting on a plane home last night, watching SpongeBob with Jackson, and as I flipped through the channels, I saw that the stock market had cratered since we got on the plane. What?

The headlines today seem to imply that the sequester will hit, as the Republicans have very little incentive to back down.

In the spirit of several previous posts, I’m taking a couple days off to take my son, Jackson, down to visit his grandparents in Florida. Among the many things I’m grateful for are that both my parents and my wife’s are healthy and active, and that Jackson has a chance to spend time with them and get to know them.

I would also like to mention the support and many thoughtful remarks, both in-person and written, I received in response to my family’s loss. One of the wonderful things about what I do—and particularly where I work, Commonwealth Financial Network—is the truly thoughtful, considerate, and wise colleagues and friends I have. These are very smart people who also really care about others and who take the time to show it. I can’t tell you how honored and grateful I am to have people like this as colleagues and friends.

The markets have had a good run for the past six weeks, with a return through Tuesday of more than 7 percent for the S&P 500 Index. The run seemed to have been predicated on the fiscal cliff deal at the end of last year, the impression that the Federal Reserve (Fed) would continue to support the economy with low interest rates, the resolution of the European debt crisis, growing corporate earnings and profits, and a real economy in steady recovery. Retail investors had started pouring money back into equities, and there was talk of a “Great Rotation” out of fixed income and back into stocks.

Well, the real economy is still in recovery, but the other pieces of the puzzle are looking ragged. Yesterday, the Fed published minutes from the most recent meeting of the Federal Open Market Committee, showing that the committee is not unified in its decision to maintain purchases of Treasury and mortgage securities. This raises the possibility that rates might increase much sooner than the market had thought. Sequestration has also moved back to the front pages of the major papers, suggesting that the political risk from Washington is rising. In addition, Europe looks to be very much in play again, as Silvio Berlusconi has a shot at the Italian elections— which could blow up the current austerity-driven political consensus—and the economy of the eurozone as a whole continues to weaken, driven primarily by France.

In the last round of the Washington budget debates—the fiscal cliff—a compromise was finally reached, whereby the Bush administration tax cuts were extended for the vast majority of the population, while taxes went up on people with incomes over $400,000 (or $450,000 for joint filers). In addition, the expiration of the payroll tax waiver raised taxes on everyone with wage income.

You probably remember this. It was only a couple of weeks ago.

I wrote several months ago about good habits and my efforts to adopt several of them. The one I’d like to focus on today is writing down daily gratitudes, a practice that experts link to increased happiness and success.

This weekend, I found out that there are other benefits as well. At 6:30 on Sunday morning, I had to put my cat, Putter, to sleep. He had been with us for 14 years, after my wife adopted him as a feral cat. He’d been there through several homes, several jobs, our marriage, and our adoption of our son, Jackson. He was part of the family.

The good news keeps trickling in. New unemployment claims ticked down again, continuing a decline that is bringing us closer to the lows of the mid-2000s, as the chart below shows.

In my post on currencies a couple of days ago, in which I discussed the strength and weakness of various currencies with respect to one another, the question I left unaddressed is what determines those relative values and whether there is in fact a “right answer” as to the value of each currency.

As is common with economic questions, there are several right answers, depending on how you look at it. One way to consider the value of one currency relative to another is to look at the markets—how many yen will it take to buy a dollar? The foreign exchange, or forex, markets are among the largest in the world. When currencies are allowed to freely float, or trade at will, the markets will determine what a currency is worth. This is the most transparent and informative way to set values, as it reflects a wide, liquid market with many participants.

The story today is the President’s State of the Union address last night. He made many points, but all centered around the role of government in the economy. Implicit in his program was the presumption that government can engineer outcomes superior to what the market would create. Also implicit was the notion that government can be key to kick-starting growth. Are those presumptions right, and can the President’s proposals really start to create a better outcome?

Let’s step back a moment and consider what “growth” means. If we are looking at a pie, any way we slice it, for someone to get more, someone else has to get less. This is how much of the debate on spending and taxes has been framed so far—either we cut spending or raise taxes, because the pie is only so big.

Here in the U.S., we are pretty lucky. We transact all of our business in dollars, and it never occurs to most of us to think about other currencies until we travel outside the U.S. It just doesn’t enter into our consciousness that we should care, or need to care, about the dollar itself. Like air, we take it for granted.

But, like air, when things turn bad, we have to start paying attention pretty quickly. Again, here in the U.S. we have never really had to cope much with that problem. As the “reserve currency,” the U.S. dollar is the currency for most of world trade, and therefore everyone else has to hold dollars in one form or another if they want to trade with the U.S.—and they do. We have a built-in demand for our currency that supports its value. The benefit is that we can buy things made in other countries cheaper, in dollar terms, if the dollar is strong.

After spending the weekend digging out from the latest “storm of the century,” it feels good to get back to my desk and away from my shovel and snowblower. Hope everyone here in the Northeast made it through with as little pain as possible.

According to my wife, who presumably got it from a reliable source, it was the fifth worst winter storm on record. But then, we’ve had multiple record-setting “hundred-year storms” over the past couple of years, which suggests either that something has changed or that our standards for hundred-year storms are out of whack. Maybe we’ve all been the unknowing beneficiaries of a spell of peaceful weather that’s now ending.

First of all, an apology—I didn’t post yesterday. I was in New York at a Morgan Stanley conference, and I blithely assumed that Wi-Fi connectivity would be available. For some reason, which was not the fault of the venue or the sponsor, I could not connect with my laptop. Even on the train home, the Wi-Fi was out for the first hour of the trip, and by that time, it was too late in the day to post.

It is surprising how dependent I have become on connectivity. I have a Mac Air laptop, which I love, and it usually works seamlessly with all sorts of connections, but not yesterday. And trying to connect with only an iPhone, which was heaven just a couple of years ago, was instead incredibly frustrating. How quickly we get spoiled. It was not all that long ago that I refused to even carry a cell phone.

Yesterday, I posted an update on the rising risks in Europe. After I wrote that piece, I spent some time thinking about other risk areas that have fallen off the radar screen a bit and decided that today would be a good time to address those as well.

Off to a great start

[youtube=http://youtu.be/41GKf3VzHdU?rel=0hd=1]

The market hiccup yesterday was widely attributed to Europe, which raises the question—what’s happening in Europe? I haven’t written about Europe for a couple of months. The last time, just after Thanksgiving, I noted that the situation was normalizing but we could certainly expect storms ahead. Two months later, the storm warnings are starting to sound.

Economic improvement has continued since then, with a start at recovery in the northern tier of the European Union. The southern tier, however, has continued to weaken—not so much economically as politically. Greece, for a change, isn’t the driving factor this time. Instead, two of the largest countries in the EU, Spain and Italy, are now showing cracks.

I have spent some time looking at the fourth-quarter GDP report over the past couple days, but it occurred to me that it might be helpful to step back and take a look at exactly what GDP is, what it is composed of, how growth happens, and what it means. This is essential to understanding any analysis of what happened in the fourth quarter.

I am actually not going to spend a lot of time talking about the numbers today, as I have made most of my points multiple times. I am also on my way back from the West Coast and am writing this in Sky Harbor airport, which will constrain my time.