20/20 Foresight
Jude Wanniski
September 24, 1997

 

Our business for these last 19 years has been to keep our financial and industrial clients informed about the most likely course of the U.S. and world economy. We do this by interpreting the impact that political and policy decisions will have on financial markets, which are the forerunners of real economic activity. In the past year, we clearly kept our clients ahead of the curve. Here are a few examples we think were especially prescient:

Putting the DJIA in some perspective. On February 19, 1997 in a client letter entitled, "The Dow At 7000: No Big Deal" we discuss the blurred vision inflation has caused in the average. We note, "How silly it is for the financial press, including The Wall Street Journal, to breathlessly celebrate the DJIA at 7000, without taking any trouble to correct the inflation in the unit of account... That is to run to 7000 from 6000 was not quite the feat it was to run to 2000 from 1000. Still, this doesn't give us any sense of how the DJ has behaved for the last century when seen against its original accounting unit. With gold now at $350, the DJIA is only 413 as compared with the 41 of a century ago, a tenfold increase. That does sound more reasonable, doesn't it? Except that if it hit 381 in 1929, the value of the Dow is only 32 points higher than it was at its peak way back then. The S&P 500 tells pretty much the same story over these years."

The late spring/early summer bond rally and the positive outlook for dollar assets. On May 27, 1997 we alerted clients in "Fedwatch: The Greenspan Standard." that a long bond yield of 7% "appears to compensate bondholders amply for the attendant risks. By the signals we watch...the current upside potential in bonds appears to outweigh the downside risk." Then, on June 17, with the bond yield at 6.75%, we apprised clients with "Fedwatch: At Last, A Rally," that the likelihood was for yields to continue falling. "Based upon the low level of risks to purchasing power indicated by the dollar price of gold remaining in a tight range... we can see no good reason for this rally to stall much before the 6% level...On the margin, in fact, the relatively higher risks in [DM, Yen] due to EMU uncertainty in the case of Germany and the ongoing policy vacuum in Japan should provide support for dollar denominated assets."

The fear of a Phillips Curve Fed puts the lid on the bull. On August 8, 1997 in "Fedwatch; Bearish for Blue Chips," we note, "As long as the Greenspan Fed remains hung up on the inflation/unemployment tradeoff of the Phillips Curve, this alone will serve as a drag on the stock market and prevent the DJIA from getting far above 8000, with more downside risk than we would like to see...For now, though, the Fed appears unlikely to hasten the bad news with another near-term policy tightening. This may give bonds a bit of room for gain... Our doubts about the long-term nature of the bull market remain small though. We just might have to tread water for awhile."

Thailand's devolution and the baht devaluation, we were on it early. On June 26, 1997 in "Time Running Out on Baht." a week before the devaluation, we alerted our clients to its inevitability. We lead off our client letter, "Having missed all opportunities to take decisive action, Thailand faces the near inevitability of a change in the baht regime. Finance minister Thanong Bidaya has offered no substantial new ideas on the fiscal or monetary front to improve business conditions and break the stranglehold of high interest rates combined with a currency under speculative siege." In the summer of 1996, we went against the bullish convention and warned investors that negatives far outweighed positives for Thai equities, and that market investors ought to begin backing off on Thailand. Just prior to national elections there, we began issuing a series of warnings that the Thai market was heading for a tailspin and advised that, despite a likely uptick in the post-election market, Thailand's political gridlock and cash flow problems were too severe to warrant further investment in equities, "The Risk Is Just Too High." November 13, 1996.

When many were predicting a Brazilian devaluation to follow, we said no, the politics were against it. On July 16, 1997 in "Cardoso, Central Bank: 'Just Say No' ", we note, "President Fernando Henrique Cardoso's resolve in the face of spreading currency jitters suggests his administration, unlike that of Thailand, has far more to lose politically than to gain by devaluation. The president's political future depends on the Real Plan."