Another milestone in my ‘muddle-through thesis’ for the global economy and the financial markets was reached over the weekend. Regular readers know I’ve been punting on gradualism as the cure for the global financial crisis (GFC) mess and over the past two weeks we’ve seen Europe make some long overdue good decisions. However, there’s still a long way to go.

Turning tide

Last week we saw Spain’s banks offered a bailout plan and now the Greeks have voted for the party that will keep it in the eurozone. In addition, French president François Hollande’s Socialist Party gained the majority in the French parliament, which is a development that is a plus for the forces arguing against the German demand for excessive fiscal discipline.

Right now the pendulum has swung too far to the fiscal-discipline approach to policy and this needs to come back towards more pro-growth policies so jobs can be created and taxes are paid to reduce the debts shouldered by the likes of Portugal, Ireland, Italy, Greece and Spain (PIIGS).

Wall Street anticipated a favourable election outcome with the Dow up 115.26 points, or 0.91% to finish at 12,767.17. The index put on 1.7% for the week and 3% for the month but has shed 3.37% for the quarter. So the question is, have we turned the corner?

What’s next?

Well, if the Greeks had played the extreme socialist card, we would be collapsing today on stock markets. One interesting development on the Dow was the fact that on Friday the index beat its 50-day moving average for the first time since early May and so we have to hope we see a few more of these ‘beats’ as it could be a precursor to some good times ahead.

Also helping stocks, as a kind of second-rate plus, is the fact that central banks were ready to spin out liquidity if the Greeks voted against the euro. In a perfect world, I would like to see the US recover without a third quantitative easing package (QE3). More stimulus wouldn’t have been on the agenda if Europe had dealt with its debt issues in a more timely way.

The latest economic signs out of the US say its recovery is slowing, with industrial output, manufacturing in the state of New York and consumer sentiment figures, all out last Friday, looking pretty disappointing.

Against that, the VIX, or fear index, fell to 21 and this says that share buyers are becoming less spooked, which is extraordinary considering what has been happening lately.

I know the EU has some of the world’s greatest slow learners when it comes to constructing policies to help economic activity and the stock market, but compared to last September there has been progress.

The Poms are set to increase their money supply to the banks by £100 billion with the goal of getting banks lending to business and consumers. And the next big challenge will be the likes of the French president mustering support from other EU leaders to lean on the Germans to ease up on their fiscal austerity demands on the PIIGS.

Opportunity knocks

We are muddling through in the right direction, although at a slower than desired pace, and that explains why our stock market has been disappointing. But there will be a breakout in the future and stocks will soar and that’s why I’ve been arguing that the bad times for shares can be a buying opportunity.

I expect a surge in stock prices this year, probably in the last quarter, but I will take it earlier if it happens to turn up – although I don’t think there is enough going right just yet.

That said, I congratulate the Greeks and the Europeans, and I don’t do that often.

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