Deflation Pressure Batters World Equities, etc.
Jude Wanniski, David Goldman and Criton Zoakos
June 17, 1992


DEFLATION PRESSURE BATTERS WORLD EQUITIES: This morning's bloodbath in Tokyo brings the Nikkei Dow to its lowest level since 1986 at 16,446, a full 40% below its 1992 high. The Wilshire 5000 index, meanwhile, has fallen almost 5% from its 1992 high, while the NASDAQ composite is down 14%. Mexico's stock index, correspondingly, is off 15% from its 1992 high. The Tokyo slide overnight appears to have been touched off by tightening action at the Bank of Japan, still trying to deflate the yen in response to the perverse demands of the U.S. Treasury. Federal Reserve policy has shown a deflationary bias since March. The fact that the DM and yen have risen against the dollar during June, rather than fallen, indicates that both the Bundesbank and Bank of Japan have erred even more than the Fed on the side of deflation. In other words, the yen and DM price of gold has fallen faster than the dollar price of gold. Using August 1990 as a benchmark, the price of gold in all three currencies -- yen, DM, and dollars -- fell below the equivalent of $350 an ounce this month. Mexico's market retreat is due entirely to the weak U.S. outlook, which is bad for Mexico's economy, and to errors in U.S. monetary policy. Earlier this year, a market updraft urged the peso above its target rate; during the past two months though, excessively tight Fed policy has put the peso under slightly downward pressure, forcing the Bank of Mexico to play monetary follow-the-leader. There may have been a slight shift of Fed policy this morning with the Fed passing instead of draining reserves. (DG)

MEXICO'S STOCK MARKET DECLINE is being blamed on Ross Perot, which is absolute nonsense. In addition to the drag of U.S. monetary policy, the negotiators of the North American Free Trade Agreement have hit gridlock, as we predicted long ago would be the case with a weak U.S. economy and a moribund U.S. government. The U.S. team is placing impossible demands on the Mexican team, on oil, agriculture, government procurement, autos, and financial services. The Bush Administration knows there is no chance that a Free Trade Agreement could be approved in this super-heated political climate. Even committed free trade GOP Senators, such as Kit Bond of Missouri, are indicating they couldn't vote for it this year. Some key people in the Mexican government, having assessed the dismal situation, are suggesting the teams negotiate without the pressure of a deadline, on the assumption that it will be easier to work things out with the next U.S. government, whether it is with Bush, Clinton or Perot. I agree with this. My current advice to my friends in Mexico is that Perot will be elected President and it will be easier to negotiate a treaty with him because he will have the confidence of the U.S. electorate and could be generous in dealing from strength. In any case, there will be no FTA until the U.S. economy moves into a real expansion, which ain't going to happen this year. Monday's outrageous Supreme Court support of kidnapping as an extension of U.S. law enforcement did, in fact, hurt U.S.-Mexican relations, but the Mexican market was already weak, for the monetary reasons cited above. (JW)

ROSS PEROT, who is soon going to be blamed for everything that goes wrong in the world, nevertheless has an astonishing lead in the most recent Electoral College Roundup by Evans & Novak. They show President Bush the probable winner in South Carolina with 8 electoral votes, ahead in Alabama (9); Delaware (3); Georgia (13); Hawaii (4); Indiana (12); Kentucky (8); Mississippi (7); New Hampshire (4); New York (33); North Carolina (14); North Dakota (3); South Dakota (3); Tennessee (11); Wisconsin (11). BUSH TOTAL 143. Clinton is probable only in DC (3) with Arkansas (6) and Maryland (10) leaning to him. CLINTON TOTAL 19. Probable for Perot are California (54); Colorado (8); Montana (3); Oregon (7); Texas (32); Washington (11). Leaning Perot are Alaska (3); Connecticut (8); Florida (25); Idaho (4); Illinois (22); Iowa (7); Kansas (6); Louisiana (9); Maine (4); Mass. (12); Michigan (18); Minnesota (10); Missouri (11); Nebraska (5); Nevada (4); New Jersey (15); New Mexico (5); Ohio (21); Oklahoma (8); Pennsylvania (23); Rhode Island (4); Utah (5); Vermont (3); Virginia (13); West Va. (5); Wyoming (3). PEROT TOTAL 376. Evans & Novak say California is wall-to-wall Perot, which means if Perot collapses nationally for some reason and still wins California, the election could go to the House. My own guess is that Perot will get stronger toward Election Day, that Clinton will win only the District of Columbia, and not even that if Jesse Jackson goes with Perot. Bush may win only a handful of states in the Northeast. He is practically signaling the voters that he is out of gas and would be relieved to turn the country over to a successor who is not a Democrat. (JW)

YELTSIN VISIT: We give Defense Secretary Dick Cheney an A+ for the arms deal he's worked out with the Russians. Remember how President Reagan was ridiculed for suggesting in 1983 that the U.S. share its "Star Wars" technology with Moscow? He was simply prophetic, as this too is part of the deal to get the Russians to scrap their ICBMs. The more SDI technology they get from us, the faster they'll move on the ICBMs. Congratulations to former DOD strategic theorist Fred Iklé and his protege at DOD today, Paul Wolfowitz. Unhappily, Treasury Secretary Nick Brady's dead hand will prevent a meaningful IMF accord with Yeltsin. Secretary of State Jim Baker has been playing "good cop" to Brady's "bad cop." We note in today's Times that Undersecretary David Mulford will insist that Yeltsin's economic team agree to his poisonous demands before he permits the IMF to turn loose its cash. The continued insistence that Russia free energy prices, which U.S. Ambassador Bob Strauss recognizes would cause economic and political chaos, suggests Yeltsin may go home with an empty bag. He'll be much better off fixing the Russian economy without the burdens of any IMF conditions. (JW)

MOSCOW SHIFTS: Finance Minister Yegor Gaidar's promotion to Prime Minister is consistent with last week's inclusion in the Russian Cabinet of three leading representatives of the old "military-industrial complex." The Western press has twisted itself into a pretzel trying to interpret Yeltsin's seemingly contradictory maneuvers, but we believe they are essential complementary pieces of one and the same Yeltsin strategy. The three industrialists who became cabinet members last week are not "anti-reform conservatives," as we're being told. They are competent anti-communist managers with long-standing credentials as pro-free market advocates who happen to have opposed the IMF since last December. Nor are they enemies of Gaidar, who personally recommended the appointment of one of the three, to whom he assigned the task of selecting the other two. There is no clash between "progressive, pro-reform" Gaidar and "conservative, anti-reform" industrialists. The only difference between the two is that Gaidar has not displayed publicly his anti-IMF feelings as the others have. Together they pushed for the privatization and bankruptcy decrees that were promulgated Monday and both aim at the privatization, during this summer and fall, of the bankrupt, obsolete and technologically primitive smokestack industries. Both are committed to preserving the integrity of those productive enterprises associated with the old "military-industrial sector" that are technologically advanced and competitive -- which they intend to privatize only under conditions that will not allow their takeover by hard-currency rich non-Russian interests. (CZ)

DEAR CLIENTS: For those of you who have not been with Polyconomics in previous election cycles, I assure you that I am not a Perot supporter, per se. I have not even made up my mind to vote for him. If I did, our analytics would be compromised and you could no longer trust my judgement. This is why I have never accepted the business of a politician or political party. I have to be able to tell you at a moment's notice that my reading of the situation has changed, as I am well aware that, in the aggregate, you are responsible for managing almost $2 trillion in assets. I can say I am a Perot admirer and would vote for him if the election were held today. Most of you are still concerned that Perot has a tendency toward protectionism and national industrial planning. This remains the case, but his preference is a free market solution, which did not appear on his scope until he encountered Ted Forstmann's views on creative public finance. We are watching Perot from that perspective and have seen steady progress, which increases our confidence in our political forecast. We will note retrogression if and when it shows up. Remember, he has 180 degrees on the compass to play with, as both Clinton and Bush are headed in the wrong direction. (JW)