The Long Labor Day Weekend Jude Wanniski August 29, 1997

We like to remember that the Dow Jones Industrial Average hit its 1929 peak on the Friday before the Labor Day weekend. The gentle slide that ended in the Great Crash in late October began the day after the long August holiday, when members of the U.S. Senate filtered back to the Capital to take up the only business remaining for Congress: the Smoot-Hawley tariff legislation that had passed the House in March. Over that August recess, the protectionist forces had softened up the Senate’s solid opposition to the tariff, one man at a time, and Wall Street began to hedge its bets accordingly.

This of course does not mean we expect bad news come Tuesday. Quite the contrary, we would not be surprised to find the Congress coming back to work with instructions from the electorate to keep up the good work -- with the President. Yes, the Senate hearings on campaign finance will try to rough up the administration, but they will have to settle for the Veep as punching bag, who will take the blows in manly fashion, and put the Party more in his debt. The more significant discussions will be on how to keep the economy rolling along, and unlike 1929, the bent of both President and Congress is in the direction of growth, not protection. In anything, the chilling turbulence of the markets in Southeast Asia -- which our Liz Carver has been warning our Global 2000 clients about for some time -- will have a positive effect on our government. There was just a bit too much backslapping on how good things are when the political crowd departed Washington for holiday. The distress emanating out of the financial problems of Bangkok should remind the politicos that crashes happen in the midst of celebrations. 

Indeed, we dropped a line to Alan Greenspan in case he did not observe that the bond market here rallied a full point after the big slide Wednesday in the Asian markets. The Fed Chairman has already been aware of arguments that the dollar’s deflation against gold since last October, to $325 from $383, has been a great burden to Thailand and the other countries that are linked either to the dollar or to the finances of the region. We must assume he also knows that a Fed tightening to slow down the economy, as the Phillips Curvers at the Fed would like to see, would only add to the burdens of the world economy -- and is completely unnecessary. It would be nice if Greenspan could express himself on these thoughts in some forum. The Asian countries involved in the financial distress are not big in terms of GDP, and will not do much damage to our economy by growing a bit slower. But it does no good to us for them to be damaged, and as they have collectively been the fastest-growing economies in the world, the setbacks they are experiencing will be felt at least by those U.S. industries which have been selling into that market. 

What else to watch for next week when Congress returns? Most importantly to the financial markets will be signs of how the new revenue projections will be dealt with. Remember, the GOP and White House in July decided to ignore the cascade of unexpected revenue coming into the Treasury. To do otherwise would have meant reopening the negotiations and spoiling the holiday. Now, there will be a discussion on whether to earmark them for new tax cuts in the bill being promised for next year, or to let them be chewed up in the appropriation process, or have them accumulate. We of course are rooting for another tax bill next year, which at least might shorten the holding period on capital gains. The other big issue is fundamental tax reform. Last Christmas, remember, the President and House Ways&Means Chairman Bill Archer shook hands on the idea of reforming the tax system before both leave office for good in January, 2001. The President’s handshake sometimes doesn’t hold up for more than an hour or two, but in this case maybe it will. With the budget deal successfully concluded, Mr. Archer at least will want to have hearings to initiate the process, and if all goes well, the White House and Treasury will be dragged along anyway.

Other than monetary policy, there’s nothing on the political horizon that could cause much damage to the stock market, at least in Washington. Screw-ups in Europe or Japan could hurt, though. The President wants congressional authority for fast-track NAFTA negotiations, which his corporate pals would like to have. I’m indifferent, preferring to see more attention given to expansion of the domestic market before we again lower taxes at our borders. The President wants authority to expand NATO, which the military-industrial complex would like to see, for no good reason I can see. I dropped a note to Senator Jesse Helms this week, suggesting that at the very least, we get Europe to pick up most of the tab -- which would never happen, because the Europeans see no need for a NATO expansion unless Uncle Sugar foots the bill. 

If all goes well, we expect a continued catch-up of the low-cap stocks with the blue chips. Since we alerted you August 8, when the Dow was at 8300, that we were “Bearish For Blue Chips,” but not for the low-caps, the markets have followed that path, as the chart clearly shows. Even with an 18-month holding period, the lower 20% capgains rate will continue to work its magic on behalf of entrepreneurial capitalism. If there is to be a slicing up of the new revenue pie between spending and tax-cutting, how about the 15% rate George Bush promised in 1988? These are the happy things we’ll be thinking about over the long Labor Day weekend.