Tremors

I want to get in a short post about what's been happening with the stock market. There are several reasons for the recent weakness, but the main one is the Federal Reserve. The market wants and needs the Fed to stop raising rates. For the past year, I've been writing that the Fed cannot stop raising as long as oil and gold betray excess liquidity; I've been correct on that, and the "8th inning crowd" is well into a double-header at this point. I do think we may be getting close to the Fed pausing for a meeting or two---and that would be more likely with continued weakness in the stock market---but I don't see the Fed stopping for an extended period, much less lowering rates as some expect. Why? Part of the answer lies in the Fed's new mantra of "data dependent." Fedspeak translation: we need to see the data on the willingness of foreigners to buy our national debt. There are unmistakable signs of that interest waning. The dollar and gold are proxies for that interest; to cite just one example, Japan's position in U.S. treasuries is smaller than at any point in the last two years.

What's troubling is that we don't determine our own interest rates at this point. Essentially, the rest of the world is telling us that if we want to borrow to pay for preemptive wars and a reckless fiscal policy, we can---but other nations won't underwrite it on favorable terms. Think about that the next time your mortgage or credit card payment increases. President Bush gets blamed for a lot, and justifiably so. But this de facto ceding of monetary power to foreigners is an inexcusable and dangerous screw-up. It didn't have to happen.

Another factor behind the recent weakness in stocks is Ben Bernanke. When Bush nominated him last year, I expressed reservations about Bernanke's naivete. Those reservations have proven justified, as Bernanke's first few few months---like Alan Greenspan's in 1987---have been rocky. Here's a stark illustration of that. Because Greenspan lasted almost twenty years, we've come to equate the job tenure of Fed chairmen with that of Supreme Court justices. But historically that's not the case. I suspect Bernanke's longevity may be a reversion to the mean.

I'll mention one other point because it's on the radar of some sharp colleagues of mine. Right now, there are some very powerful interests who not only want but desperately need something to take the spotlight off their own misdeeds. Here's only the latest entry in what's now a long list of those bearing the brunt of public outrage over various forms of ethical misconduct. If something suddenly came along to distract the public and divert its focus elsewhere, some of those in a tight spot would no doubt welcome that. And if it happened before November, all the better. A summer of Duke lacrosse players and Florida alligator attacks won't quite cut it, will it?