An excellent article, although quite disturbing...:Market Jitters
12/18/2000
Market Jitters
By Sheila R. Cherry
cherry@insightmag.com
The continuing uncertainty concerning the presidential election results has many investors unsure of what to do next or of what direction the economy will take.
Election 2000 is over — maybe. “The people” have spoken — sort of. Whatever victors there may be will have to pick through political rubble for their spoils — such that there are.
But jittery financial markets meanwhile have been convulsed between stunned disbelief and opportunism amid the chaos. While the political hacks sought to augur voter intent by reading “pregnant” chads to determine who won Florida’s prized 25 electoral votes, and hence the presidency of the United States, nervous investors searched through the nasty jumble for clues concerning the likely direction of U.S. economic policy and the consequences. Financial markets hate uncertainty and Election 2000 was chock full of it — even more than during the 1998 presidential-impeachment crisis.
Impeachment, at least, would not have meant enough change to wipe out a booming stock market, analysts note. But the 2000 electoral crisis had a very negative effect on a tumultuous stock market — especially when it turned out that Al Gore’s lead attorney is the very David Boies who prosecuted the federal government’s antitrust case against Microsoft and sent electronic stocks into a tailspin.
But what scared people on Nov. 9 was Gore campaign chairman William Daley’s threat to let “the legal system run its course,” dragging the election out until enough votes could be procured for Gore to win an Electoral College victory. The NASDAQ, already teetering from tech-stock slowdowns triggered by disappointing earnings in the face of the Clinton/Gore assault on Microsoft, closed election week at its lowest level in a year. The Standard & Poor’s 500 and the Dow Jones industrial average plunged as well.
Investors were scared further when George W. Bush spokesman and former secretary of state James Baker threatened to respond in kind with GOP requests for recounts in Midwestern states with close vote margins. The prospect of a protracted recount battle with no apparent resolution was “very, very disturbing to the financial markets,” notes William Niskanen of the Washington-based Cato Institute.
Friday, Nov. 17, brought mixed judicial decisions, observes Richard Maybury, publisher of Early Warning Report. In the morning, NASDAQ came out of the gate falling.
Then the Bush camp received the welcome news of a circuit-court ruling that Florida Secretary of State Katherine Harris acted within statutory authority to exercise her discretion and reject Gore campaign demands that she disregard a statutory deadline and accept a questionable hand count of ballots chosen amid a series of rules changes only from heavily Democratic counties. With the rule of law now pointing to Bush, the Dow turned around and shot upward by roughly 75 points.
Figuring that it ain’t over ’til it’s over, the professional traders sold into the temporary enthusiasm and the Dow plunged again. By the end of the same day, the Democrat-packed Florida Supreme Court had put a hold on Harris’ plans to announce certification of the Florida vote the next day. Instead, it scheduled a hearing on the matter for Nov. 20, effectively giving Gore a reprieve.
In the market, Maybury explains, the amateurs quickly had reacted bullishly to the good news for Bush. The professionals then came in, took advantage of the quick runup and sold into the blip. The market has a downward bias and amateurs kept coming in on the assumption that Bush was going to prevail, he says. “The amateurs keep driving it up and the pros keep taking profits and driving it back down again.”
Financial markets may hate uncertainty, but they don’t seem to mind paralysis. One important signal from the election that was consistent, claims Niskanen, is that it was a repudiation of the Democratic leadership and the administration of President Clinton and Gore. “Gore should have won this election going in,” he says, “given the strength of the economy and the fact that we are at peace.” That would have been consistent with the historical record. “As it’s turned out, he barely might have a popular majority.”
At the same time, says Niskanen, the election results were a repudiation of the Washington leadership of the Republican Party in Congress. The Republicans lost seats in both the Senate and the House. While maintaining a tenuous control in both, the GOP will be hard put to stop any Democrat-endorsed filibuster in the Senate, giving the Dems an effective legislative veto over almost anything. But Maybury thinks that whichever way it goes the presidential debacle probably will be beneficial in the long run. He bases this on his belief that the American Founders were right in intending the government to be a relatively weak institution since unrestrained government is both dangerous and troublesome. As a result, they wrote a Constitution to limit government, Maybury asserts, because they believed it had little capacity to do good and an infinite capacity to do evil.
“Whichever way it goes, millions of Americans are going to be saying that their new president stole the election. That is going to greatly reduce his influence. So we’re going to wind up with a slightly Republican House, a Senate that is split down the middle and a president with very little credibility. In short, we are likely to get just about what the Founders intended the federal government to be, which is pretty much paralyzed.” Maybury thinks that can only be good for the economy.
Not everyone is so certain. According to Bruce Bartlett, a senior fellow for the National Center for Policy Analysis in Dallas, it’s not gridlock that financial markets and businesses want so much as the status quo. Although, in a recent op-ed he admits that “continued economic growth and a higher stock market” cannot continue indefinitely.
Besides, warn other observers, foreign investment in the United States has been spooked by Gore’s political shenanigans. For the moment, “everybody’s sitting on the sidelines until they see how this is resolved,” Niskanen says, as sidelined investors watch how whoever is the new president is able to operate in the face of the bitter divisions between the political parties and possibly between the executive branch and Congress.
Even back to back, the impeachment and this electoral challenge won’t have much of a cumulative negative effect on the foreign markets, says Niskanen, unless it leads to discrimination against foreign investors. He describes measures such as the 1998 Exon-Florio amendment to the Omnibus Trade and Competitiveness Act which, according to Niskanen, gives the U.S. government the discretion to veto mergers between foreign and domestic firms. That has been administered benignly, so far, he says.
Similarly, the Cato analyst says, the Justice Department has made recent attempts to bring U.S. subsidiaries of foreign firms to U.S. courts based on behavior of their parent company in another country. Niskanen describes such litigation as, in effect, U.S. attempts to extend its antitrust laws to its trading partners. He thinks in a state of prolonged crisis such efforts could add to the concerns of spooked foreign investors — particularly if they also were to see signs of attacks on domestic investors by an antibusiness administration.
Larry Abraham, editor of Insider Report and a serious player in Latin American funds, says that investors in Latin America have been stunned by the U.S. electoral crises. “I don’t think Americans realize how shocking this whole event is to foreigners. People all over the world, and particularly in South America, have this love/hate relationship with the United States. Still they view it as a haven of efficiency and productivity but also as a model of stability.”
Watching the brouhaha over who won the U.S. presidency, a Panamanian groused, “You’re acting like a bunch of Hondurans!” Abraham reports. “This is shocking to them. They are puzzled by it. They don’t understand it. They can’t believe that the great United States is going through this sort of thing.” However, they don’t know enough about the U.S. Electoral College system to understand where to lay the blame, he says. “They were laughing about it at first, but not now. It’s the old business that when the United States sneezes the rest of the world gets a cold.”
But Abraham says he has been surprised at how little effect the political situation has had so far on either bonds or the dollar. “The fall of the Soviet Union and all of the chaos that has ensued in various places in the world since that time have contributed powerfully to the mighty U.S. dollar. That perception hasn’t been drained out of the system yet. Hopefully it won’t be because that could trigger all sorts of other dire consequences. If this goes much beyond the second or third week I think we will see U.S. Treasury obligations and the dollar come under pressure.”
Asked whether foreign trepidation about crises in the United States might rise enough to reposition the currency positions of the dollar and the beleaguered euro, Abraham is cautiously bullish on America. “The only threat of that happening is if the dispute goes on for another month or so and it gets further wrangled in the courts. A lot will depend, too, on whether there is civil disorder in the United States,” he says. “If Jesse Jackson can send an awful lot of people into the streets and make it look like this is leading to civil disorder, then I think you could see a precipitous drop in the dollar versus the euro. But as long as that’s not happening, probably not.”
Abraham emphasizes that the longer the political crisis lingers the more likelihood there is that something such as a dollar-euro flip-flop could happen. “The euro is under a great deal of suspicion itself as a currency risk,” he adds. But more than the euro, says Abraham, keep your eye on the price of gold. “I think gold will be the lead indicator, not the trailing indicator. That will tell you how a lot of the big, smart, foreign money is going to bet. The only thing that has kept the euro from plummeting even further has been interventions by the European central bank. Nor is the relationship between the yen and the dollar a good indicator at this time because of all the problems in the Japanese banking economy.”
Abraham says gold is a much more sensitive lead indicator than a lot of people now are crediting. “Particularly, a lot of the younger players on Wall Street don’t even think about it. But I guarantee you the big money abroad thinks about it.” For domestic players, he says, “It’s been like a flat liner in a hospital drama. But that isn’t to say that it still isn’t appreciated as a safe-haven refuge. Should chaos develop as the electoral challenge drags on, watch to see if the price of gold starts to move. That will be a key indicator.”
Cato’s Niskanen thinks the major effect of what the voters have done is to slow the pace of change. He says that an almost equally divided Senate and House simply “will prevent any president … from pursuing very much of an agenda addressing longer-term problems.” He sees some prospect that this whole business will be drawn out for a while in other venues and represent a conflict among the branches of government between the Congress, the administration and the courts. As far as the markets are concerned, he tells Insight, the protraction greatly increases concern about the uncertainty of the political outcome. Second, because of the tactics being used by the Democrats and threatened by the Republicans, the conflict could continue this uncertainty for some time.
When the conflict is over and the presidency is resolved, you will find some pickup in the financial markets — not so much in the level of the market, but in what segments of the market do best, Niskanen advises.
Investor-class opinion is seen as favoring Bush, says Abraham. When Gore is successfully spinning the situation in his direction, the market goes down. When Bush is spinning it in his direction, the market goes up. “Make no mistake about it,” he says, “the investor class is decidedly pro-Bush and the markets have acted that way for the three weeks” since the election. Under Bush, Abraham tells Insight, it is anticipated that high-tech companies such as Microsoft and the oil, pharmaceutical and insurance industries will fare better. Under Gore, entities that are favored by governmental action such as Fannie Mae are likely to benefit. Some pickup in the markets is expected to result simply from resolution of the crisis, he agrees, but this will be accompanied quickly by some split in the market between firms and industries that may or may not be favored by one administration or the other.
The prospect remains that the dispute could drag on to the detriment of the country and its economy with no apparent resolution until the Electoral College vote, which is scheduled for Dec. 18, and even beyond. So far that has left most investors sitting on their portfolios rather than boosting the market with purchases. Other possibilities, such as throwing the crises into the federal courts or even Congress, portend further problems even in the most stable republic on earth. The Electoral College vote would cause a problem only if some “faithless” elector were to be persuaded to vote independently rather than for the candidate as pledged. A conditional forecast: If any or all of this happens as the electoral crisis continues, protracting the whole business into an authentic panic, catastrophe is possible, say professional observers.
Maybury says that Americans are severely handicapped in the financial world because they do not pay much attention to what goes on beyond their shores. “And that is where the real game is,” he says. “It’s geopolitics that really drives the world economy. And Americans don’t pay a lot of attention to it.”
Abraham agrees. “It’s amazing to me how few politicians are really aware of how sensitive the investment class is to all this,” he laments. In the old days the politicians would go out, spout their populist rhetoric, “and by and large you’d just figure that’s politics as usual. But, it’s not that way anymore. When you consider that 40-plus percent of the American people are invested in the stock market, either directly or indirectly, that’s sending a big message and investors are very sensitive to it.”
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