Crazy Cross-Currents Jude Wanniski and David Gitlitz April 27, 2000

In our 22 years following the markets through a political prism, we have never seen the kinds of cross-currents, swirls, and eddies produced by so many variables: the cloud over monetary policy; Microsoft's antitrust problem; the ever-shifting Bush/Gore presidential backdrop; the sagging euro; China and Congress; the congressional tax possibilities; oil prices. Here are a few thoughts worth considering:

MICROSOFT: We have been neutral on Microsoft's problems with the Department of Justice antitrust division as they affect the broad market. As long as the punishment fits the crime and all that is involved is Microsoft's wings being clipped a bit, there would be no systemic problem that would invite serious weakness in the high-tech industry. The rumors of a breakup of the company indicate a much more serious and systemic risk that is weighing heavily on NASDAQ and e-commerce in particular. As Steve Lohr of the NYTimes points out today, there never has been an antitrust breakup of a corporation that grew up on its own: "In addition, courts have generally split up companies in federal antitrust cases when the monopolist was created through mergers, from Standard Oil and American Tobacco in the early part of the century to Hollywood studios in the 40's and 50's...The merger precedent is not one that applies to Microsoft, which has mostly grown on its own." A government precedent that limits the size to which a corporation can grow would be a direct attack on the New Economy, which has been booming precisely because the market can feed it capital with no end in sight to how tall it can get. The metaphor of Gulliver and the antitrust Lilliputians is apt. Microsoft's competitors who have been relishing the idea of a slap on the wrist must be horrified at the idea of a breakup. A major competitor of Bill Gates, we hear, has appealed to Congressional leaders now urging they somehow pass legislation to restrain the courts. That won't happen. We of course must root for Microsoft and against breakup. Don Luskin of Metamarkets is correct in saying it would be "a de facto policy that you can't grow too big. It's like a huge, ad hoc, retroactive cap-gains tax. The government did it to Milken, they're doing it to Gates."

EURO: Our global clients have been reminded a number of times that the Euro's continued weakness was foreseen by Robert Mundell in his Wall Street Journal series last year, prior to the announcement he had won the Nobel Prize for his work in this realm. When individuals and enterprises of eleven countries no longer need eleven currencies, there will be far less need for liquidity. Mundell said there would be a one-time adjustment, and that calibration process has been under way as Europe adjusts to the new efficiencies. Mundell erred, though, in thinking the ECB bureaucrats would have the smarts to realize they would have to mop up the surplus via the sale of Eurobond assets. Instead, the ECB is fiddling with interest rates and a monetarist M-3 target. As our Michael Darda reported Wednesday to our global clients, the currency will have to continue sinking, with the inflationary implications, until the tax cuts being discussed throughout Europe increase the demand for liquidity faster than the surplus is appearing. We urge those of you who have not seen our global product in some time to take another look. It has improved enormously under the new team leader, Mike Churchill.

BUSH/McCAIN: In his syndicated column today, Bob Novak thinks he sees a glimmer of a chance George W. Bush will invite Arizona Sen. John McCain on the GOP ticket and that McCain will accept. As we have pointed out many times, one major problem is the fact that both have hardline foreign-policy advisors, "bombers," as Colin Powell calls those who are quick on the trigger. The Texas governor, who has a weak economic team that is afraid of cutting taxes that might benefit the rich, would not get any balance from McCain on that score either. It would get worse, with McCain preferring to tax the rich and cut their money out of the political process with campaign finance reforms designed by the Democrats. Of the first-tier candidates mentioned as a Bush running mate, Pennsylvania Gov. Tom Ridge would be the best of the lot, but his moderately pro-choice position is unacceptable to the Christian right. Rep. John Kasich [R-OH] is Senate Majority Leader Trent Lott's first choice and in some ways would be superior to Ridge.

WHAT INFLATION? With gold steady around $276 per ounce, the dollar's forex value rising to near 14-year highs, and the Treasury yield curve further inverting, the "inflation" purportedly revealed in today's data remains as elusive as ever. More than anything, the Employment Cost Index's 1.4% first quarter rise in wages and benefits suggests that the already robust 3.6% pace of productivity growth recorded in the fourth quarter of last year may even be improved upon in data due for release next week. If not, any marginal rise in unit labor costs would point to a slight slowdown in corporate profits rather than to an acceleration of inflation. Equally benign, from our perspective, was the price data accompanying today's GDP report. In a year during which crude-oil prices more than doubled, the GDP price deflator rose just 1.75%. The reversal of oil prices seen since last month soon will be reflected in the price indices. No doubt though, today's data on wages will be seized upon by those at the FOMC convinced that an inflationary "overheating" is bearing down upon us. This explains the 2-year note yield rising above 6.6% for the first time since late last month, up nearly 25 basis points in the past week. At these levels, long-term yields are probably near the top of a trading range which we see holding in the realm of 5.75-6%.

CAPGAINS HOLDING PERIOD: The Essex County, N.J. County Executive, Jim Treffinger, this morning sent a letter to Senate Majority Leader Trent Lott urging a shortening to 3 months from 12 the holding period on capital gains. A candidate for the GOP nomination to the U.S. Senate in the June 6 primary, Treffinger is the first political figure in the country to read about the tax selling that contributed to the NASDAQ sell off and do something about it. He's one of the most attractive young candidates I've met since I first ran into Jack Kemp in 1976, and he just happens to be a supply-sider who carries with him copies of The Way the World Works and Jack Kemp's An American Renaissance.(JW)