While the Dow hit 14,000 it has been retreating heading toward 13,000. I think a lot of people lusted after that nice big round number and sold like crazy cashing in for a profit.
It also looks like a bunch of people have freaked out about it and are selling because “everyone” is selling.

If you haven’t seen Jim Cramer’s meltdown, it’s worth seeing. Jim is a perma-bull, he always says the stock market goes up. In general he may be right but there are obviously corrections from time to time that definitely go down. We are seeing that right now, it looks as though the Dow is heading for 13,000 as people reevaluate the market.

I’ve read up on this a little and the big thing that Jim is complaining about is the Federal Reserve’s (the Fed) policy of printing lots of money but not so much that it causes too much inflation. The Fed has been scared of high inflation since the Jimmy Carter era.

There are two big markets that the The Fed are trying to balance: the stock market and the housing market, actually they are linked. Mortgages have been packaged into debt instruments and sold on the stock market. While Jim Cramer’s buddies may be big into the stock market most voters are in the mortgage market. At a guess I would think Congress would tell the Fed to concentrate on the mortgage market since we are coming up on an election year. So the mortgage market may remain pretty stable until 2009 then things may get really interesting.

There is a complication however. The Chinese have been buying a lot of US T-bills, which is financing a lot of this stuff, and when Congress started debating over possible protectionist policies toward Chinese goods, because of those poisoned toothpastes, toys with lead paint and the rest China said “Who buys all your debt, again?” This could be a little bit interesting as China has enough T-bills to drive up our inflation rate at least for a short while.

I don’t know that would help them really as we buy almost everything they make. While the Chinese are getting more prosperous they can’t exactly sell all that stuff to their own people, they just don’t have a large enough techno-literate class to buy iPods, internet frigs and all the rest.

Is it an empty threat? Not exactly. It depends on if they can count the cost or think the cost is worth it. They do have a burgeoning middle class that is calling for more freedom, a trade war would be very bad for them but the ruling class may just want that.

On the whole we can expect a rather bearish next few years.