Wall Street Space Invaders Jude Wanniski May 11, 2000

The ancient astronomers could predict the exact alignment of the planets that occurred last week, but they were wrong when they forecast typhoons and tidal waves -- which this week have been creating havoc on Wall Street. The carnage on NASDAQ and the Internet, which finally seems to be abating today, has not been the result of actual damage done to the New Economy, but the perceived threats coming at it. Remember the early computer game “Space Invaders,” with hostile alien creatures of different configurations coming relentlessly at mere earthlings? In this case, one of them is named Alan Greenspan, another is named China Trade, another Internet Tax, then Microsoft, then Analysis Risk, then the Euro and most dangerous of all, Leadership Vacuum. If all of these threats were to hit simultaneously, the worst-case scenarios would see the end of world as we know it, but we believe the good guys will knock each of them out in turn, and peace and prosperity will return to Wall Street and the dot.coms.

If the China trade bill were to fail when it comes to a vote in the House in two weeks, yes, it would be a major blow to e-commerce as well as commerce. It also would be a major blow to the good guys in Beijing, who are now in control with their argument that the PRC’s differences with Washington are being handled rationally. The New Economy cannot be stopped forever by hostile forces coming at it, but it can be slowed by global recession or worse. When we shifted to wireless from telegraph in the 1920s, stock in RCA was beaten up along with the buggywhips, but radio could not be uninvented. My best guess is that even as the press reports the China trade bill is in serious trouble and may go down to defeat, the Political Establishment understands the stakes. The leadership will pay the price in pork barrels to those Republicans and Democrats who are willing to vote for the bill, but only if they can get something in return to take to their constituents. China has been so demonized by the Military-Industrial Establishment, which wants to jack up Pentagon spending, that the national electorate is confused about the merits of a permanent lowering of tariffs. The bill should pass by one or two votes, but that will be enough to lift this major threat to Wall Street.

As we noted earlier this week in a Fedwatch report, the concern that the Federal Reserve will continue raising interest rates until it has smashed the Old Economy and the New into higher unemployment rates should soon abate. The price indices now should begin reflecting a decline in oil prices, beginning with tomorrow’s PPI number, which is expected to be negative. With gold at $275, there will be further downward pressure on oil as the year unfolds. Greenspan & Co. always can find excuses to raise interest rates, but after next week’s hike, they will not be helped by the price indices. I’d actually prefer the increase be only 25 basis points, not the 50 which some folks think would enable Greenspan to call it quits for a while. That’s because we would have more time to see the lower price indices and get deeper into the presidential campaigns, which could mean a top of 6.25% on fed funds instead of the current market projection of 7.25%. Yes, I’m again being optimistic here, but this is based on my secure belief that there is no inflation in the system -- only price distortions arising out of previous Fed errors on the deflation side. Time is on the side of truth.

The dot.coms are suffering from fatigue and the barrage of bear stories, but they will be back. There was a bit of confusion yesterday when the House voted 352-75 to extend the tax moratorium for five years. It was confusion that may have caused the NASDAQ problems yesterday when there was no vote to provide the Internet with relief from assaults in the courts. The more important story, overlooked for the most part, was the roughing up Utah’s Governor Myron “Tax the Internet” Leavitt got at the GOP state convention in Salt Lake City last weekend. The party faithful not only forced him to run in a primary to get renominated, but also booed him for his tax positions. Every governor of every state knows what happened and will think twice before urging state action to probe for taxes. The fact that state and local governments are awash in revenues flowing from the New Economy makes this another Space Invader held at bay, at least temporarily.

Have you heard of Analysis Risk? It’s a term I picked up from Marc Weiss of Amerindo, who told me on March 31 that he thought NASDAQ would soon correct to 3500. As this New Economy is being born with a Big Bang, he says it often becomes impossible to do the correct analysis of a dot.com IPO before it has run up. In other words, if you take the time to dissect the story and bizplans that underpin a new entrant, you risk losing its biggest move. If you are committed to playing in the high-tech ballpark, you do the best you can and hang on through the kind of thrashings going on now. There is analysis risk on the downside too, when a major correction is underway. Amerindo, for example, entirely missed the correction it anticipated with a mistake in timing. When the dot.coms crashed, it happened so swiftly it was already too late to go into cash. As the New Economy matures, there will be less “analysis risk,” as investors have moved up the learning curve on how fast their winners can crash.

The biggest risk at the moment remains political leadership. There now is no political figure on Earth who we could put in the class of a Reagan or a Kemp (or a Maggie Thatcher) when it comes to willingness to take risks for economic growth. Neither George W. Bush nor Al Gore are willing to take the kinds of chances Reagan did with his 1981 tax cuts in the face of mounting deficits. Even with the Treasury submerged in colossal budget surpluses, Gore is accusing Bush of proposing “risky” tax cuts when the Bush program does not even address capital gains or tax simplification. Bush thinks his own Social Security privatization scheme is risky -- and so does Gore, and so do I. Gore will win that debate. The only solution to the SS/Medicare deficits is economic growth through the kinds of reforms that Bush will not touch with a ten-foot pole.

The pickings are so slim when I look about for such leadership that I’d actually looked forward to Rudy Giuliani’s campaign against Hillary, as Giuliani at least celebrates “supply-side economics” because he thinks it works. With his marriage and health problems likely to implode his campaign, though, we either have to talk Kemp into coming out of retirement to take on Hillary or hope that Ted Forstmann can make better use of his fortune than did Steve Forbes, if Ted decides to take a handoff from Giuliani. If Essex County Prosecutor Jim Treffinger wins the New Jersey GOP nomination for the U.S. Senate on June 6, he could be the surprise successor to Kemp and provide a rallying point for supply-siders in the new Congress. He’s even eager to help finish the Reagan agenda with a gold-based monetary reform, which is essential if we are ever going to put an end to the always dangerous inflation/deflation Space Invaders. Read about him at our website. With a little help in a crowded field with no clear frontrunner, he can win. The thought adds to my relative cheerfulness today.