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The Legend of Al Cid

June 8, 2001

Not that politics ultimately matters in the least, but the mid-cycle elections in 2002 could provide an entertaining test of entrenched political theory. The Republicans are universally expected to lose some Congressional seats simply because…they are the incumbents. Recent history suggests the effect would be exacerbated if the economy is in a deep wallow at the time, as we should by now strongly expect it to be. But the question remains whether the Democrats, the pollsters and their clueless lackeys in the news media will be able to pin the rap for a deep recession on George W. Bush.

For, except during the heat of the statistical Punch-and-Judy show that took place a few months ago, when pundits were attempting to benchmark the economy for purposes of apportioning political blame later on, few have had the chutzpah to suggest in print that our current economic straits are in any way related to President Bush in particular or to Republicans in general. This point was driven home by Congress' recent enactment of a bread-and-circuses tax bill whose pathetic insignificance will not be overestimated by Joe Sixpack, even if it has gotten a lot of ink on the editorial pages. The bill was a loser to begin with, since it failed to take a meat-cutter approach to high marginal rates, to redundant levies on capital gains, and to the zillion-page tax code itself. But at least Bush can credibly claim that his heart was in the right place before Daschle and his ideological thugs stabbed him in the chest.

Irreplaceable Al

Ironically, the blame for our deepening economic miseries must eventually settle on the one consummate politician who has never run for office, Alan Greenspan. That this will happen is already fairly obvious, but it will be so much more obvious 18 months from now that Bush and the GOP will not even need to scapegoat our still semi-beloved Fed chairman. By then it may be more beneficial politically for the GOP to benignly cut the rope from which Mr. Greenspan has been hanged. The fact that he will no doubt be seen as irreplaceable even after his reputation has been gang-raped and defenestrated attests to the powerful mythology that has grown around him. Perhaps we'll have to prop his corpse at a desk, just as Spanish soldiers mounted the slain warrior El Cid on a horse, to lead them into battle against the Moors.

Meanwhile, there is no disputing that vigorous easing by the Fed will ultimately force stock prices higher. But there are limits, as Alan Newman points out in the current issue of Crosscurrents ( ). He notes that, in ten prior instances, four successive Discount Rate reductions by the Fed have produced Dow gains averaging 11.8% after six months and 23.3% over twelve months. However, a fifth rate cut has been tried seven times, with much less-impressive results: the Dow averaged a 1.4% loss after six months, and only a 6.5% gain after twelve months. "The fifth cut is apparently a signal of overwhelming weakness," writes Alan. "After four cuts, double-digit gains occurred in five of ten instances after six months. After five cuts, double-digit gains occurred in only one of the seven instances. And that case was in 1982, at the tail end of a secular bear market!"

Cognitive Dissonance

I won't belabor the obvious, but the hoped-for business rebound in the second quarter is looking increasingly dicey -- looking fantastical, actually. There is not much good news emanating from corporate sources, and Wall Street's unsupported assertions that the worst is behind us are becoming more incongruous each day with the dour pronouncements of Fortune 500 CEOs -- not to mention, with the steepest drop in corporate profits in more than two generations.

Meanwhile, the stock market's recent action has done little to change an anomalously bullish technical picture. Most of the dozen or so high-profile issues tracked in my daily newsletter are rallying off well-oversold lows, and there appears to be sufficient wattage to carry them still higher, even if the momentum died a bit today (Wednesday, June 6). We'll know better by the end of tomorrow's session whether another swoon is imminent, but my guess is that the week will finish on an upswing.

My trading logic often proceeds from the perspective that the stock market is a heavily rigged game, one in which a relatively small number of deft criminal entrepreneurs prey upon the greedy and the stupid. By this reckoning, imputing the worst of intentions to Baal's minions on Wall Street, a moderate rally into week's end would be the perfect way to set up a shakedown next week. Emboldened by the impression that such a rally was so unprepossessing as to be easily sustainable, our pigeons would come to their computer monitors on Monday morning with a hopeful song in their hearts, thereby deserving to be stomped.

Due primarily to the California Gold Rush, San Francisco’s population exploded from 1,000 to 100,000 in only two years.
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