As W. Takes Oath, Market Is Adrift and Euro Lurks

When George W. Bush lowers his right hand come Saturday, he

will find himself with a very full plate. I’m not concerned about his cabinet

choices. John Ashcroft may well have been chosen to forward a judicial

ideology; I find no surprise in that and small cause for outrage, despite being

completely pro-choice myself (I also have no problem with posting the Ten

Commandments in courtrooms). Just as I found no surprise, although somewhat

more cause for outrage, in the departing administration’s choice of an Attorney

General whose principal task would be to keep the Clintons, their friends and

their campaign contributors out of the sneezer. This is politics, after all. I’m sorry not to see Linda Chavez take

office; she sounds very bright and practical, and has firsthand experience of

the difficulties faced by the “illegals” who do most of the work in this

country that the “legals” are unwilling or too stoned to do.

It’s the business and economic situation that I find

troubling. The chickens coming home to roost-some the size of that new Airbus

A380-may not quite blot out the sun, but they do cast a definite shadow. Let’s

look at some of these.

What to do about the

stock market ? What is a good rule of thumb for stock traders is also a good

rule for administrations and central banks: You can’t fight the tape. Another

good rule reminds one of that old Lampoon

joke about elephants and fellatio: Everything will work once . I don’t think there will be any more Mexican bailouts.

This is a market awash in uncertainty, in which fools are

still listened to as they try to cover their tails. Until the practitioners of

what I call “The Og Oggilby School of Security Analysis”-the prime example

being Henry Blodget at Merrill Lynch, whose “analysis” is mainly conceptual-are

driven from the Street, confusion will continue to reign. By way of

nomenclatural explanation, veteran readers

will recognize Og Oggilby (played by the incomparable Grady Sutton) as

the would-be son-in-law of Egbert P. Sousé (played by W.C. Fields) in The Bank Dick, a film which, along with Animal House , is as full of revealed

truth about this country as anything in de Tocqueville. In the movie, Og allows

himself to be persuaded by Sousé to invest the funds of the bank of which he is

cashier in shares of the Great Beefsteak Mine. Sousé’s projection of the riches

that will flow from this fraudulent Golconda reads like a Blodget “analysis”

of, say, Amazon.

The market has not really been helped by clear signs of

panic at the Fed. Neither in this country nor globally are capital markets so

finely calibrated that a one-half-point rate reduction, even leveraged (as was

the case with the infamous Alan Greenspan “carry trade” of the early 90′s:

borrow from Uncle Sam at 3 percent, lend back to Uncle Sam at about 6 percent),

will turn around the psychology of investors accustomed to thinking in terms of

internal rates of return of 30 percent or better. What the Fed needs to do is

worry about the possible effect of credit liquidations on stock prices. Worry

about what things cost relative to the spending power of the people. Wall

Street will do just fine; it generally has.

The dollar .

Starting back with OPEC in the 70′s, the world was flooded with dollars, a

torrent that was exponentially increased in size and power by the trade

deficits of the 20-year boom. It is axiomatic that the only way for holders of

a currency in oversupply to protect themselves against exchange losses is to

invest that currency in the country of its birth. One problem we had was that

many of the dollars that flooded the U.S. beginning in the mid-70′s weren’t

born here; they were created offshore, without the Fed’s by-your-leave, by the

“petrodollar recycling” Ponzi scheme. I believe that down the line this will

come to be seen as the most grossly irresponsible management of a nation’s money

since Spain in the 17th century. As my friend Martin Mayer wrote at the time, a

nation that can’t control its currency won’t be able to control much else about


This dollar inflow forced a massive upward pricing

readjustment of the two “fuels” that drive the U.S. economy, energy and credit,

leading to a ripple effect that reached the checkout counter and eventuated as

the inflation of 1977-81, which Paul Volcker ended by squeezing its neck until

dead. A huge liquidity pool remained, however; as this began to be pumped into

circulation, the economy took off. After all, the only sure way to grow an

economy is to put money into the hands of more and more people. It didn’t hurt

that the population grew dramatically during this period.

The situation is different now. For one thing, the euro’s

out there, lurking in the underbrush, tail swishing back and forth.

What happens if OPEC

decides to accept euros as well as dollars in payment for oil transfers ? As

a store of value alternative to the greenback, the euro seems, culturally and

demographically, infinitely preferable to the yen. If the dollar bloc that

stretches from Point Barrow to Cape Horn is weakening economically, why

wouldn’t OPEC hedge by billing its E.U. and satellite customers in euros? My bet

is that it will. What this will mean I simply cannot predict, but my guess is

that the odds would be on the order of 60-40 favoring worse  rather than better for us.

The global problem .

Frequent readers of this column are aware that, over and over again, I have

expressed my concern that the U.S. has represented too great a share of world

demand to be ultimately healthy for anyone, including ourselves. We have become

the consumer of first, middle and last resort, especially for finished goods

with high overseas technological and/or labor content. A dollar convulsion that

reduced U.S. imports could lead, overseas, to political convulsions that might

find their retributive way to these shores.

I don’t think we properly appreciate how thoroughly we are

disliked by grown-ups around the world. We may point to McDonalds, Hollywood

and rap as symbols of our cultural hegemony, our command of values, but we tend

to overlook that the appeal of these is largely to post-adolescents-especially

to young people who feel themselves incarcerated in tradition, or in

religion-based social orders where the rules are laid down by village elders

who feel challenged by the anarchic youth culture. The world is aging, and the

ambition and envy (along with greed, the two drives that animate both the

zealots of capitalism and its enemies) felt by older folk is more to be feared

than that felt by the young, who don’t really know what they’re fighting

against, only that it’s cool and the alternatives are less so.

In 1992, I voted for Bill Clinton. Saturday, I will be glad

to see him go, because he takes with him what I now recognize to be an illusion

on my part: that young people are fit to govern. If nothing else proved this,

the dot-com boom/bust, in all its aspects, did. It was a virtual catalog of

youthful mistakes, starting with No. 1: the belief of young people (“I vas

dere, Charlie”) that what is happening to them is happening for the first


Obviously there are exceptions: men and women made grown-up

before their time by combat, or by the kind

of high-level competition in which there is only win or lose, in which

there are no second chances, repechages, bail-outs, spin-doctoring,

Presidential pardons. There are others-I think J.F.K. was one-who never grow

up, on whom war confers a kind of eternal youth of outlook. The incoming

President worries me; he sometimes comes across as callow. But I take comfort

in the lines on the faces of the men and women he has chosen to surround

himself with. This is going to be a bumpy ride. There’s going to be a need for:

been there, seen that.