Commentary

Market Meets Reality

The stock market met reality yesterday – it did not go well. Record high oil prices and a warning about inflation form the Federal Reserve smacked sobriety into U.S. investors. Oil traded at $135 a barrel and the minutes from the Fed’s late April policy meeting implied that further interest rate cuts are unlikely due to rising prices for goods and services. This bad news comes at a time when the economy is already feeling the bite from the bursting of the massive housing and the even larger credit bubble. Job losses are mounting and real wages are falling – and that is not good for anyone.

For the past few weeks, stock prices were merrily marching higher – avoiding reality. Investors were ignoring the continuing demise of the housing market, weak retail sales, paltry consumer confidence readings and pitiful numbers from the labor market. Now, global inflation is handcuffing the Federal Reserv’s ability to deliver monetary stimulus to the economy.

Consumption – some would toss “mindless” before this word – drive this nation. By most estimates, it accounts for approximately 70 percent of economic activity. For years, consumers borrowed heavily against their homes, or just outright, in order to fill their lives with shiny things. Now their homes are no longer assets from which to borrow against, but liabilities from which to run.
And despite the Federal Reserve’s feverish interest rate cuts, credit is getting harder to come by.

Now inflation is gathering steam. Oil and food prices are reaching record high levels, leaving consumers with less money to spend at Malls and fast food restaurants. A vicious cycle is developing. Higher prices lead to lower spending levels, which reduces profits and employment, driving spending lower still.

Wall Street may finally be realizing what is finally happening on Main Street. The reckless idiocy of the banking and investment community, coupled with debt-driven consumption, brought us the housing and credit bubbles, which are now imploding. But the Wall Street party could easily last several months longer – with the final round of drinks served this fall.

© 2008 Splendid Marbles.