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Double Dipper?
As Congress packed up to leave town for a month, the stock market produced another triple
digit slide. The local temperature reached one hundred degrees several days in a row and portfolios have become
political.
The remaining Democrats that aren't atheists prayed for a double dip recession in the fall, not too big a one.
In fact, a long lingering stay at the bottom would do. Some economists liken a market bottom to a basketball court
- capable of producing a bounce. Others, however, look at the bottom as being more like jumping into quick sand
of an unknown depth - you need to watch where you step. The more muddled the economy, the better for the out party,
or so they tell each other.
One rather fiendish pundit, Bill Safire, suggested that the common folks like divided government and may want to
try a new combination this November - give the House to the Democrats, the Senate to the Republicans. The Dems
use their subpoena power to hold harassing hearings for the next two years but the Senate gives Bush the judicial
and administrative appointments he wants. Get ready for '04.
The card that nobody quite knows how to play is portfolio politics. For the first time since the advent of all
news cable and the introduction of 401-K plans, the stock market is taking a prolonged and pronounced beating in
every aspect. As of this past Monday, large value mutual funds are off 26 percent YTD. Large growth funds are down
32 percent. Long term bonds are paying around 2.6 percent and global stocks are off 21 percent. Some $7 trillion
of value has vanished since March.
Since the historic pattern is that the party in power gets the criticism for any discomfort and the out party thereby
gains momentum, both parties are creating blame game strategies that could easily backfire on them. The Republicans
are making fat cat donors do the perp walk on international television. Democrats have unleashed every possible
snoop on Vice President Cheney. The Left, ever eager to be seen as relevant, is blasting the excesses of greedy
capitalism and calling for more government, heavier regulations and higher taxes. Business Week declares that what
is happening is nothing less than a re-stating of the massive economic delusions of the 1990's so that the next
bull market will have a solid foundation of reality.
The issue, for public and politician alike, is when. When will the decline be over? Congress has passed no FY03
appropriations bills. Some five dozen judicial appointees are backed up waiting for hearings. The government-run
airport security program is a total mess. Both the Homeland Security and Energy bills are too screwy to pass and
should be scrapped. But these are normal Washington fiascos. There are some very important factors which have not
been resolved but will weigh heavily on the Washington environment in the fall.
When is the War? Were the United States to engage all the threats from the Middle East at once, China would
move on Taiwan. Saudi Arabia teeters on the brink, with money and royal family members fleeing to Europe. Iran
is teetering also but it is headed the other way. American lives were lost in the latest attack from Hamas in Israel.
The problem with Saddam is that if you fail to engage him until after he has the bomb, you are one day too late.
So this week the Senate held hearings on Iraq. They showed four things: we have no allies, we have no bases, we
don't know how much the war will cost and we have no plan for follow up after victory. Add to that the fact that
Pentagon civilian leaders want to fight the war of the future and Central Command wants to fight the Gulf War all
over again and we have little doubt that there won't be an attack anytime soon.
EU and Elections. "Imagine," said Portugal's Prime Minister Jose Manuel Durao Barraso, "that
you visit the cockpit of a 747 and find no pilot at the controls. That's the EU leadership from Brussels."
Echoing his sentiments, Marta Andreasen, the former chief accountant of the European Union, refused to sign the
98 billion pound annual budget report for 2001 stating that the figures were unreliable because "no account
had been taken of generally accepted accounting standards, such as double-entry bookkeeping." The 1999 and
2000 reports are also under question from the EU's court of auditors as insecure and unreliable. As a final note
before EU country's elections this fall, a poll for Credit Suisse First Boston (CFSB) showed that opposition to
the EU single currency has risen sharply in Britain. Some 55 percent oppose joining the Euro and support has dropped
to 35 percent. The poll was commissioned because of rising anti-euro sentiment on the continent.
Latin America Turns Left. Fears of a Castro Axis in Latin America rose this week when Hudson Institute scholar
Constantine Menges reported that if pro-Castro radical Luis Ignacio de Silva were elected President of Brazil anti-U.S.
dictatorships would control as many as 300 million Latin American citizens. Add in Venezuelan Hugo Chavez, a Castro
friend for decades, and there is an immediate threat to the United States through their support of narco-terrorists
in Columbia. Trade would be expanded to Cuba, Iraq, Iran and China as well.
Subsequent to the Menges report, several additional South American countries were added to the worst regional economic
crisis in two decades. Countries with sufficient economic problems to create political instability include Argentina,
Bolivia, Urugay, Paraguay and Peru. Numerous nations in the region have begun U.S.-backed free market reforms,
including privatizations and lowered trade tariffs. Congress has finally given the Bush administration fast track
trade negotiating authority. However, as economies have fallen, political backlash has caused rioting against the
sell-off of state-run industries. Much of the unrest is connected to Argentina who staged the biggest debt default
in history last January. This week's reaction occurred when investors could not unload Brazilian debt. Despite
efforts from the Central Bank, the Brazilian dollar (the real) has dropped 34 percent this year, 19 percent in
July alone.
"Few believe that Europe could step into the role of locomotive to the world economy," The Economist
says. Figures released at the end of the month show that the economy grew at just 1.1 percent in the second quarter
and that the recession that began in Clinton's last month in office extended for three consecutive quarters and
was significantly worse that previously thought. These figures are a blow to the idea that America's recovery is
well established, The Economist continues, and makes the recovery suddenly look weak and the economy vulnerable.
No one knows what consumers will do with the experience of a negative wealth effect. So far, housing and auto sales
are still high even though consumer confidence is low. Those who dollar average seem to be continuing.
Look for the return of Congress to create even more quick sand. The GAO announced last week that they couldn't
find $14 billion from last year. And Congress wants to tell business how to keep its books.
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