All the nervous market talk is monetary these days. Will the Fed hike the discount rate in order to "cool off" an "overheating" economy? Is the dollar rally over? Which way will the Dow head as bulls and bears argue about interest rates?
Yes, we worry about Alan Greenspan's latent fear of economic growth, his concern that too many people at work is inflationary. But not all that much. The Fed has been deftly managing the levers at its disposal. Monetary policy, we think, is currently the tail being wagged by the trade bill, a real dog that is throwing a shadow over all the markets. We recall that Fed Vice Chairman Manuel Johnson told the Cato Institute last year that passage of the trade bill would force the Fed to tighten. Sure, the bill as it now looms is not as obviously protectionist and destructive as the one Johnson was addressing a year ago, but it is still bad enough to worry him and other Fed governors. It remains our view that the market crash last October was tied to both the trade bill's enhanced prospects and the Treasury's reckless dollar policy. The fact that the trade bill is hardly being mentioned in the press only adds to the surprise of investors and policymakers at home and abroad when they learn it is rumbling down the pike, and that it is not the innocuous bill the White House says it is. The market peak in June came with the successful veto of the trade bill. The July slide coincides with its resuscitation.
There's still a chance, of course, that it could be throttled by election-year politicking. If the plant-closing bill is vetoed and the veto sustained in the House, Senate Majority Leader Byrd indicates it might be slapped back into the trade bill. The President has until August 3 to decide on a veto and whether or not to be serious about it; there are rumblings from some of the Bush people that they'd just as soon avoid a fight on plant closing. Sad stuff. A sustained veto on plant closing would be a positive event, signaling the President and Bush and Jim Baker are prepared to call Byrd's bluff and lose the trade bill. If the trade bill is delayed until after the August recess by these maneuvers, that too would be positive. JBIII will be less fervent in his trade bill advocacy once he leaves Treasury (any day now). He'd be less tied to the deals struck by Clayton Yeutter on the Super 301 provisions, the worst of the lot, and would be less likely to oppose Bush's support of the Wallop Amendment, which is now in the works (you should be reading about it in the papers shortly). Senator Wallop would fix Super 301, avoiding the dangerous transfer of trade power away from the President. In the short run, the outcome should be worth at least a few hundred points on the Dow, in either direction. This would of course impact the presidential campaign, a climbing market boosting Bush's prospects.
The plant-closing bill and the trade bill are both anti-capitalist in nature. The longer-term impact of this struggle could mean the difference of a thousand points on the Dow in the next five years or so (3500 vs 2500). Granted there is nothing scientific in these numbers I'm throwing around, simply a bottom-line hunch on where one line or another will lead, everything else being equal. The fact that the national press corps has been incredibly negligent in reporting on the trade bill, its particulars and status, doesn't mean it isn't of vital importance to the future of the world political economy. The press corps in 1929-30 was just as blind to the significance of Smoot-Hawley.