Inflation Surges, Stock Markets Plunge
The beating continued on Wall Street today, despite early indications that yesterday's pounding was the extent of it. Thursday, the Dow Jones Industrial Average lost another 77.32 points, or 0.69 percent; the Standard & Poor's 500 shaved off an additional 8.51 points, or 0.67 percent; the NASDAQ composite index slipped a further 15.48 points, or 0.70 percent; and the New York Stock Exchange composite index, the biggest loser on Wednesday, surrendered yet another 51.20 points, or 0.62 percent. The losses today indicate, as noted below, that more than just unexpectedly bad inflation news is driving the markets down.
Off its 52-week high of 11670.19 earlier this month, the Dow has lost 4.64 percent; off its 52-week high of 1326.70, the Standard & Poor's 500 has lost 5.14 percent; off its 52-week high of 2375.54, the NASDAQ composite has lost 8.21 percent of its value; and off its 52-week high of 8651.74, the NYSE composite has lost 5.82 percent of its value.
Wednesday, May 17, 2006, was the worst day on Wall Street in recent memory. Market bulls, who had only recently stampeded the Dow to within 80 points of its all-time high, were taken to the slaughterhouse and turned into ground beef in a rout that began earlier in the week. The Dow Jones Industrial Average of 30 blue-chip companies lost more than 214 points, shedding 1.88 percent of its value. The Standard & Poor's 500 lost almost 22 points, surrendering 1.68 percent of its value; and the NASDAQ Composite Index of thousands of smaller-cap companies fell 33.33 points, or 1.50 percent of its value. By far the biggest loser, however, was the composite index of the massive New York Stock Exchange, which dove over 188 points, representing a loss in value of 2.24 percent.
The spirals downward in major stock indices were attributed by mainstream financial news networks to the back-to-back reports of unexpectedly strong inflation at both the wholesale and retail levels. On Tuesday, May 16, the Bureau of Labor statistics reported that the producer price index, measuring price inflation in wholesale goods and services, rose in April by 0.9 percent, which translates into an annualized inflation rate of 11.4 percent. Excluding the food and energy sectors,
the so-called "core" wholesale inflation rate for April was 0.1 percent, for an annualized rate of 1.2 percent. Wednesday, the Bureau released the April consumer price index data, which showed that price increases at the wholesale level were being passed to goods and services on the shelves at an aggressive pace. The consumer price index for April rose an unexpectedly sharp 0.6 percent, for an annualized rate of retail inflation of 7.44 percent. Excluding food and energy price increases, the "core" inflation rate at the consumer level came in at 0.3 percent, for an annualized rate of 3.7 percent.
The conventional wisdom is that market participants had been hoping for an end in the near future to the Federal Reserve Board's string of short-term interest rate hikes that goes all the way back to the Summer of 2004. Recent statements by both the Fed Chairman and by other Fed governors had been interpreted to this effect, and stock markets had reached near-record levels in recent weeks in the belief that the Fed would soon be taking pressure off interest rates because the fight against inflation had been successful and the economy could use a breather from higher and higher costs of borrowing. Such a move by the Fed would translate into stronger business growth and consumer spending in the months ahead.
However, with the one-two punch of bad inflation numbers at both the wholesale and retail levels in April, the hopes of an end to Fed rate hikes were dashed: the central bank simply cannot shift its monetary policy in the foreseeable future. Clearly, inflationary pressures are still present and perhaps even more ominous than they have been in previous months, which means rising interest rates and the risk of a resulting economic slowdown will dog the economy at least into the Summer and quite possibly well beyond.This week's stock market losses came on the heels of the financial news media breathlessly panting about "near-record" highs for the major market indices early last week. Unfortunately for investors lured by what appeared to be the good times rolling, long-simmering effects of disastrous U.S. economic policies are finally beginning to wash up on the happy beaches of securities and commodities markets around the world: staggering U.S. budget deficits coupled with debilitating, month-after-month, year after year trade deficits have left the American economy on the verge of significant difficulties, despite the constant stream of good economic news that pumps from the Bush Administration in its unrelenting effort to convince average Americans that the mounting economic problems they're experiencing in their own lives are entirely at odds with the great economic success everyone else is having.
Global currency markets aren't buying the hype anymore. The U.S. dollar has been dropping since late last year against major foreign currencies. Relative to the euro, the greenback has lost about eight percent since its intermediate high last November. Even against the yuan, the dollar is finally losing noticeable ground: for the first time in memory, the Mainland Chinese currency has strengthened to a level above eight to the dollar. The brutally efficient, mercantilist Chinese Communists—willing and able as they have been to prosecute a years-long policy of exchange rate manipulation against the dollar—can no longer hold back the tide of the collapsing greenback. The current sentiment that interest rates in the U.S. are on the rise will only temporarily halt the long-term decline in the value of the American dollar against other currencies.Ultimately, unless dramatic action is soon taken to display to the world that the United States leadership has finally and resolutely come to grips with its fiduciary duties, and unless that leadership puts on clear and earnest display meaningful and perhaps even draconian measures to return policy to a responsible course with respect to taxes, budgets, and international relations, the status of America as the premier and most powerful economy on Earth will fade permanently into memories of a previous century, one in which a far better breed of stewards guided the republic.
Further analysis of the looming and dire situation currently facing the country will be forthcoming here at The Dark Wraith Forums.
In the meantime, the Dark Wraith certainly wishes everyone a good and profitable investment experience in the days and years to come.
Published 5/17/2006 10:37:00 PM
<< 28 Comments Total
The dismal science, indeed.
I just checked my income vs. the national average. I'm in the top 10%. I just looked at whether I could actually afford to buy a home here in California. It was "No effin' way!" -- the lowest-priced local homes that I found would eat up 75% of my income. No effin' way that this is sustainable.
-BT
Caves, BadTux.
Caves can be cheap, and with proper home decoration self-help manuals, they can be made into highly sought-after real estate.
Not only that, stalactites need not concern the feng shui conscious home dweller, given that they already accord with well-understood principles of balance and other aesthetics.
Caves, BadTux: look into them. (But do make sure no bears are in residence before you fully commit your head to the opening.)
The Dark Wraith renders advice worthy of Better Homes and Gardens.
I shall stick to my iceberg, Wraith. Caves and penguins do not mix.
The inflation numbers are... interesting. One way to deal with a surplus of obligations and insufficient funds to meet said obligations is to of course crank up the printing presses and simply print dollars to fill the hole between the assets you have and the demands for payment with which one is presented. I have been following the money supply numbers with interest -- the printing presses have been cranked mightily for some time now. Yet strangely, other than oil, wages and prices have increased little during this time. Which points to deflationary pressures elsewhere holding wages and prices down, the most important of which, of course, is the export of good-paying jobs to other countries thereby turning our nation into a nation of Subway sandwich artists and Wal-Mart greeters. That, and the dollarization of the world economy, which soaked up so many of those dollars for so long.
But now... are the chickens coming home to roost? And what kind of eggs will they lay, anyhow? My bet is vulture eggs, for cleaning the carcass of the economy after it is hit by an 18-wheeler of stagflationary reality. These chickens, I suspect, are quite talented chickens in their own way.
This penguin is stocking his iceberg with plentiful herring in preparation for the roosting.
- BadTux the Observant Penguin
And, as I know I mentioned a few other times on your blog, this is the compounding issue that so far has masked to most Americans just how bad things really are. The value of our assets are collapsing, but since they are valued in undervalued currency, we don't see it as much (just like fish in a pond that is slowly drying up; the water level may fall, but they still have plenty of room to roam in. By the time they realize they will be running out of water it is too late). In some of your previous analyses on the stock markets, you haven't even figured in the collapsing dollar; or put another way, had you bought euros on the day that Bush was inaugurated in 2001 and stashed them under your mattress and sold them back as dollars today, you would have seen a growth rate that would have put any 'market analyst' or fund manager to shame.
DW,
Barry McGuire might have been right, only 40 years early.
Didn't we hear someone sort of prophesize this during the 2000 campaign, you know, if we went the way Bush wanted, this would happen? But he was accused of fuzzy math. The people got what they wanted to hear now they'll clamor for superman to fix things right away. This may wake people up; at least the ones that survive the economic plague knocking at the White House door. Borrow-barians (or more appropriate, borrow-buryians)at the gate!
Well like Sgt. Yamana from Barney Miller said," At least we ain't got locusts!"
Good morning, Eli Blake.
The problem with the "buy euros" scenario is that it is a variation on any investment analysis that proves its worth in historical data. I spend no end of time in investment classes trying to disabuse people of buying into a trading scheme that shows how good it is by testing itself against historical data. That is one of the premiere fallacies of investment logic. The extension of that fallacy is to actually build financial models based upon historical empirical data unless that data has somehow been corrected for the fact that its components have already happened.
Moreover, to the broader point, any good, balanced portfolio should have foreign assets in it; but as I note in this article, foreign assets are meaningful only if you are in the country of denomination of asset valuation. If I convert a dollar to a euro, the resulting liquid asset is of no value whatsoever to me unless one of two things occurs: either I go to Europe to use the euro, or I convert the euro back into a dollar to use it here.
In the first scenario, I go to the countries where that euro is probably more or less at purchasing power parity (or it's going to try to get to it) with the dollar, so I win nothing because everything is more expensive because it's being valued in the more expensive currency.
In the second scenario, I deal with three major hurdles.
First is transaction cost of trading. Unless you are a large-scale trader in currencies, fixed costs (direct and indirect) are going to dominate, and they'll put you in a negative position right off the bat.
Second is massive currency risk. Again, this is where the hindsight fallacy comes into play. I do not know with certainty, looking forward, what's going to happen to exchange rates. I might have an outstanding theoretical basis for believing the investment is appropriate, but that's all I have. Eli, corporations all over the world trade billions and billions of dollars in currency futures contracts every week, and the reason they do this is to hedge against currency risk. The other side of these transaction is the world of highly trained (generally very high-strung) professionals who eat, live, and breath currency risk for profit. I cannot under any circumstances suggest that the average Joe walk into that market and stand side by side with such brutally efficient risk-taking market players, men and women who soak themselves daily in every bit of information floating around about currency movements and underlying economic factors. Playing the currency risk market is a prescription for disaster, whether a small-time investor is buying futures contracts or the currencies themselves. It's a market where amateurs get slaughtered; and it's a market where seasoned pros do, too, sometimes.
Third is a much more fundamental issue of consumption and savings here in the United States. Eli, I can't afford to turn a dollar into a euro. I just can't. Neither can most people in the work-a-day world. The reality is that, for an unbelievably large number of Americans, if they didn't have some kind of voluntary or forced retirement plan, they wouldn't save any money at all. Survival just doesn't have room for a luxury like savings and investment.
People—middle-class people, even—are borrowing to eat. They're borrowing to have a place to live. They're borrowing to pay for the healthcare industry's false promises of life without misery. They're borrowing to provide themselves with mind-numbing entertainment to keep them from seeing what has happened to America over the past three decades. They're borrowing on the belief that, somehow, what they're doing is for the best.
That's not an investment community; it's a community of dead citizens walking into a future that won't get any better because we no longer have hope—that sliver of light we had through the 1990s in good stewardship and the end of a major, long-term, debilitating global confrontation.
That hope is gone. Today, I'm going to have barely enough to buy food to eat; so today, I'm not going to turn any of the four one-dollar bills in my pocket into euros.
Tomorrow doesn't look good for bearing currency exchange risk, either.
The Dark Wraith can't eat a euro.
"Let me now.....warn you in the most solemn manner against the baneful effects of the spirit of party," President George Washington said in his farewell address in 1796. Political parties, he said prophetically, "are in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the Power of the People and to unsurp for themselves the reins of Government."
Wahington's prophetic fears may be truer and more real than any of us would like to admit.
good morning dark wraith:
my sole personal experience in currency trading came during my military service. at one point i was assigned to NATO staff. each month, we were allowed to draw our pay in cash, in any currency of the alliance. we would spend a few days before payday scanning the exchange rates, make our best guess and go with it. one thing we found out right away was that to maximize any gain (and any gain was usually quite small) a visit to the country in question was called for. after about six months of trying to be smarter than the pros we began to simply decide on where we wanted to go, then get the currency of that country. less work, more fun, not a lot of loss incurred. we would use exchange rates to influence our decision on our travels, but, nothing could keep me from the beaujolais district when the new wine was released, or out of sevilla when the magnificent el cordobes was in the ring, or the greek islands any time. as he was signing the tax cuts and making an even bigger deficit a certainty our president actually had the gall to speak of his responsibility and acumen. the bloody cheek.
Good Morning Dark Wraith:
I'm a lover of U.S. history--especially the Cold War history between the U.S. and Soviet Union. Looking at the current political and economic events of the past four years, have reminded me of an earlier historical period in our history. Is it me, or do I see a disturbing parallel between the current Bush administration's tax cuts to the rich while fighting a war in Iraq, to Lyndon Johnson's Great Society anti-poverty programs while fightin a war in Vietnam during the late 1960s? Both presidents--Bush and Johnson--pretty much decided they could pay for their "guns and butter" programs by turning on the government's printing presses. And now it appears that I'm seeing the same affects today, that may have also occurred after Lyndon Johnson left office. We've got both inflation and stagflation worries today--just as we've had inflation and stagflation during the 1970s. Gold prices have already gone up, just as gold prices have gone up during the late 1970s. The government is swarming in red ink-only now it is much worst than it ever was during the Johnson years. In fact the similarities are so strange, it is like George Bush is trying to do the exact opposite of what Lyndon Johnson did, using the same page from the Johnson playbook. With Lyndon Johnson, we had the Great Society anti-poverty fighting program coupled with fighting in Vietnam. With George Bush, we now have the anti-Great Society program of tax cuts to the rich while destroying social programs to the poor, coupled with the U.S. fighting two wars in Iraq and Afghanistan (and a possible third in Iran).
We're heading down that same road as we did in the 1970s--only this time it is much worst.
Good Afternoon Dark Wraith,
I agree with Mo Mu: It's amazing really, that it took so long for a political party to overwhelm the checks and balances. Usually politicians don't want to give up any of their personal power to the party hierarchy. That this republican party at this time has such power over their operatives smacks of something much more evil than politics as usual.
And the truth of that is born out by their actions.
MM great quote. Political parties, he(Pres. George Washington), said prophetically, "are in the course of time and things, to become potent engines, by which cunning, ambitious, and unprincipled men will be enabled to subvert the Power of the People and to unsurp for themselves the reins of Government."
It's interesting if one looks at his own life and honestly and objectively sees what is going on that it can be a microcosm of the bigger picture and more accurate than what others may want you to think. Just the other day GWB was saying how strong the economy is. Not that I believe anything that comes out of that pie hole, but there are those who do. So do I live in a parrallel universe? Why am I having such a hard time of it?
Then wam bam, down goes the stock market and I think, quick run over to the DW blog and see if my instincts are close to what IS going on.
Thanks for your good work here, DW.
Hello Dark Wraith: I like your little update on the Dow's pounding of another 77 points today, on top of the 214-point loss on Wednesday. Are we going to see another big sell-off for Friday?
Looking at these two days of sell-offs, and some of the latest economic statistics that just came out regarding the CPI increases, the jobless claims, and the continued possibility of the Feds raising interest rates, it tells me that the market is completely spooked at this time. The market is spooked at inflation fears, at interest rate increases, a slowing economy, and even more Middle East war fears and high gas prices. With all this uncertainty in the world today, how many Americans are willing to put their money in the stock market?
I think we're going to see a long, slow slide in the stock market over the course of this year.
Good evening, Eric.
The way I describe it, the market players right now are "receptive" to bad news. At times, they'll shrug off this or that problematic number or troubling event; at other times, they won't. That receptivity factor is especially true when there's a leader number that to a greater or lesser extent confirms or consolidates an understanding of troubles ahead.
Just a little while before this brutal down market started, I wrote on a thread that I was getting worried. That's a trader's sentiment, something not so much to get in front of the market as to signal that an accumulation of problems is building that might confirm for others their similar sentiments.
This kind of feeling isn't necessarily actionable, at least not for a while; then, all of a sudden, a dam bursts and what was in one person's gut turns out to have been in everyone's gut. This is very much like what you see in wild animal herds: just all of a sudden, it looks like they're all spooked and moving at once... and usually all in the same direction.
Everyone knows the rules, everyone knows about what to do. It's just instinctive. It's also part and parcel of the old saying that you should never fight the market. You might be smart enough to lead the market, but if no one starts doing what you're doing pretty soon, it's time to turn tail and head back to where the herd is.
Otherwise, you might end up being some bear's meal.
The Dark Wraith doesn't much care for the thought of that ignoble end.
Good evening, meEE.
Among the most effective weapons the Right has is making those who oppose them feel isolated, unusual, at odds with the prevailing and overwhelming experience.
This is how to silence people: make their plight, their feelings, their very lives shame them.
It's quite effective... unless, of course, you're a blog reader.
The bad part about that way of fighting isolation is that you have to put up with the occasional crookéd-nosed, obtuse, somewhat pompous blogger who has a habit of ending his posts by referring to himself in the third person.
The Dark Wraith cautions against that kind of online experience.
Good evening, SB Gypsy.
No small part of the allure of succumbing to party discipline was the Republican money engine. Tom Delay was masterful in his ability to get fellow Republicans to do his bidding, and it was almost wholly because he was such a huge wellspring of money, access, and influence.
The story goes that many, many Republicans in the House of Representatives wanted nothing whatsoever to do with the impeachment of Bill Clinton, but it was Tom Delay who almost single-handedly forced nearly perfect, lock-step compliance with the game plan. There really weren't all that many on board the impeachment bandwagon, save for Henry Hyde, whose own bizarre obsession with the impeachment has its own story.
This, of course, doesn't explain the other side of more recent history: why the Democrats of the 21st Century have been so completely absent a unified mission. The claim is entirely specious that it's somehow because Democrats are, by their nature, more diverse and less willing to be brought into lock-step conformity with an agenda.
The truth of the matter is that there's another reason for their completely scattered-brained, weak ineffectiveness in coming to bear on the Republicans.
But the truth of the matter won't be told.
Not here, anyway.
The Dark Wraith just hates conspiracy theories, y'know.
Good evening, Dark Wraith.
That graphic of the "Meat grinder for the Wall Street Bulls" is very eye-catching. I liked it so much, I could hardly pay attention to your article:)
Good evening, Old White Lady.
I am happy to report that, according to my backroom logs, the number of saves of that graphic is now well over a hundred. I suspect that at least of few of the downloads were done by stock traders, but I don't know that for sure.
One way or the other, the Meatgrinder Bull will apparently be one of the Dark Wraith graphic classics.
The Dark Wraith is quite proud of that.
Is it me, or do I see a disturbing parallel between the current Bush administration's tax cuts to the rich while fighting a war in Iraq, to Lyndon Johnson's Great Society anti-poverty programs while fightin a war in Vietnam during the late 1960s?
No, Eric, that's not just you. I notice it, too, and did as well during the Reagan presidency. It puts the lie to all the blather about how tax cuts are the panacaea to all ills. The reality is that if you cut taxes but do nothing to spending, then you are using fiscal policies generally associated with the hated Keynesians........
To talk about that as "conservative", let alone fiscally responsible, is complete, utter, lying, fraudulent BULLSHIT!
- oddjob
OT, but the best post for it is too far down:
Green Knight has posted a link to an interesting tidbit.
- oddjob
RATS! Try this.
- oddjob
Oddjob: You're right about the Republican wet dream of tax cuts solving all fiscal and economic ills. It is like we're spending money on our national credit card like a drunken sailor at an extravegant party. As Reagan pushed through his "vodoo economics" scheme, I certainly became worried at the growing national debt problem in the late 1980s (I was a freshmen in high school when Reagan came to office in 1980). It took 12 years to undo the disaster of Reagan's fiscal policies (under Bush I and Clinton), and to get this country back to a sound fiscal path--only to see that sound fiscal path destroyed by Voodoo Economics: Part Deux, courtesy of this current Dubya Bush nightmare.
It is going to take more than a generation to correct the problems this Bush administration has forced upon this country.
Meanwhile warped flapdoodle such as this continues to be published like there's no tomorrow.......
- oddjob
Meanwhile warped flapdoodle such as this continues to be published like there's no tomorrow.......
Kind of goes hand in hand with the money supply, now doesn't it?
Greenspan says US housing boom is over
NEW YORK (Reuters) - "Former Federal Reserve Chairman Alan Greenspan said on Thursday that the "extraordinary" boom in the U.S. housing market in recent years is over. "This has been quite an extraordinary boom," Greenspan told a Bond Market Association dinner in New York. "The boom is over. I think we can safely say that with a strong degree of confidence. "Greenspan said there was a "high degree of froth in the system," and that it was clear that home equity extraction and the turnover of home sales was waning."
Good evening, Peter of Lone Tree.
Greenspan says there's a lot of 'froth' in the housing market right now?!
What's that? He's likening the housing market to a good latté?
Well, at least the old boy's going to get some market participants all kinds of excited. If there really was a "bubble," Greenspan probably just gave it a pretty serious, if not fatal, puncture.
The good news is that we might soon be able to get some mansion-type housing on the cheap. I could run this blog from there and turn the whole place into a giant rooming house for all the regular readers here at The Dark Wraith Forums.
...If, that is, I have any left after I've torn my ass on Sunday about the Leopold/Rove fiasco.
The Dark Wraith might be feeling mighty lonely after a rant such as he's planning.
...If, that is, I have any left after I've torn my ass on Sunday about the Leopold/Rove fiasco. The Dark Wraith might be feeling mighty lonely after a rant such as he's planning."
Hew to the line; let the quips fall where they may.
Here are two articles from the last two Boston Globe front pages regarding the metro Boston housing market:
Yesterday's story
Today's story.
- oddjob
I'm still working my way through recent posts here ...
Bad Tux's first comment here really resonated with me. I live within 5 miles of Boston, and I've been dutifully saving 15-30% of my income for 20 years now, with most of that money invested in the stock market. I make solidly middle quintile money. But could I buy a house here for cash, assuming the same amount of space that I'm renting? Heck no; I could put every dime I've got into a down payment, and I'd still have to take out a $25-100k mortgage, and put the closing costs and lawyer's fee on my credit card. This is insane!
I know most people just think of buying a home in terms of the monthly mortgage payment, but when you can save and invest your money for 20 years and still not have enough for a whole house with a bit left over to invest, there's something seriously wrong.