Dow at 6100: What Next?
Jude Wanniski
October 21, 1996


The Dow Jones Industrial Average is doing as well as it is because Fed policy at the moment is about as good as it gets, absent a formal gold standard. Itís a bond-market-driven stock market, which is why the high capitalization stocks are doing so much better than the lower caps. The Russell 2000, which tracks the 2000 publicly traded companies which are smaller than the first 1000, is still trailing its peak of last May by 5% while the DJIA is up 5.75% from that same point -- quite a gap. If we project these differentials to the bottom of the economy, we can imagine an inverted pyramid, with those at the top doing swell, but those at the bottom right where they have been. We give President Clinton half the credit, for reappointing Alan Greenspan as Fed chairman and signing the Telecommunications Bill. The other half goes to Steve Forbes, for changing the political dynamics of the presidential race from austerity to growth, these elements being the basis for our prediction in February of a 6000 DJIA this year. What next?

It is still no sure thing, but if Clinton is re-elected, we have to brace ourselves for a moderate November sell-off, one that might take us back to 5500 or so. Clinton doesnít have to do a thing to scare the markets. The idea will take hold that the White House and Democrats would welcome a weakening of the economy as soon as possible, in order for it to recover in time for the mid-term elections and an Albert Gore presidential run in 2000. This has been the conventional wisdom among political strategists for as long as I can remember. It is the outgrowth of the rise of demand-side economics, which is zero-sum, and afflicts Republicans as much as Democrats. It was part of the rationale behind the 1981 deferral of the Reagan tax-cut promise, which produced a horrendous recession. On the same theory, President Bush was being pushed to break his read-my-lips promise soon after his inauguration in 1989, but it was too unseemly for the President, who waited another year. No doubt it may occasionally occur to him that if he had broken his promise in the first year, he would have gotten the recession over earlier and gotten re-elected. That strand of thinking, which never existed in American politics prior to the Keynesian revolution in economics, is alive and well in the Clinton administration.

Any signs of growth that appear after November 5 thus will feed pressures to slow growth and get it over with ASAP. Given the weight of this political calculus, Greenspan may be unable to halt an increase in interest rates at the November 13 or December 17 meeting of the FOMC. All it takes are signs of upward pressure on wages. The powerful economic establishment, which has its headquarters at Goldman, Sachs these days (in the old days, when David Rockefeller was still a factor, it was at Chase Manhattan), does not really care about having the domestic U.S. economy grow at a rate faster than 2Ĺ%. The establishment represents the security of bonds and blue-chip stocks, not the riskier rabble. This does not mean the people who run Goldman, Sachs are not warm and caring human beings. It simply means that these warm and caring people make cold-blooded decisions in the course of a business day. This establishment at the moment prefers to have the domestic economy behave itself so there is no upward pressure on wages. This enables the major corporations to compete against the major corporations in the rest of the world in selling their stuff to the great big world economy. Upward pressure on wages means they must export capital to have the stuff produced abroad. These days, the bottom line for the Big Guys is the profit that comes from selling stuff anywhere on the planet. There is no net interest within corporate America concerning the plight of ordinary Americans, nor should we expect there to be. Corporations are not human. They are legal fictions, created to maximize profits even if this requires wholesale firings of long-time, dedicated employees. Government exists to corral the uninhibited profit-seeking of the business establishment, our superior political system the gift of the Founding Fathers.

Warm and caring business executives privately tell pollsters they will vote by 8-to-1 for the GOP ticket, even while they publicly line up by the thousands for President Clinton. As long as the federal government can lean on corporate America through the tax codes and regulatory apparatus, it is not prudent for it to spit in the Presidentís eye. At the same time, our economic establishment is not uncomfortable with the idea of another four years of slow growth and status quo. If by some miracle Bob Dole and Jack Kemp were to be elected, they might actually try to expand the economy by 5% a year, by changes in the tax law that would feed capital to the bottom of the pile. This not only would cause an intense competition for labor, but it also would cause an intense competition for management. With all that capital flooding from top to bottom, entrepreneurial capitalism would be draining top talent away from existing enterprise. It is not only in the interest of Rustbucket, Inc. to prevent this from happening, but also in the interest of Bill Gates at Microsoft, who would soon find some of his best people leaving in order to develop the nifty ideas they have, which he now owns for the price of their wages and stock options.

The one positive thing we can expect from President Clinton as soon as the November 5 election is history would be a UN decision to permit Iraq to sell 700,000 barrels of oil per day. The decision is of course controlled by the Oval Office, which cannot release the oil for fear of being seen as soft on Saddam Hussein prior to November 5. This is why oil inventories are at rock bottom and domestic heating oil prices are soaring. It is Saddamís revenge on Clinton. This is because the oil world knows Clinton has to give the green light to the UN as soon as he can, to enable Saddam to send resources to his side of the Kurdish struggle in northern Iraq. The global political establishment does not want the Iran faction to get control, which means it has to find a way to prop up Baghdad in order to check Teheranís designs. These are all little boys playing games with the world. Boy Clinton hasnít the foggiest idea of what is going on here, because his team informs him on a need-to-know basis. Once again, this all started when the Bush administration couldnít decide whether it was going to reward Saddam Hussein, who we rooted for in the eight-year Iraq/Iran war. We first told Saddam we wouldnít mind if he plucked off Iraqís claims in northern Kuwaitís oil fields. Then, we decided this was not a good idea after all. The Gulf War ensued. The only way this can be settled is with a Dole victory on November 5, followed by appointment of Colin Powell as Secretary of State -- Powell being the only man I can see on the planet who has his feet on the ground regarding these dangerous issues.

While we should expect a modest November sell-off with a Clinton victory, we are not that pessimistic about the future course of the DJIA. The dynamic that Forbes initiated still will be in place after November, with Democrats being kept from backsliding by an electorate that wants more, not less growth, and by Kemp, who would be the frontrunner for the GOP nomination in 2000. That kind of pressure should be enough to keep President Clinton pointed in a general supply-side direction, stealing bits and pieces of Kempís ideas as he goes along. Iím much more concerned with the dangers that will flow from the Presidentís ineptitude in foreign policy. Heís been successful thus far in keeping a lid on Bosnia, Haiti and Russia, but after November 5, he will have to deal with these and more. With an ad hoc approach to the world, we can expect more ad hoc military deployments, a compounding of crises, and more terrorism than we have been used to on our own shores. These kind of bolts from the blue can cause serious financial setbacks even for those at the top.