Bernanke Yaps, Market Snaps: Stocks Crushed, Bulls Flushed

After a morning rally that saw stock indices recovering some of the ground lost in the early-week's punishing rout, the bulls finally gave up in mid-afternoon as the bears came thundering back, beating stocks into the ground across the board in what is now looking more and more like a genuine bear market. While major financial media outlets are blaming the whipping completely on blunt statements by inexperienced Fed Chairman Ben Bernanke, the losses appear to be part of a much more fundamental market re-assessment of an economy touted for so long as strong and healthy by tax-cut-and-spend Republicans while it was crumbling from the foundation up with massive federal budget and trade deficits coupled with inflationary pressures only partly recognized by the government in its official statistics.

After losing more than 200 points in trading earlier in the week, the Dow Jones Industrial Average gave up another 71.24 points, or 0.65 percent, on Wednesday to fall below the psychologically important neckline at 11,000, finishing at 10,930.90. The Standard & Poor's 500 shed 7.70 points, or 0.61 percent, to close at 1,256.15; and the New York Stock Exchange plunged 63.65 points, or 0.79 percent, to finish at 8,034.06, easily within one more down day of sliding back below the 8,000 point mark. The tech-heavy NASDAQ composite index surrendered 10.98 points, or just over half-a-percent, to finish the day at 2151.80. Bargain hunters who had pushed stocks up in early trading lost their will to live as bad news piled on more bad news across sectors. Among the huge corporations whose stocks trade on the major exchanges, energy-sector equities took a hit as the front-end, July contract for U.S. crude oil fell toward the $70 mark on easing worries about a West-versus-Iran military confrontation over Tehran's nuclear program. The tech sector was broadly punished as Intel stock fell two percent and Google common lost almost a full percent.

Earlier in the Spring, some Federal Reserve Board members had made statements stock market participants interpreted as indicating the central bank was planning at least for a while to end its record string of interest rate hikes, which began in the Summer of 2004 when the Fed, under former Chairman Alan Greenspan, openly declared the end of "accommodative" monetary policy. The appointment last month of new Federal Reserve Chairman Ben Bernanke further seemed to bouy hopes for the rate hike respite on the belief that a new Fed Chairman would tread cautiously with an economy already showing signs of weakness, especially with the late-Winter inversion of the yield curve, a phenomenon highly correlated with recessions two to four quarters later.


Unlike his predecessor, Alan Greenspan, whose pronouncements at times made Vogon poetry thoroughly engaging by comparison, Mr. Bernanke's previous penchant for candor—along with his promise to Senators during his confirmation hearings to "speak clearly"—came shining through this week as he stated flatly that inflation was at the high end of his comfort zone, a clear indication that the Fed has no intention of laying off the rate hikes to keep the economy from finding its own level at which to put its coffin. Now that Mr. Bernanke's "transparent" statements have sent shock waves through the market, Greenspan's much-criticized obtuse language is being heralded in retrospect as a beacon of circumspect self-control in light of his successor's utter lack of understanding of how much weight his statements are going to carry, especially when those statements signal that the Fed plans to move directly against market expectations that had been building for months into securities prices.

On the upside, now that the Fed's policy direction is nothing if not crystal clear with respect to continued upward pressure on interest rates, the U.S. dollar, which had been sliding precipitously against major foreign currencies, has now turned the corner and is rising on the strength of expected returns on investment in a high domestic interest rate environment. Moreover, the yield curve, which had inverted in March, is now beginning to recover an upward arch as long rates reflect what investors believe will be a strong fight against inflation for some time to come. The bad news about the newly emerging configuration of the yield curve is that it is pretty much the one that follows an inverted yield curve in the months immediately preceding the onset of a recession.

As a result of rising interest rates, business investment and consumer spending will probably slack off through the Summer; and although some good days lie ahead for the stock markets, the negative real returns on stock investments that have plagued the era of the neo-conservatives' control in Washington are likely to get worse, leaving tens of millions of Americans in greater and greater peril of having their retirement savings substantially compromised in terms of actual purchasing power.

Those average Americans who will be adversely affected should, however, take comfort in knowing that they may, in their Golden Years spent hungry, cold, and impoverished, return from time to time to The Dark Wraith Forums to read all about how they came to be so wretchédly poor in what was supposed to be the land of plenty.


The Dark Wraith will also publish the chronicle he is creating of this time as a relatively inexpensive paperback.