by John M. Curtis
(310) 204-8700

Copyright April 21, 2005
All Rights Reserved.

aking the best case for why President George W. Bush's Social Security privatization plan won't work, the stock market's wild swings take the breath away from even seasoned investors. Panic selling followed by frenzied bargain-hunting have become all too common in a market increasingly manipulated by programmed trading. Small investors have nothing to do with Wall Street's wild gyrations, too often driven by day traders and fund managers looking for bargains and fast profits. While there's lots of good and bad news blamed on frenzied buying or selling, any excuse—no matter how feeble—can be used to explain wild swings. “You're seeing strong earnings numbers . . .” said Jay Suskin, head trader at Ryan Beck & Co., explaining an explosive rally, ignoring yesterday's panic about inflation, especially spiraling oil prices threatening to take down the economy.

      Investors still recall the market meltdown associated with the “dot-com” bubble in 2000, liquidating $3-trillion in corporate and personal wealth. While there's nothing wrong with stock market investing, there's something very wrong with tying Social Security—no matter how small the percentage—to Wall Street. Bush talks about Social Security's meager returns but he doesn't mention cataclysmic losses when markets crash. You can't retire or pay for college when broken investments take years, if ever, to recover. Billionaire investor Warren Buffett frequently asks investors to set long-term horizons, sometimes 25 years, to weather the stock market's incalculable ups and downs. Tell that to the retiree or middle-aged family when it's time to stop working or pay for a college education. While it's safer to invest during rising or bull markets, it's also next to impossible to forecast downturns, even for “gurus,” giving cheap advise on cable TV or over the airwaves.

      Today's economic volatility stems, at least in part, from runaway oil prices. It's ludicrous ferreting out energy prices from today's inflation rate because energy prices, especially fossil fuels, exert a ubiquitous effect on the economy. Prices jumped 0.6% in March, over 7.2% on a yearly basis. No consumer subtracts out 0.2% for food and energy to calculate “core” inflation. Despite today's rally, there's no end in sight to spiraling oil prices, punishing all industries, especially those dependent on transportation—which is almost everything. It's costs roughly $400 to drive one-way cross-country. Is it any wonder that major airlines selling cross-country round-trips for around $300 are losing their shirts? Bush has a plan to drill in Alaska's National Wildlife Reserve [ANWR] but he has no plan to stop Wall Street's petroleum traders from bidding oil into outer space.

      Former President Jimmy Carter found out the hard way what happens when oil prices get out of control. Whether it was blamed then on the Organization of Petroleum Exporting Countries [OPEC] or today on China, can't hide the fact that publicly traded oil companies make astronomical profits with rising oil prices. Why does the federal government through the Federal Energy Regulatory Commission [FERC] have a vested interest in regulating the power industry but ignores completely the petroleum business? Spiraling oil prices threaten a repeat of the runaway inflation that paralyzed the economy in the late ‘70s. “The Federal Reserve is having to walk a very fine line now, hoping to keep growth continuing but acting to keep inflation in check,” said Lynn Reaser, chief economist at Banc of America Capital Management, pointing to Greenspan's latest tightrope act.

      Today's volatile markets reflect uncertainty stemming from spiraling oil prices, rising interest rates and what looks like an unending war in Iraq. Whether justified or not, the Iraq war—and the global war on terror—now threatens the U.S. economy, taking far too much cash out of the federal treasury. Massive military expenditures, while benefiting some industries, hurt the overall economy by driving up budget deficits and hammering the U.S. dollar. A falling dollar has ballooned the trade deficit and driven foreign capital out U.S. investments, including U.S. treasuries, forcing Greenspan's hand to hike short-term interest rates. Driving up rates, in turn, helps the bond market but throws cold water on stocks, hurting business expansion and economic recovery. As long as Greenspan keeps hiking rates, the stock markets will continue moving sideways and lately downward.

      Caught between a rock and hard place, Greenspan can't stop spiraling oil prices or the current drain on the U.S. treasury caused by the war in Iraq. Hiking rates is bad medicine for the stock market. It may increase the dollar's value or make U.S. treasuries more attractive but it hurts economic expansion. Today's inflationary pressures stem directly from runaway oil prices, caused more by Wall Street traders than global petroleum supplies. Bush's current energy policy allows oil companies to run amok. Drilling in ANWR or increasing domestic production doesn't rein-in Wall Street's oil traders, currently driving prices to the moon. Allowing mega-mergers like Chevron-Texaco and Unocal reduces competition leading to higher prices. Before Wall Street, Greenspan and inflation can make peace, Bush will have to find a better way of bridling the oil industry.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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