An Overcooked Bear?
Jude Wanniski
June 24, 2002


If there were NO lights at ANY of the tunnels that go in and out of Wall Street, we could see the bear continuing to cook at these levels approaching 9000 on the DJIA and a 1400 NASDAQ. For one good reason alone, the light has at long last lit up in the monetary tunnel. There is not only no deflationary drag at 9200 or 9300, but a whiff of breeze at Wall Street`s back. The Federal Reserve could mess things up in other ways, by deciding the whiff is sufficient to cause a series of rate hikes from the 1.75% level. But unless Chairman Greenspan experiences "senior moments" as the year unfolds, he will leave the funds rate alone. With gold at $325 and still tending up a bit, one big macroeconomic lever is now working for the markets and not against them. Market analysts who have nothing better to say about the equity swoon of recent weeks are insisting the "trade deficit" is the problem, causing a "weakening of the dollar" that is spooking equity investors. Pish tosh. There is no relationship between currency valuations and trade flows. None. This was almost the first lesson I learned from Art Laffer in 1971, and experience has proven it to be absolutely accurate. The dollar/yen rate is the intersection of the monetary errors of the Fed and the Bank of Japan. The dollar and the yen have both "weakened" against gold since January and one has a trade deficit and the other has a smaller trade surplus.

Can tax rates be pulling down equity values? We mean higher explicit tax rates and a higher "terrorist tax." The answer is yes, but that`s why the gold price is at $325 and not $300. As the gold  market assesses liquidity errors by the Fed – not draining when it should, not adding when it should – it takes into account the threats of monetary inflations or deflations. It does not discount twice. This is why we are more sanguine about the market bottom being close at hand and a market top being somewhere not far above 9500 DJIA and 1500 NASDAQ.  These are the other macro possibilities, which exclude the micro forces that are constantly in motion. When a company like Enron causes a great kerfluffle in Washington, the risks that Washington will take ACTION to prevent further Enrons increase, and with them the cost of doing business.  When CEO`s make headlines with their megamillion compensation packages, chances increase that tax rates will go up from where they are supposed to go from past legislation, and this must spook the markets too. As for the weak earnings in corporate America discouraging investors, we think the mix coming in is justified at the moment, as the real economy does begin to creep ahead.

It is still ugly out there, especially with the potential for further violence in the Middle East, violence that would spill into our homeland in ways the FBI, CIA and Tom Ridge will be helpless to stop. Sen. John Kerry [D MA], an interesting presidential hopeful, was the star of the weekend talk shows because he did such an expert job of carving up President Bush, who can`t seem to decide from one day to the next whether to act on the Pentagon`s advice or on the advice of State. White House dithering does play into the hands of the Sharon Likudniks, who want nothing more than delays. Kerry also surprised me by arguing the Israelis should pick up where the negotiations left off prior to the last elections, at Taba, Egypt, not at Camp David. No dithering there, but a bold step, which opens up lots of space between Kerry and the other Democratic hopefuls, Joe Lieberman among them. If the President also finds his footing in the Middle East, more lights will come on at the end of more tunnels.