Gah!

What is going on?

The Dow Jones, the main US share index, reached another record high as it breached the 13,900 mark on Friday - a day after setting a fresh record.

The Dow Jones index of blue-chip stocks closed up 45.52 points, or 0.33%, at 13,907.25. It had earlier reached a new intraday trading high of 13,932.29.

But then:

US retail sales unexpectedly dropped by 0.9% in June, a report from the US Commerce Department says - their biggest decline in almost two years.

Sales were down 0.4% even without the effect of a slump in the car market, the cause of much of the fall.

Yet Tony Snow is telling us:

To walk out of Iraq right now would plant a seed that ultimately would lead to destabilization there, hundreds of thousands of deaths, loss of our influence in the region, would create instability throughout the Middle East throughout East Asia, throughout Europe. And sooner or later it would come to our shores, to a shopping mall near you.

And Bush is saying:

It's better to fight them there than here. And this concept about, well, maybe let's just kind of just leave them alone and maybe they'll be all right is naive. These people attacked us before we were in Iraq. They viciously attacked us before we were in Iraq, and they've been attacking ever since. They are a threat to your children, David, and whoever is in that Oval Office better understand it and take measures necessary to protect the American people.

I don't know whether to buy stocks, sell stocks, go shopping, or drag out my box of plastic wrap and duct tape....

A snowball rolling down a hill

And getting bigger all the time:

Ben Bernanke, the Federal Reserve chairman and the man who controls the central bank strings, made a game effort to explain the numbers to legislators here this week.

The big demographic bulge known as the baby boomers is getting ready to retire, he noted. Meaning they will start to collect social security, and will likely require considerably more medical attention.

Those two items represent an unfunded liability that can also be measured in the trillions, and no one has done a thing to prepare for it.

Bernanke delivered a simple lesson about the public ledger sheet. Basically, that the money has to come from somewhere.

Either taxes have to go up, and considerably, or spending has to be slashed on an unheard-of scale. Keep borrowing, and the public debt balloons so fantastically it becomes an unmanageable fiscal crisis.

"This is sort of like a snowball rolling down the hill," said Bernanke, striving for a metaphor to impress a panel of skeptical politicians. "It's already a pretty big snowball, but it's going to get a lot bigger a lot faster."

And:

A lot of wags have noticed that for the US stock market, bad news is frequently treated as good news. Unemployment is up, or industrial production is down, and stocks rally (due to attendant possibility seen in these reports of upcoming Fed interest-rate cuts). However, when major financial institutions have what are delicately called "liquidity issues" (ie, their loans aren't being paid back - they have no income), that is always bad news. What if the bank defaults, declares bankruptcy? Other banks that it had borrowed money from now won't be getting paid back, they'll lose whatever income stream they were receiving from the first bank. The same with that bank's creditors, and then other banks and so on.

This kind of cascading financial catastrophe is often called a "contagion", and with good reason. Like a virus, it can spread and bankrupt the entire financial system. It almost did in 1998, during the LTCM hedge-fund crisis; in 1929,in an era when the worldwide financial system was far less globalized and integrated than it is today, after the Great Crash it actually did, and so initiated the Great Depression of the 1930s.

Is it over? Not necessarily. Two little-known indicators that more investors should be cognizant of are what are called the VIX and VXN indicators. (Put these letters in the stock symbol line of your quote website; they should come up - watch how their values move inversely to stock prices.) Technically, what these two indices measure is what is called stock-option volatility (stock "beta", in jargon), but what they really tell smart investors is just how much fear there is in the markets. When these levels get very high (roughly above 30 in both indices; after the selling caused by the Enron corporate-management scandals of 2002, the VXN actually topped out over 70), it indicates that the market has seen so much fear-driven panic selling that, by the rules of what is called contrarian investment philosophy, stocks are due for a turnaround. As of the first weekend in March, neither index had reached those extreme levels.

So it's not China. It's not Nancy Pelosi, it's not the Easter Bunny, nor is it the War on Easter. It has been said that all market psychology, all market movement, is a continuous oscillation between the mental polar opposites of optimism and pessimism, between greed and fear, between Pollyanna and Cassandra. Since at least the market rally that started in early 2003, optimistic Pollyanna has ruled the markets, and greed has run rampant. As the markets wait for Fed chairman Ben Bernanke to put on his best Donna Reed mask to bail out the subprime lenders with the Bailey family's honeymoon money, Cassandra and her fear are ruling the day.

And:

While the most recent slump was set off by a 9.2 percent plunge in the Shanghai and Shenzhen 300 Index on Feb. 27, U.S. shares have been hit by concern economic growth will slow.

Last week, reports showed that in January new-home sales dropped by the most in 13 years, while the economy also expanded less than initially estimated in the fourth quarter of 2006.

Alan Greenspan, former chairman of the Federal Reserve, weighed in by saying profit margins at U.S. companies are peaking and the growth cycle is in a mature phase. He also said there's a ``one-third probability'' of a U.S. recession this year.

Meanwhile, delinquencies and defaults on subprime mortgages, or home loans made to people with limited credit records or higher debts, are at the highest in at least seven years, a Feb. 22 report by Barclays Capital showed.

``We were just due for a correction,'' said Steven Folker, who helps oversee $3 billion as managing director at Fifth Third Asset Management in Cincinnati. ``We may not have seen the worst'' of the slump.

Wheeeeee!

Update: Yen carry trade:

NEW YORK (CNNMoney.com) -- As investors wonder if the global market selloff is reaching a bottom, economists are keeping a close eye on one big trading bet that could send more seismic tremors through Wall Street.

For more than a decade, investors have profited by borrowing yen at ultra-low interest rates and using the funds to buy higher-yielding investments based in other currencies - known in Wall Street parlance as the yen carry trade.

But last week's market swoon has brought risk back into focus, and a number of these borrowers have been unwinding those trades lately.

"There's been complacency and under pricing of risk across the board," said Nouriel Roubini, chairman of Roubini Global Economics, a research firm. But now many big investors, as well as policy-makers, are bracing for more volatility in the markets, he said.

Bush's people

The haves, NOT the have-nots:

Yes, these were Bush's people: the masters of finance, agribusiness and the military-industrial complex and they had reason to cheer. Never mind that the number of young women and men killed in the war in Iraq had reached 3,092. Never mind that hundreds of thousands of people had taken to the streets of Mexico City because the new economics of corn production has driven up the price of tortillas, threatening their livelihood; that they were demanding that revision be made in the 'free trade' agreement that made it possible for the U.S. traders to raise the price to control a large portion of their food market. Never mind that when the new U.S. employment figures were released two days after hoopla on the trading floor, unemployment had held pretty steady but the joblessness rate for young African Americans in January reached 29.1 percent, up from 26.2 percent in December, even though black unemployment overall had declined somewhat. Never mind that with our economy, considered to be the engine for the world economy, we cannot marshal the resources necessary to guarantee the people, whose lives were disrupted and decimated by hurricane Katrina, that they can once again live in a viable community. Or that the President, who once promised a post-Katrina 'Marshal Plan', can give a State of the Union address and not mention New Orleans.

Yes, for those cheering on the Stock Exchange floor, the economy is doing well. The problem is that the high profits being engendered are not being shared proportionately. There is what the Nation magazine termed, 'The destructive inequalities embedded in our supposedly healthy economy' and increasing economic insecurity of the country's working people. The President is acutely aware that as he tries to shift the public debate from his disastrous foreign policies to the resilience of the economy, the inequities of the returns hangs over anything he may say. He is aware that there is widespread public recognition that the policies he has pursued have – to put it simply – benefited those who need more money the least rather than those who need it most. That extends from his tax cuts for the well-to-do, his healthcare plan, which is really a new tax on working people, to his latest schemes to reduce Medicare benefits.