Peace is Bullish, War is Bearish
Jude Wanniski
October 15, 2002


Memo To: Wall Street retail and institutional investors
From: Jude Wanniski
Re: The Saddam Stock Market

The chief reason Polyconomics has been so popular with institutional investors over the last 25 years is our successes in forecasting compared to our competitors. A big reason we are so successful is that we are willing to be politically incorrect in our financial advice. We cannot be financial advisors and at the same time be team players, either on behalf of a political team or an economic agenda advanced by one political party or another.

In the last several weeks, we have been telling our clients and subscribers that the biggest risk to the Dow Jones Industrial Average, the S&P 500, and the NASDAQ is the possibility that President Bush will pull the trigger on Iraq. When there is news about peace reaching the market, these market indices will improve. When the news all points in the direction of war, the markets head south in a hurry. Our calls have been clearly correct, but if you are not a client of Polyconomics you are totally unaware of the Saddam Stock Market. You may hear Iraq mentioned in news reports as a reason for “market uncertainty,” with commentators saying that once the decision is made, and it is either war or peace, the market will recover because the uncertainty will be over. This is nonsensical, but almost all the financial commentary we read about in the major media – or hear about on all the major network and cable financial programs - makes little sense. If analysts must ignore the tidal waves, they are forced to concentrate on the rain drops.

Why is this? It is because the financial press is not free to report “news” if it appears to be “opinion.” The Wall Street Journal editorial page, for example, is totally conflicted. It is philosophically committed to having a “regime change” in Baghdad, even if it takes another 88,000 tons of bombs dropped on the 5 million people of Baghdad, several hundred thousand casualties, and several hundred billion dollars of taxpayer money. I can only sympathize with my old colleagues at the WSJ, because I know they are conflicted. They want a regime change in Baghdad and they want the American economy to improve and the stock market to rise, not fall. They have to then pretend that the declining stock market has to do with “bubbles” that were initiated back in the days of the bad old Clinton administration. The WSJ editors cannot even examine the monetary policies of the Federal Reserve, because they got into bed with Fed Chairman Alan Greenspan several years ago, and now they are stuck with him. I feel sorry for the Journal editors, because they do not have the luxury I have. I can say nice things about Greenspan on Monday and say awful things about him on Tuesday. The Poly team cannot be embarrassed in telling its Wall Street clients that the dollar value of equities will rise if the Pentagon is losing in its ongoing struggle with the State Department over Iraq, and vice versa.

I’m not going to bother you with all the ups and downs of the market with the variations of peace and war in Iraq. If you would like to become a client, of course we will inundate you with proof of our perspicacity. It is only enough for me to point out that when Wall Street had its monster rally on the last two days of last week, climbing 600 points, there was only one voice noting the coincidence of a rally among the forces of peace. We sent this flash e-mail report to our institutional clients on Friday:

There is no doubt this is a Saddam rally. In order to win over the Senate doves, the administration has agreed to let diplomacy prevail over a unilateral pre-emptive strike. The tough talk from the administration on how they are already planning the post-Saddam regime masks the fact that there are now enough assurances given to the Senate that weapons inspectors will return to Iraq, unfettered. This dramatically reduces chances of military action after the November elections, or next year for that matter.

We cited Senate Majority Leader Tom Daschle’s statement of support, which listed four points covering his agreement with the White House in the wording. The most relevant were the second and third points. The second says the President “should continue to work through the United Nations Security Council in order to secure Iraqi compliance with UN resolutions. Unfettered inspections may or may not lead to Iraqi disarmament. But whether they succeed or fail, the effort we expend in seeking inspections will make it easier for the President to assemble a global coalition against Saddam, should military action eventually be needed.” Point three says the resolution makes it clear that, “before the President can use force in Iraq, he must certify to the Congress that diplomacy has failed.”

As long as the President agrees to get the UN weapons inspectors back into Iraq, and that is what happens, the threat of war dramatically recedes. We noted in our Friday report: “It seems most unlikely this will now unravel as the Pentagon hawks have pushed every possible button to head off the inspectors and still have been outflanked by Colin Powell.”

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The financial market is much wiser than the financial commentators. It quickly sees the reduction of risks to war as a reduction of risks to commerce. Many financial commentators still remember learning from their Nobel Prizewinning economics professors that war is good for the economy because it puts people to work and puts money in their pockets. When it finally becomes clear to the news media that there will be no war with Iraq, the peace rally will be over.