A Nice Summer Rally Jude Wanniski July 29, 1992

There are several things happening at once to give the stock and bond markets encouragement:

1. It has begun to sink in around the world that Fed Chairman Alan Greenspan's very important congressional testimony last week has elevated the price rule of Price Level Targeting (PLT) and demolished the quantity rule of monetary aggregate (M) targeting. This is a clear milestone on the road to a commodity standard. In other words, the global market for U.S. dollar assets no longer has to worry that this Fed board of governors will make inflationary errors based on a misreading of money-supply numbers, M-1, M-2, or M-3. Greenspan made it absolutely clear that these numbers mean nothing as long as it is impossible to predict monetary velocity. His argument is that the yield spread is as wide as it is because the markets are worried that (some future) Fed will monetize the national debt, but that, by God, they need not worry about this one. This emphatic reassurance in itself is worth plenty on the long end of the bond market, as the dazzling rally we are now seeing demonstrates. Our forecast in January of a long bond in the 6-6.5% range by year's end was based on our assessment that Governor Wayne Angell's PLT strategy would prevail. The bond market sagged when Angell seemed to retreat from his own position, but he and Greenspan are now back, without any question, on this extremely positive track.

2. As we argued last week in "Where Do We Go From Here?" the departure of Ross Perot instantly made the Reaganauts critical to the President's re-election prospects. Instead of assuming victory without owing anything to Jack Kemp & Co., the Country Club Republicans who run the White House now desperately need the growth wing of the GOP if the party is to have any chance of closing the enormous lead Governor Clinton and the Democrats have opened up.

3. The single most important step the President could take along that path would be to index the capital gains tax against inflation, including all gains realized in calendar 1992. He could do this with the stroke of a pen. We reported last week that the GOP growth forces had galvanized around this idea. Now, Senate Minority Leader Bob Dole, the most influential Republican in Congress, has joined in, urging the President to index capital gains by executive order. The President, says Senator Dole, has said he would seriously consider the idea. You can bet he will. The Treasury tax lawyers won't like the idea and will try to keep Secretary Nick Brady in opposition, but Brady will listen to Bob Dole as to practically nobody else in Congress. Budget Director Richard Darman, who has been a neutral rather than negative force on economic policymaking this year, would like to play a positive role on capgains and is said to be very warm to the indexing idea. Clinton's closest economics advisor, Robert Shapiro, tells me there is no "political wiggle room" in Clinton's capgains position, which is narrowly targeted to start-up companies, but that Clinton does at least favor prospective indexing of capgains on all assets.

4. One of the chief reasons Senator Dole urges executive action on capgains is that he does not want a confrontation with the Democrats on the tax legislation about to come before the Senate. The Administration can get legislation without capgains -- which the Democrats insist is unacceptable at this time. Or, it can make a fight for capgains and lose, as it has in the past. The best of all possible worlds for the financial markets would be if the President dealt with capgains by executive order and allowed the remainder of the tax legislation to get to his desk for signature. As Democrats will argue the President does not have authority to do this, even citing an offhand opinion of the Attorney General, the President could announce that he will now sign the order, but date it November 4, which will mean the many millions of Americans who would benefit from this action would actually have to get to the polls to make sure they will cash in. Would Governor Clinton attack this ploy? He would be better advised to endorse it. Contrary to Democratic propaganda, most of the people who benefit are farmers, small businessmen, middle-class, middle-aged and seniors, who are now unable to sell assets because of the confiscatory tax bite. These people would suddenly realize that George Bush is not such a bad fellow after all, and advise their sons and daughters and nephews and nieces of this good news about the family estate.

5. The Democratic theologians are getting cocky, already counting their chickens in the eggshell. With such an enormous lead over President Bush, the Democratic strategists are suddenly wondering if they gave up too much of the liberal agenda at the Democratic Convention in order to posture as moderates. As The Wall Street Journal editorializes this morning, Bill Clinton the free-trader has suddenly become Bill Clinton the "fair trader" vis a vis the North American Free Trade Agreement (NAFTA). Instead of a re-run of the 1976 Ford-Carter race shaping up, the pressures at work are pushing both parties toward a re-run of Bush-Dukakis, although the President is now saddled with his dismal economic record and the breaking of his no-new-taxes pledge. As the gap between Clinton and the President closes, we will see how adroit the Arkansas Governor will be in defending the puny economic program his team has assembled for him on the basis of Perot still being in the race. If he realizes that the Reaganauts, who were headed toward Perot, are up for grabs, we may yet find ourselves courted by both candidates.