February Upbeat Jude Wanniski February 12, 1991

THE GULF WAR: President Bush's decision yesterday to delay a ground engagement in Kuwait was welcome news here and may have contributed to the euphoria on Wall Street. Edward Luttwak, who is one of our favorite military analysts, has been persuasive in arguing since the war began that no ground war will be needed if only the air war is conducted properly. That is, he believes if the coalition would concentrate on interdicting the supply lines to Iraq's force of a half million men instead of trying to bomb them to bits, he believes it would only be a matter of weeks before they run out of food and water. Yes, Saddam Hussein had five months to stockpile supplies near his troops in Kuwait, but Luttwak advises us his sources do not believe the stockpiles were sufficient to last more than three weeks without convoy resupply. It takes an enormous amount of food and water to sustain 500,000 soldiers. Only in the last ten days has the air campaign put its attention more directly on the supply convoys, as best as he can tell. The several hundred Iraqis who have given up have been parched and famished. If Luttwak is right, and supplies are now dwindling, the number of soldiers giving up should increase on an ascending curve. It's my thought that we should now consider a limited bombing pause of one week, to give the Iraqi military commanders time to consider giving up en masse. That is, we should pause in the strategic bombing of Iraq and announce that only supply convoys and SCUD launchers will be targeted for seven days, to give the military professionals the option of surrender instead of starvation. Having won every round in this fight, it would be a sign of humanity as well as strength. There would be nothing to lose that I can think of and it would be positively received throughout the Islamic world. If it doesn't work, we go back to bombing. Luttwak likes the idea.

THE BULL MARKET: As Floyd Norris of The New York Times pointed out in his financial column Monday, the low cap stocks are having their best rally in a decade, the NASDAQ stocks now up more than 23% in only five weeks. I have chided Norris on his failure to mention that in the first two weeks of January the NASDAQ stocks were falling with widespread reports that the capital gains tax issue was "dead, dead, dead," as the President supposedly agreed not to bring it up again. The low cap stocks have most of their capital gains in front of them. I pointed out to Norris that the situation had turned around with reports that White House Chief of Staff John Sununu was trying to get it into the State of the Union message. My "Washington Report," 1-10, contained the first positive comments I could muster in several weeks, including the fact that Sununu had patched up his feud with Rep. Newt Gingrich, and that "the guessing is that the President will almost surely restate his support for capgains in his State of the Union message." It's my firm belief that a substantial part of the rally is capgains, the markets believing the Greenspan Commission, with the solid support of Sununu, will deliver what Richard Darman and Nick Brady could not. If I am right, and somehow the process falters, we would of course expect to see the NASDAQ stocks tumble. The 71-point move yesterday, which had the DJIA outrunning the broader market, was probably more directly related to the war and the general worldwide relief that the U.S. is not hellbent on engaging Iraqi ground forces anytime soon.

MONETARY POLICY: The financial press is uniformly attributing the bull market to an easier Federal Reserve policy, even though the monetarists, the President and the Treasury Secretary continue to complain the Fed has not been easy enough. In our book, the Fed gets credit for not being easy. It has carefully followed interest rates down with the recession. The Fed governors should be delighted and may even be surprised at how neatly their attention to commodity prices and gold has paid off, with the steady gold price feeding confidence back into the long-term bond market. The dollar is said to be falling, but of course it has been "as good as gold." It is the Bundesbank that has been making the kinds of foolish errors the Volcker Fed made repeatedly in the early '80s. Its president, Karl-Otto Poehl, no doubt remembers how nice it felt when the Deutschemark appreciated against the dollar in the '70s and how it should be a good thing again. He does not realize that back then the dollar was falling against the Deutschemark and gold! All he is doing now is deflating the DM, flattening DM creditors, and worst of all, pulling the rest of the EMS and the United Kingdom on this foolish deflationary ride. Just when the U.K. decided to hook up with the ecu, on the assumption that the Germans were better at running money than the Americans, it is the Greenspan Fed that is outperforming the rest of the world. As David Goldman points out, we should soon see that the anguish Poehl is causing will bring a political reaction throughout Europe that forces him to reverse himself. The dollar will get the last laugh, we are betting along with the bond market.

MONETARISTS AND CREDIT CRUNCH: Professor Alan Meltzer of Carnegie Mellon, Professor Milton Friedman's heir apparent as Monetarist Guru, advises us in The Wall Street Journal, 2-8, that "There Is No Credit Crunch." Banks aren't sitting on idle reserves, he says, which means they must be lending money to someone!! Or, he mentions quickly in passing, they may be buying Treasury bills. (Psst, Alan, they are buying Treasury bills.) Dr. Meltzer also praises the Fed for having shown restraint in the past, and concludes that now is the time for the Fed to throw caution to the wind and print enough money to,get M-2 up to snuff. Some Guru, eh?

BUSH'S NEW SPEECHWRITER: We have been crossing our fingers and saying our prayers for weeks, and maybe it helped: John Sununu has hired Tony Snow as the President's chief speechwriter. This alone will be worth a few hundred points on the DJIA and even more on the NASDAQ, as Tony is a bona fide, no-holds-barred supply-sider, who many of you met at our supply-side festivals the last two years in Boca Raton. Tony has been the editorial page editor of The Washington Times for the last three years. He was previously the protege of Tom Bray, editorial page editor of the Detroit News. Bray, in turn, was the protege of Robert Bartley, editorial page editor of The Wall Street Journal, who many of you will meet again at our supply-side festival in Puerto Rico later this month. Bartley, of course, presided over the Genesis of Supply Side. In case you miss my point: Sununu would not be stockpiling lethal weapons like Tony Snow if he did not intend to use them, nor would Tony Snow sign on to a kinder, gentler cruise in the spirit of bipartisanship, if it meant giving up the growth agenda. William Safire of The New York Times, who was Richard Nixon's chief speechwriter, knows what's up, as he devoted his entire column yesterday to young Mr. Snow. One bit that Safire did not mention: The two people who had the most to do with drumming House Speaker Jim Wright out of office were Newt Gingrich and Tony Snow.

SOVIET PROJECT: For almost two years I've been talking to officials of the Soviet government about a joint economic project with Polyconomics, built around the ideas Federal Reserve Gov. Wayne Angell and I developed in 1989 on how to get perestroika up and running with a convertible ruble. With the country now in an utter mess, it is beginning to look like Moscow might turn to Morristown out of desperation. This past week, Deputy Foreign Minister Ernst Obminski, an academic economist for most of his life, who is now President Gorbachev's chief emissary to the international financial institutions, asked me to prepare a formal proposal to Prime Minister Valentin Pavlov. Minister Obminski, who I first met last April, believes in the approach enough to have offered to recommend it to Pavlov and to offer to captain the Soviet team in the joint project. I've asked the WEFA Group of Bala Cynwyd, Pa., and the Hudson Institute of Indianapolis, to be part of the U.S. team. The Soviets would cover the ruble costs of the project. We would raise the dollar costs from multinationals interested in an up-and-running USSR economy. With a little supply-side help, Gorbachev may yet pull victory from the jaws of defeat. If all goes according to plan, Lithuanians will be pleading to stay in the USSR federation to share in one of the Biggest Booms of the Century. Stay tuned.