A couple of days ago, at the end of a post on reasons for optimism regarding the economy, I promised that the following day we would discuss what could go wrong. And of course, something did go wrong—I didn’t discuss it. In any event, Friday the 13th just seemed like the right time to discuss the downside—so here we are.

Uncertainty continues

It’s Friday the 13th, widely considered a bad-luck day, and if the Financial Times (FT) lead—which states that banks face a $22 billion bill for LIBOR-related misdeeds—is correct, it certainly is bad luck for them. U.S. regulators are trying to get their side of the LIBOR story out, with reports in the business section of the New York Times (NYT) and on page C3 of the Wall Street Journal (WSJ) that Tim Geithner, then-president of the New York Fed, is said to have noted problems with the LIBOR rate-setting process and attempted to correct them. Apparently, the problems were not corrected, as we are finding out, but the Fed wants us to know that at least Geithner tried. The story just keeps getting more interesting by the day.

Other than that, economic reporting is actually rather upbeat for a change. Page 1 of the NYT reports that economists see signs of a pick-up. Not a fast pick-up, as the article notes, but renewed growth in the second half of the year. On page 4 of the FT, an optimistic take on China’s growth is reported, and on page 3, Ireland seems to be on track with its bailout requirements. Finally, the first page of the NYT business section reports that California municipal bankruptcies are not seen as a trend, despite three in the past couple of weeks. Good to know.

Another day without front-page crisis news—a good thing. The New York Times (NYT) did not have any economic or financial articles of note in the front section, while the lead articles in the Wall Street Journal (WSJ) had the Fed weighing more stimulus—old news. The Financial Times (FT) noted the yield record for U.S. Treasury sales—1.459 percent for the 10-year, the lowest ever. Kind of surprising this did not make either the WSJ or NYT.

The economic slowdown implied by record-low U.S. Treasury yields was consistent with the stories deeper in the papers. The NYT led the business section with the pending year-end fiscal cliff and the effect on the economy of related business uncertainty; reported to have gone up by more than half since April, business uncertainty could knock up to 0.5 percent off of growth this year. The effect of the disquiet over the lifting of the debt ceiling last year was given as an example of how uncertainty can postpone business decisions, including hiring. The NYT also had an article on how the Fed is divided over additional stimulus, creating even more uncertainty.

This post will be a bit different—I am writing it on the road, so I don’t have access to many of my usual resources and tools. I am therefore going to take the chance to talk about something nonquantitative that I find helpful in both an investment and a noninvestment context.

One of the significant perks of my position at Commonwealth is the ability to talk with a wide range of experts in a wide range of fields. A couple of years ago, at our Chairman’s Retreat, we had a speaker who was an expert in the field of happiness.

Looking at the headlines, again it’s more evolution than revolution, continuing with ongoing themes. Spain continues to be a topic of interest, with the Wall Street Journal (WSJ) running an article on page A7 about how Spain will have to cede bank control to European regulators. The Financial Times has a front-page article on how Spain is stepping up austerity, while the New York Times (NYT) has an article in the business section on how, now that Spain has negotiated easier terms, it must meet them.

The LIBOR rigging scandal remains a hot topic, with a shift in focus. Where earlier discussion was on what happened and who was to blame, now the articles focus on who will be paying for it. The NYT has a front-page article on how the scandal has instigated a scramble for damages, and the WSJ has an article on page C2 about U.S. lawmakers joining the LIBOR probe. This will be a much bigger topic in days to come, as it has been described as banking’s “tobacco moment,” with prospective liabilities that could go into the billions.

We talked yesterday about housing. We discussed how it is bottoming, how it is poised—at some point—to start a recovery, and how that is a very good thing for the economy. It’s good for several reasons—largely because of the employment the sector generates and the multiplier effects it has on other areas of the economy.

Housing can be considered a durable good. Because it is a long-term asset that is purchased with financing, it reflects, to some extent, the buyer’s vision of the future. The stabilization and incipient improvement of this sector is also a sign that the U.S. population has started to recover psychologically from the crisis, which is an underappreciated element of what has to happen before recovery really kicks in.

We have another day without a single overarching theme in the newspapers. The U.S. papers, the Wall Street Journal (WSJ) and the New York Times (NYT), lead with domestic politics. The WSJ hits on union political spending and on the beginnings of the battle over the extension of the Bush tax cuts. The NYT looks at fundraising by the presidential campaigns—Romney is ahead—and the evolving political incentives on the tax-cut extensions and health care. This is a pretty interesting article, as it highlights the evolution of the incentives we discussed in an earlier post in the context of intra-party politics. The bright line for a cutoff of $250,000 in income for the tax-cut extension, as opposed to $1 million, actually appears to run through the Democratic Party to a greater extent than I would have expected. Likewise, there appears to be some evolving Republican support for parts of the health care bill. These intra-party arguments will only get more complicated, particularly on the health care side, as voters start to process what they will now be losing, either on the expiration of the tax cuts or on a repeal of the health care bill. Don’t expect simple party line votes on either—that may be what we get, but it really is not as simple as that.

The Financial Times (FT) focused on Europe and China again. Key issues include an accelerated plan to aid Spanish banks, which also makes the “What’s News” column in the WSJ and the business section of the NYT. Overall, this is probably a good thing, but it does not seem to have impressed the markets to any degree. The LIBOR fixing scandal is also highlighted in the FT; the problem continues to expand to other banks besides Barclays. and we can expect to be hearing a lot more about this going forward.

Just finished giving a talk on the economy at Commonwealth Live!, so thought that might be a good thing to share for general comment.

There is nothing particularly new today—mostly commentary of a follow-up nature on trends already in place. The common focuses are China and Europe.

For China, the New York Times (NYT) has an article on the front page of the business section about the premier’s call to spur the economy. Given the recent policy actions that China has already taken, this seems to be confirmation that weakness is continuing. China has taken a big hit from weakening demand in both Europe and the U.S. The situation may be getting worse for them, with a front-page article in the Financial Times (FT) about a pending China/EU trade dispute. As I discussed in an earlier blog post, protectionism is on the rise, and this is one of the latest manifestations. Rounding out coverage, the Wall Street Journal (WSJ) had an article on page A6 about China’s growth challenge. China is becoming a larger issue, as the “certainty” of a soft landing seems to be getting much less certain.

A couple of days ago, I wrote about how financial factors and decision models are receding in importance compared with other, noneconomic factors. While there are examples around the world that illustrate the process, it still is not necessarily apparent, given the constant financial headlines, whether and why this should be the case. I think it is helpful to take a look at the same phenomenon from another angle to show why this change has to happen and why, in the end, it will be a good thing.