At long last, we are witnessing some panic-selling in the US stock market taking the Dow Jones Industrial Average (DJIA) to 11,000 points – 3,000 points away from the peak of 14,000 points – at a two-year low.

Previously, the DJIA dropped to 13,000 points at the peak of the subprime mortgage crisis but things have taken a turn for the worse with the crisis affecting almost all segments of the housing market. The “normal” mortgage market, which includes housing loans taken from the banks, remains healthy unless unforeseen circumstances force the mortgagee to default e.g. death, injury.

As long as the mortgage is being repaid, everything is fine even though housing prices may fall. However, there is a sense of fear and panic gripping the market due to the weak state of the capital markets especially when Freddie Mac and Fannie Mae are facing possible insolvency. With total debts of more than US$5 trillion – owed to various government agencies all over the world – the repercussion of the two units going bust is huge.

It was reported that the Chinese government holds US$300 billion in US bonds while the Japanese government owns some US$100 billion of the same. At the same time, investors are not reassured by the bleak outlook of the US economy painted by Fed Chairman Ben Bernanke at the Senate meeting on 15 July. To add fuel to fire, inflation is now a very serious risk that could take the world into a recession.

Under normal circumstances, the Fed should raise interest rate whenever inflation grows but doing so will seriously hurt economic growth. When the economy goes down, the Fed will cut rates but doing so will weaken the Greenback and support inflation once more. Ben Bernanke is caught in the middle and, thus, resulting in the depressing remarks he made at the Senate meeting.

Blame can be put on high energy and food prices for the state of the inflation. It really is a problem that is hard to solve.

The situation in the Middle East is worsening, as the Iranians have refused to back off from developing nuclear capabilities. As a result, the Israelis are threatening military action against the oil-rich state which will lead to even higher oil prices – already driven high by insatiable demand from China, India, Russia and Brazil. Seeing the demand will continue to grow, speculators have played a part in driving up oil prices so much so that a bubble is being formed. This will invariably affect the global financial markets.

Food prices are also higher because of demand from the developing nations where growing affluence is evident in restaurants where food is being wasted in the form of leftovers. To make things worse, food supply have become tighter after the US and European Union have decided to use ethanol as a substitute for crude oil. Corn, which is used to produce ethanol, is the staple food of pigs and the price of pork has gone up because of higher feed costs. With most farmers rushing to plant corn instead of other crops, prices of rice and wheat, too, have increased.

We cannot help but sigh at the amount of bad news flowing into the market. The stock market is a place where falls and rebounds are a way of life. With the end of the bull comes the bear and vice versa.

The Bull Run ended last October when I warned everybody to leave the stock market. We are in the midst of a long bear raid. We can only wait for the good times to return.