Inflation Surges, Stock Markets Plunge

UPDATE for Thursday, May 18, 2006
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.

◊ End of UPDATE for Thursday, May 18, 2006 ◊
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 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.

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This article is cross-posted from The Dark Wraith Forums.