A Lovely Sell-Off
Jude Wanniski
July 6, 2001


You may recall a memo of April 14, 2000, where I reported going out to dinner with my wife Patricia to celebrate with a champagne dinner, even though my personal portfolio had declined that Friday by more than a million dollars. The good news was that my analytical framework had worked for me again, as I had a month earlier warned of a tax selloff that would end on the 14th, the last day to postmark your IRS payment without a penalty. In that Friday memo, I advised that Monday would be safe to get back into a buying mood, because the cause of the selloff was behind the market. In a real sense, I had bet my reputation, my career, my business on the call, which is why the Friday selloff called for champagne. If you remember, the following Monday produced a huge rebound, one of the biggest run-ups in Wall Street history.

So it is with the market decline today -- not that I am saying it is safe to buy, but because Congress comes back into session on Monday. The entire government returns from its Independence Day mini-vacation, and it is feeling the heat from the prospect of a serious recession moving deeper and deeper into the economy. A few other economists who had strung along with my deflation argument for awhile recently backed away, thinking the tax rebates and interest-rate cuts would reverse the weakness. From what I can tell, President Bush still does not have a clue as to what is going on, and I now doubt that Vice President Cheney or Treasury Secretary O'Neill have let him in on the deflation scenario. O'Neill's performance in recent days tells me he has been sold by Alan Greenspan that the Fed has not been responsible for this mess, and in any case prosperity is just around the corner. Today's jolt may also help O'Neill get off his Greenspan fix.

Enjoy the weekend. The selloff is what we needed to get the political and financial establishment to sit up and pay attention. Of course, it may take another round or two to get policy change. I would really be worried if I thought the solution was a difficult one, like peace in the Middle East, but the solution is easy, requiring only a small change in monetary targeting by the Greenspan Fed. This means Preisdent George W. Bush has to get off the golf course and start asking some serious questions of his economic team, but the raspberries from Wall Street will definitely help.