A Dow Breakout Possibility
Jude Wanniski
October 17, 1991


President Bush is about to get behind a growth package which his White House team is designing today with GOP congressional activists. It is likely to feature a more aggressive posture on capital gains than the Administration has ever before exhibited. We suspect this is in good part the reason for the surge in the Dow index this week, more particularly the even greater surge in the low-cap NASDAQ stocks. The Clarence Thomas victory in the Senate Tuesday has infused the President's White House team with a confidence that is astonishing supply-side GOP legislative aides on Capitol Hill. Chief-of-staff John Sununu yesterday met with GOP administrative assistants on the Hill and vowed that the President would fight as hard for the growth package they will soon produce as he did for the Thomas nomination. I talked late last night with House Minority Whip Newt Gingrich, who with other leaders is meeting this morning with the President and Mr. Bush's economic advisors. Gingrich says he believes the mood has changed considerably in the last several days and that he believes the Administration is on the threshold of dramatic action on the domestic front. I spoke to one of the most important senior White House policymakers late yesterday afternoon, who also indicated there is now a very sharp focus on the economy and the most serious discussions of what kind of legislative vehicle to adopt. He indicated the "horse race" metaphor that I recently developed is circulating at the senior staff level and is "the strongest argument for cutting the capital gains tax I've ever heard." He agreed that once you accept the logic of the argument you are led to the conclusion that a zero rate is optimum. Newt Gingrich last night reminded me that two years ago he tried to persuade me to support a zero rate and I argued for a 10% rate, based on advice I'd been getting elsewhere, before I had completely thought through the issue myself. My guess is the White House will propose a 15% rate for now, to get the economy moving, and will consider discussing a bolder program in the 1992 election campaign.

The growth package will also surely include an extension of unemployment benefits, a scaled-down version of the one the President vetoed, enabling the President then to assert that he wants to provide for those on the unemployment lines, but also wants his growth package to dramatically reduce the unemployment lines. The White House team is also keen on the Gramm-Gingrich "Peace Dividend" legislation, which would direct Pentagon savings to deficit reduction and an increase in the personal exemption.

If the White House is as serious as it now indicates, a new policy initiative would be felt immediately in both the stock market and the bond market. We continue to believe the 30-year bond could see a 7.5% yield by year's end, especially if the markets are generally impressed with a new fighting spirit at the White House. We've pointed out a number of times that we would not be optimistic about a robust recovery in 1992 until we saw the DJIA in the 3300-to-3500 range. These certainly would seem to be plausible near-term objectives if the Administration really does have its act together. The remaining question mark is Treasury Secretary Nick Brady, who one participant likens to a fellow hanging on to the fire hydrant while the rest of the team tries to pull him down the street. Nevertheless, we are feeling very bullish this morning.