The Guns of August/Rally on Wall Street/Mexico Upbeat
Jude Wanniski & David Gitlitz
July 29, 1994



August is usually a big snooze in Washington, D.C., but the month beginning Monday should keep us all awake with the constant ack-ack of partisan battle over Whitewater and health care -- the issues history has chosen as the backdrop to the historic midterm congressional elections this year. The pop guns fired by the GOP in the House Banking Committee's Whitewater hearings this week will almost surely give way next week to more serious firepower in Senate Banking. The intellectual corruption that has warped the House after 40 uninterrupted years of Democratic control was palpable in the House hearings, with Chairman Henry Gonzalez, a walking advertisement for term limits, announcing in advance that he was whitewashing Whitewater, that nobody is guilty of nuttin'. Any attempt by Republicans to hold a Democratic president accountable to the standards that had been established by Congressional Democrats to hold Republican Presidents to account were gaveled down by Gonzalez, on the grounds that everyone knows the Democratic witnesses were honorable men who tell the truth. The highlight of the proceedings occurred late Thursday, when Rep. Maxine Waters [D-Cal], got each of the dozen White House cover-uppers to admit they were regular churchgoers, had wives and children they dearly loved, and would never, ever obstruct justice! 

We can expect more from Senate Banking, whose chairman, Donald Reigle [D-Mich], is still on speaking terms with his Republican colleagues. I really don't care all that much what the President and Hillary did before they got to Washington. When they won the '92 election, as far as I was concerned, the statute of limitations on their past behavior ran out in a political sense. The clock started ticking, though, on their behavior in the Oval Office, and this is what these hearings are all about. To the naked Republican eye, the White House has spent an enormous amount of energy and taken great risks in what seem to be attempts to prevent someone from finding out something. In his opening statement today, Sen. Orrin Hatch [R-Utah] laid out this pattern of suspicious behavior as a roadmap he would follow next week, when the committee begins its questioning of witnesses. He indicated the Banking Committee's own investigators found more troubling material in six weeks than the Fiske Commission had found in six months. While Hatch said there is absolutely no credible evidence to contradict the Fiske conclusion that White House Counsel Vince Foster committed suicide, he sharply criticized Fiske for having dismissed without serious inquiry any connection between Whitewater and Foster's depression that provoked his suicide. As far as I can tell, the Republicans don't expect any revelations of criminal behavior to emerge, but do expect it to become clear that there has been an abuse of power sanctioned and promoted by this White House. 

Against this backdrop, the prospects of serious health care legislation passing this year are dwindling by the day. When the Clinton administration began its crusade, Republicans feared they would suffer at the hands of the voters if they were perceived as being "obstructionists." We have now reached a point where the opposite is becoming the case, with obstructionism becoming fashionable. Senate Democrats are now rushing around trying to find Republicans with whom to make deals, to get something, anything, passed that might be passed off as bipartisan compromise. The deals being offered by the Democrats get better every day, though, as the Republicans realize the political market for health-care legislation this year is crashing, so why not wait for the bottom? All of Washington is talking about Hillary's disastrous bus tour, which was supposed to have pumped up support for her plan and is instead magnifying its unpopularity.

As it now stands, Senate Majority Leader George Mitchell only has 40 votes for legislation containing employer mandates. It is assumed that when he does produce a bill, it will have employer mandates, and will go down to defeat with only 40 votes. Whereupon the moderate Democrats, working with moderate Republicans, will offer a moderate proposal. They will try to coax 15 Republican Senators into joining this effort, swearing up and down that when it goes to conference with the House, the moderate Senate Democrats will not permit the House liberals in the conference to strike an unacceptable balance. They will hold firm! Republicans smell an attempt to get bad legislation back from conference in September, forcing the GOP to filibuster on the eve of the elections in order to kill any legislation for the year. The Democrats might then pick off enough Republicans to break the filibuster and push through legislation at the last minute. I doubt this scenario will play out, because I don't think enough Republicans can be coaxed into it. They are also feeling more enthusiastic about their own Dole-Packwood plan, which they can offer the electorate this fall as being superior to anything that might pass in 1994.

The partisan guns will blast away in August, but given the general sense that the GOP is likely to make major gains in the midterm elections, and perhaps even control the Senate, there will also be a tendency for Democrats to hedge their own bets. At the very moment when partisan tensions are at their peak, by definition they will begin to subside. As Democrats accept the idea that the GOP has the upper hand, they will accommodate to it. The arrogance of power diminishes when there is a perception of diminished power. A critical element is the awareness that the Perot voters, who had been assumed by Democrats to be the likeliest supporters of health-care reform, are now seen as those most opposed to hasty, last-minute action. We should not be surprised to see Ross Perot himself actively engaged on the GOP side of these partisan battles in the months ahead.

Jude Wanniski


Stocks and bonds are booming today with the second quarter GDP report, which indicates that more than half of the 3.7% gain can be attributed to inventory accumulation. Real final sales -- GDP minus business inventories -- grew at an annual rate of only 1.5%, down from 2.2% in the first quarter. We can forget about the Fed raising interest rates in August. Instead, watch for Fed funds to trade below the 4.25% target, which would give Alan Greenspan an opportunity to slow the flow of liquidity. We may yet see a nice summer rally, which would be enhanced by prospects of GOP gains in November. The economy needs it. Yesterday's NASDAQ close at 712.43 is below the 714 of a year ago. The S&P 500, at 454, is barely above the 448 registered last July 30.

David Gitlitz


We reported earlier this week to our Global 2000 clients that the political risk clouding the Mexican Bolsa had declined sharply, with a statement by National Action Party (PAN) candidate Diego Fernandez de Cevallos favoring a 20% peso devaluation. The blunder ended any popular hope that Fernandez would in general continue the economic reforms of the Salinas administration if he were to defeat the PRI candidate. The Salinas Finance Ministry almost immediately responded by assuring the markets that under no circumstances would they contemplate a devaluation, and the Bolsa soared. This drives potential PRI defectors back to their own candidate, Ernesto Zedillo, assuring him an almost certain, clear-cut victory in the August 21 election. The markets can now contemplate a strengthening peso, a new infusion of foreign capital bolstering Bank of Mexico reserves, and new economic and political reforms to follow soon thereafter.

Jude Wanniski