What Next?
Jude Wanniski
April 14, 2000


I'd been tempted all day long to write this brief but decided to wait until the market had closed. If I had been wrong in my March 30 hypothesis that the market was selling off because of millions of Americans scrambling to pay tax liabilities on their huge 1999 capital gains, today would have been a nothing day. My net worth is down considerably since March 30, if it is any consolation. I don't manage any of my own money. And until I saw the mad rush this week culminating in today's carnage, I could not be sure I was right. There is now no doubt in my mind that this selloff has been almost entirely a result of the tax consequences of 1999. Which means we've hit bottom, as there is no way taxpayers can sell stock on Monday to meet 1999 liabilities, even with extensions on filing.

This situation has never confronted the stock market.... ever. Which is why it is such a surprise to the world. In earlier periods of history, where there have been paradigm shifts from Old Economy to New Economy, tax rates were much lower. The transition from brick-and-mortar enterprise to a street-of-dreams was also extended over several taxable years. The folks who were cashing in last year on their gains, to buy this or that or pay estimated quarterlies, of course believed they would be able to sell off a little of this and a little of that in March and April to meet their tax liabilities. It is human nature. The market can't discount this kind of behavior. We'll now see the really topnotch analysts discover the hidden state and local tax glitches that compounded the problem -- as in many states people are finding their state liabilities exceed their federal, because of state piggybacking on federal returns, except of capital gains.

If I were managing my own money, folks, I would jump in on Monday. The pattern should follow 1999's when the bottom was hit on April 16 and jumped from there when mass selling pressure was removed. How fast will recovery occur from these lows? That depends on our political class, and how they interpret the events of the last few weeks. If my hypothesis is brushed aside and the wise guys decide it was Greenspan threatening to ratchet up the funds rate, the debate will go on and on about whether the Fed should do this or that. Much better if our "leaders" understand the noxious effects of capgains taxation and the threat to the Internet of taxation of any kind in the next few years.

The talk shows will be most interesting on the weekend. I'll try to watch all of them and report on Monday.