Notes on the Revolution XXV
Jude Wanniski
December 6 1995


BUDGET: It’s taking longer to get new numbers out of CBO, which is good news in the sense that it suggests House Budget Chairman John Kasich really is kicking the computers. As long as the negotiators know bigger numbers are coming -- perhaps as much as $100 billion -- they can horse trade. The White House offer of a seven-year package will move things along, especially since the administration is ready to discuss changes in the Consumer Price Index formulations that would add another $147 billion to the pot. House Speaker Newt Gingrich for the first time connected the negotiations to the financial markets, correctly predicting sharp declines in both stocks and bonds if the negotiations fail. This increases the pressure on both sides to find a compromise. We remain appalled at the failure of the financial press to see any link between the budget talks and the boom on Wall Street, but I suppose that’s why we are in business. We’ve done everything we can, by the way, to encourage the restoration of capgains indexation, on the grounds that it will dramatically expand capital formation at the grass roots. I wrote Kasich a memo yesterday at 6 a.m. on the arguments. This seems to be the least understood concept in the Beltway. We see the chief lobbyist of the National Federation of Independent Businesses has been dismissing the idea as simply a boon to Big Business. 

BONDS: The 30-year broke the 6% barrier this morning, with market commentary explaining the continuing rally on low growth, low inflation and expectations of a Greenspan cut in fed funds. In our model, we do see some of the advance tied to the steadiness of the gold price this year and the anticipation of further declines in overnight rates by the Fed. There is also a sense that there will be a budget deal that begins to get future spending under control. A good part of the advance is tied to the discounting of capital gains relief, though. If suddenly this were dropped, the markets would no longer find credible relief on future spending. Economic weakness would make it impossible for political Washington to slow social spending and chip away at entitlements. The bond market is least sensitive to calculations about future spending. Mexico has balanced its budget for five years in a row and it can’t get rates on short-term debt below 60%. Bonds most of all want to see the price of gold remain steady as far as the eye can see. This practically will be assured if capgains is cut and indexed, which expands the productivity horizon for the national economy. It is far easier for Greenspan and the Fed to manage monetary policy when there is a steady increase in the demand for dollar assets, as there has been all year in the equity markets. A budget debacle and stock market sell-off would not be good for bonds.

DOLE & BOSNIA: We are now seeing Senate Majority Leader Bob Dole being punished for his unthinking allegiance to his foreign policy mentors, who have as their hidden agenda the establishment of a Muslim Bosnia beholden to NATO. The complex rationale involves long-term encirclement of a resurgent Moscow. The whole game falls apart given the realities of 20,000 U.S. troops on the ground, trying to remain peacekeeping neutral while arming and training the Bosnian Muslims after bombing the Bosnian Serbs. Senate Majority Whip Trent Lott has now broken with Dole over Bosnia and the peacekeeping idea is getting the ridicule it deserves. Sen. Hank Brown [R-CO] refers to the use of our combat troops as “international social workers,” not far from our characterization of them as “babysitters.” In another superb column this morning, “The Clinton Gamble,” New York Times Foreign Affairs correspondent Thomas L. Friedman writes in the same vein. He cites a coming Foreign Affairs article by Michael Mandelbaum, a Johns Hopkins specialist on international affairs who is identified with Democrats: “His thesis is that the Clinton policy is congenitally flawed because it never identified U.S. national interests abroad after the cold war, but instead tried to conduct foreign policy by ‘the standards of Mother Teresa,’ trying to ‘turn American foreign policy into a branch of social work.’” Dole is certainly no Mother Teresa, but he now finds himself unable to explain why he supports President Clinton’s ill-conceived dispatch of sociologist soldiers into a rat’s nest of terrorists and counter-terrorists. For two years, Dole would not consult with General Colin Powell on Bosnia, as Powell does not share the concerns of Dole’s mentors. On Sunday morning, before he went on Face the Nation, Dole finally called Powell to ask if he supports the dispatch of troops to Bosnia. He reported that Powell supports the troops. (He didn’t ask if Powell supports the policy.) This is pathetic, with Dole hiding behind Powell’s skirts and Clinton hiding behind the robes of His Holiness the Pope. The Vatican, by the way, refuses to comment on Clinton’s use of the Pope’s private comments to him on Sarajevo as a virtual endorsement of Clinton’s Mother Teresa dispatch of troops. 

FORBES: Suddenly our hero is the talk of the town, now that the Des Moines Register has him at 14% in Iowa, behind Dole’s thirty-something. Gerald Seib of The Wall Street Journal this morning devotes his whole column to Steve’s “boomlet, [which] hasn’t reached its peak yet.” The January issue of Vanity Fair is now out, with a major profile of Steve (”The Son Also Rises”) by Marie Brenner, a marvelous piece that suggests the “boomlet” may never end. Steve’s big night will be next Wednesday at the Waldorf, when 1400 of his earliest enthusiasts will gather to hear him do his “vision thing.” We can still make room for you.

As this year opened, we were the mostly wildly optimistic forecasters on the economic block. If you don’t remember, here is an item from Polyconomics initial “Notes on the Revolution,” of January 5, 1995:

FINANCIAL MARKETS: The economic forecasters are all stepping forward at the first of the year to prognosticate on whither the Dow, wherefore the bond market. Even the most bullish see only incremental advances, a DJIA of 4400, a long bond of 7.5, which does not make sense to those of us who are observing revolutionary change in Washington. If the Congress manages at least the objective on capital gains set forth in the contract -- prospective indexation and a 50% exclusion, we would be surprised if the DJIA remained below 5000, with NASDAQ making even fancier percentage gains. The prospect of success should have beneficial effects on both stocks and bonds even now, as the Republicans have made it clear the effective date of legislation passed later this year will be January 1. The reduced risk to capital plays into Fed Chairman Alan Greenspan’s hands, because it shows up as an increased demand for dollar assets. The decline in gold to $375 and the rise of the dollar versus the yen suggests increased confidence that Greenspan will be able to finesse another increase in fed funds at the end of the month. It is of course to the great advantage of the GOP in both House and Senate to have the financial markets responding warmly to the unfolding reforms. At some point, as the markets become more confident that an indexed capgains can be capitalized, the stock market and bond market should be advancing in tandem, gold falling toward the $350 level we assume Greenspan would like to see as both ceiling and floor. In this scenario, we cannot imagine a long bond above 7 or a DJIA below 5000.