Thursday, May 20, 2010

"Fasten your seatbelts--it's going to be a bumpy night"

American stock markets plunged about 4% today, their biggest drop in a year. Blame has been put on the surprise increase in weekly first time applications for unemployment benefits and the drop of a leading measure of future economic activity. Continued financial turmoil in Europe is also on everyone’s mind.

The DOW now officially stands “corrected” having receded 10% from its high in April. No one knows, of course, where this slide will end. Some are expecting another 10%. Other sages have sounded the “everyone out of the pool” alarm fearing that a free-fall is in the offing. Or it could all start climbing again (probably not).

Part of the uncertainty is the growing conviction that central banks are intervening heavily, including the Federal Reserve. It’s widely accepted that today’s turnaround of the previously falling euro was the result of purchases by the ECB (European Central Bank). Action by the Fed was also suspected. There have also been suspicions and rumors for some time that Fed purchases have even been pushing up the DOW, which would be unprecedented (and if true, probably illegal). In any case, there has been a steady outflow of funds from the markets for several months, which only accelerated after the crazy 90-minute plunge a couple weeks ago.

It seems pretty certain that we have turned another corner but to what is not at all clear. It is entirely possible that another downturn is beginning. Most real economic indicators have been going sideways for some months. The widely expressed fear, that last year’s stimulus bill was big enough to only halt the slide but not re-ignite the economy, may well be proving true. Many state governments are at the end of their budgetary ropes and cuts and layoffs are coming soon. Government housing supports are ending and prices and sales are likely to drop. The Fed’s monetary spigot is nearly shut off as its independent stimulus of buying junk of all kinds has ended. The ugly specter of deflation still looms, as shown by the first drop in consumer prices in a year.

So, yes, the markets are nervous and for good reason. Toss in social upheaval in Greece and Thailand, the continuing oil catastrophe in the Gulf of Mexico, a volcano in Iceland, and the announcement that it was indeed North Korea which had sunk a South Korean ship (which in another time would be classified “an act of war”) and you know lights are burning late in ministries and financial houses around the world. Yes, fasten your seatbelts.

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