One of our most thoughtful clients has been watching the NASDAQ slide for the last several weeks and has come to the conclusion the market is discounting a victory by Al Gore in the presidential race. The consensus view that George W. Bush at least held his own in the first debate in Boston last night has been accompanied today with the NASDAQ holding its own for a change. There probably is something to the thesis, but I frankly doubt there is much of a connection at this point. At the same point in 1992, we were advising our clients that a Clinton victory over Bush would be good for the bond market, having observed Clinton siding with Fed Chairman Alan Greenspan in his dispute with Bush’s dreadful Treasury Secretary, Nick Brady, who seemed to think the Bush tax increase was good for the economy and that the recession was caused by the Fed refusing to inflate.
The only reason Gore got high marks last night was because of his persistence in hitting Bush with the assertion that the top 1% of the taxpayers -- those making a million dollars a year or more -- would get the lion’s share of the $1.3 trillion Bush tax cut. Press commentators gave Bush poor marks for not being able to answer the charge, except to insist the numbers were phony, which they are. Gore, like the NYTimes, relies on the Citizens for Tax Justice for his analysis. Most of the “millionaires” in the top 1% are there because of the proposed cuts in the estate tax, which clips the millionaires after they are gone. These are not folks earning a million a year, but farmers and shopkeepers or their widows who have small incomes but one-time tax liabilities when their estates are confiscated by Uncle Sam. Once Bush understands how he was mangled with this nonsense, he can clean Gore’s clock in the next two debates. What I observe about Bush is that while he may be poorly served by the people briefing him for these debates, especially his economic policy advisors, he only uses honest numbers and arguments. The Vice President really does have an “honesty” problem, spouting gibberish he has committed to memory so confidently that his fans think he knows what he is talking about. This will catch up to him between now and November 7.
The problems with NASDAQ are more related to the present happenings on Capitol Hill and at the White House. As long as I’m assured that there will be a tax bill signed by the President this year -- as I continue to be from my best sources -- I’m persuaded that there will be sufficient improvement to our capital-formation machine to feed the New Economy stocks. That means at least an expansion of the Roth IRA to $5,000 annually from $2,000. Even on that note, there is so much pressure from Democrats to cut tax rates on estates and pensions, that a prospective Gore/Lieberman administration probably would propose such measures on November 8, and the market happily would discount the potential. The difficulty we have at this juncture is that with the race so close, there are dark forces in both parties that prefer inaction now to action when their man wins the White House. Governor Bush is more or less part of that strategy, staying aloof from the maneuverings in Washington.
A separate problem for NASDAQ is the weakness in the Old Economy, which is still afflicted by the Federal Reserve’s monetary deflation. We must continue to remind you that as long as the dollar price of gold remains as low as it is, much of the exchange economy is fighting the drag of monetary deflation. All the stock indices we watch, remember, are reckoned in dollars. While internationally-traded commodity prices are the first to adjust to a monetary deflation -- i.e., a significantly lower dollar gold price -- the rest of the economy adjusts over a longer time frame. Can you imagine the Dow Jones Industrial average at 10,000 if gold were back at $35 an ounce? Impossible. Which is why I wrote on March 17, 1999, “Dow at 10,000: The Easy Part.” When gold climbed from $35 in the 1960's to $350 in the 1980's, nominal dollar asset prices also would have eventually to creep up by a factor of ten -- but only if tax progressions were adjusted. We have gone that far, at least. By the same token, though, the decline in gold from the $350 level to the $270 level will act as a drag on further advances in the dollar value of equities. Even if gold stays at $270, the promise of the Internet and New World Economy will feel the drag of adjustment in the Old World economy -- unless that drag is offset by lower tax-rate schedules that inspire/invite more capital formation.
These are problems not being addressed at all by either Bush or Gore. Debate moderator Jim Lehrer of PBS last night tried to develop discussion about how to deal with the baby boom retirees, when each will have to be supported by two workers instead of the current three. Gore’s advisors, totally trapped in the Keynesian model, only have been able to recommend a “lock box” that pays down the national debt just in time to start building it back up to finance the senior programs. Bush has a somewhat smaller lock box and tries to suggest that a bit of privatization will make up for the rest. The only solution, as we have been noting for years, is elimination of the capital-gains tax. But Bush’s chief economic advisor, Larry Lindsey, enjoys taxing capgains, and it is anathema to Gore and his advisors. There was not a hint of supply-side economics, the Laffer Curve, or dynamic scoring in Bush’s exposition last night. Lindsey also has misled Bush into thinking he took care of the Alterative Minimum Tax, which he has not, and with which Gore still could beat up on him in the next round.
As for the further drag on the NASDAQ, there remains the intellectual vacuum in both major parties -- and even in the minor parties -- in their unwillingness to face up to the floating dollar, the floating yen, and the floating euro. The world economy is pooping along, with technology straining at the bit to offset the negative forces pulling in the wrong direction. The potential dangers arising out of chaotic currencies, though, must be addressed by the world’s political leaders if we are going to see the kind of capital formation that must be there to underpin further development of the New Economy. When the Old Economy is forced to tighten its belt, as it was in the 1930's when there was an intellectual breakdown of another sort, the new wave of technology associated with the Roaring Twenties had to tread water as well. These are sobering thoughts, but so far the political risks are far lower now than they were in 1932. There are still plenty of folks around who know the way the world works and there is enough of Ronald Reagan’s legacy still alive to keep policy moving ahead, even if there is a step back after every two forward.