Based on some of the commentary about Cyprus, particularly in the New York Times, it would seem that the country is so small that the crisis there essentially doesn’t matter. I understand what’s behind this view, but I think it misses the point. Let’s take a closer look at why Cyprus does matter and how it could create some very unpleasant consequences in ways that perhaps aren’t immediately obvious.

Here’s the short explanation: Germany and the other major economies have decided they’re done paying any price to keep the eurozone together. A failed Cyprus bailout probably means that the country leaves the eurozone. For Greece, the rest of Europe was willing to pay almost any price to keep that from happening. Now they’re not. This is a big change, and it has implications for every country in Europe.

I’m still in New Orleans, but I wanted to expand on a response I wrote to a question posed by Faye Casey as a comment on an earlier post. It addresses, directly and indirectly, many of the issues we now face in Washington, D.C. The question was, “If we were to eliminate many of the loopholes in our taxation system, would it not be possible to have lower rates? Seems to me that’s what I’ve been reading lately.”

First of all, thank you, Faye. This is a very good question, and it raises a number of issues that speak not only to the tax problem but to every problem we have in Washington.

This will be a short post because I’m down in New Orleans at the Chairman’s Retreat conference. Commonwealth’s conferences offer absolutely wonderful content—my “Good Habits” post a while ago was based on an earlier one—and are a great deal of fun because of the people who attend.

I can’t focus on this right now, though, because Europe has come back with a vengeance as a risk factor. A bailout for the Cypriot banking system has been proposed, one that would whack individual depositors for the first time ever.

The recovery continues. Employment figures keep improving, wages are edging up, and the unemployment rate is dropping. At some point, the Fed will have to make a decision to start pulling back, and that could be a problem.

I’m meeting with my accountant this evening to go over my finances and prepare my tax return. Although I like my accountant and enjoy catching up, I’m not looking forward to it because I always end up owing money. I set aside as little as I can throughout the year, so the question at tax time isn’t whether I owe, but how much. I know I could easily avoid this by having more withheld, but I dislike giving the government an interest-free loan more than I dislike writing the check.

What I try to remember is that my life is much, much easier on the tax front than it used to be. Once upon a time, I owned and managed a couple of different companies. Accounting and tax issues took up more of my time than I could initially believe. Now that I’m a W-2 employee, albeit one with various investments that create their own complications, life is easy. Sort of.

In yesterday’s post about revenue growth and profit margins, we talked about how the significant tailwinds that have benefited the markets over the past couple of years may well be playing out. With that in mind, if company earnings are looking to—at best—grow at significantly slower rates than they have over the past couple of years, does that mean similar results for the stock market?

Not necessarily. Stock prices are based on shares, not companies. The relevant metric, therefore, is earnings per share (EPS), not company earnings. The two are obviously connected; however, while company earnings growth may slow, EPS growth doesn’t have to lag to the same extent.

We’ve hit a record with the Dow and are getting very close with the S&P 500. Excitement is building, and the expectation is that stock prices will continue to rise. They may, for a while, based on the psychology alone, but as I discussed in the CFA Institute post last week, the financial fundamentals have to come into play at some point.

Ultimately, for a market rally to be sustainable, earnings per share—the metric that defines the financial benefit to shareholders—has to increase. The question now is whether the current rally is actually based on increases in earnings and, if so, whether that growth can continue.

— Guest post from Peter Essele, CFA^®, senior investment research analyst

To assess the riskiness of the highest-yielding area of the bond market relative to that of the equity market, we produced the chart below. The line shows the difference between the average yield for the high-yield market and the average yield for the top 10 percent of securities in the S&P 500. For instance, the current reading of 0.45 is the result of subtracting the average yield of higher-yielding equities (5.33) from the average yield in the high-yield market (5.78).

I am rather proud of that title. How often do you get to riff on Bill Gross (“the new normal”) and Michael Lewis (The New New Thing) at the same time? As a bonus, I think it actually reflects what we’re seeing as the economy and markets evolve.

The New New Thing, for those too young to remember, is a book about Jim Clark and his role in the new Internet economy. It’s a great read and recalls a time when everything seemed possible, when we were entering a new economy and it really was different this time. Freed from the constraints of geography (and profitability), Internet companies were going to change the world.

I want to do something today that I do not do that often: make a specific case for something. Ordinarily, economics is very much a nuanced “on the one hand/on the other hand” subject—to the extent many wish for a one-armed economist. Today, though, I want to make the case for a strong U.S. recovery.

Let me be clear. I am not pounding the table on this. I still don’t consider it the most probable case, and there are certainly enough factors out there that could derail it. The news keeps surprising to the upside, however, and I think it makes sense to look at how we could continue to be pleasantly surprised as the recovery starts to gear and turn really strong.