Equal and opposite
FINANCE USA WILLIAM JANEWAY
The past week has witnessed the most dramatic demonstration imaginable of the current and prospective nature of the relationship between Washington and Wall Street. Washington acts, Wall Street reacts: that is the name of the game. The divergence between the stock mar- ket's behaviour and the depressing state of the economic fundamentals has now been institu- tionalised for the duration of the 1968 cam- paigning season.
The new factor is this. Hitherto, Wall Street has been responding to developments in the military war across the Pacific Ocean and the financial war across the Atlantic Ocean. Now the political war at home has exploded to upset all past calculations.
Peace is bullish. The peace offensive which the President has launched has triggered a wave of optimism among speculators and investors. In the context of the trials and tribulations
which afflict both the President and the nation, this week's peace-plus-resignation surge on Wall Street represents in extreme form a poli- tical bear market rally, with all the dangers and vulnerabilities associated with the purely finan- cial variety. The extent of the rally will be the measure of the stock market's vulnerability to a reversal of the Vietnam war news. When peace does not come, when negotiations drag on or are not even commenced, the reaction to present over-optimism will be as sudden and dramatic as the rally itself.
Even before the peace-plus-resignation rally has a chance to be killed off by action on the Vietnam front, however, Wall Street has a rendezvous with the immediate domestic im- pact of the financial war being waged against the dollar. The March gold crisis demonstrated to one and all that, until Washington brings the Vietnam war and its financial backlash under control, the world's money system will be subject to shock and disintegration. All sophisticated judgments as to the durability of the two-tier gold system hinge upon Washing- ton's ability to reassert long-term leadership and control over its own and the world's finances. World financial opinion—private and official—is looking to Washington either to de- escalate the Vietnam war to the point at which the financial burden falls to manageable pro- portions, or to deflate the American economy to the point at which the surplus on the private sec- tor's balance of international payments is great enough to offset the dollar drain to Vietnam.
The President's speech on Sunday night re- vealed that even a peace offensive of this mag- nitude goes with an increase in the financial cost of the war to the us Treasury, as well as the calling up of 13,500 reserves. (Typically, the President's request for a $5,000 million supplemental appropriation understated the Treasurys unfunded commitments by some-
thing like two-thirds.). With the cost of the
war rising during the peace offensive, and bound to rise explosively if the peace offensive fails, Washington is left with the alternative of cutting back domestic demand, by fiscal or monetary means, to make room for Vietnam.
The token 10 per cent tax increase, whose passage through Congress has become the international symbol of American 'fiscal re- sponsibility,' remains a chimera. The only tax increase with a real chance of passage would be a far more severe measure included as part of a post-peace offensive move towards an out-and-out war economy. What is left is monetary policy—specifically, a policy of mone- tary restraint by the Federal Reserve aiming towards a us bank rate of 6 per cent and Triple A bond rates of 8 per cent. The 1966 credit crunch, with its world-wide repercussions, took place because of the honestly amateurish miscalculation by the administration of the cost of its Vietnam com- mitments. By contrast, the 1968 credit crunch will be planned and programmed by Washing- ton as the forced response to the gold crisis. For this very reason it will not be subject to the swift reversal which saved the 1966 situa- tion at the brink of financial disaster.
During the coming months, therefore, be- haviour on Wall Street will reflect day-to-day developments in America's three wars—the military war in Asia, the financial war across the Atlantic and the political war at home, with the racial war in America's cities adding yet another source of dismay and disruption as the simmer comes on. At this critical time, it is worth spelling out in detail the likely course
of events on Wall Street. The President's in- tended resignation has lent credibility to the peace offensive; consequently, it will lend strength to the peace-plus-resignation rally. But the President's forced translation to a higher sphere 'above politics' will serve to augment his already disturbingly great ability to trans- form the political, and thus the financial, climate on a moment-to-moment basis. And, at the same time as the peace offensive makes re-escalation the next item on the agenda, Wall Street's markets will be deliberately squeezed for cash and credit as the alternatives to equity investment become increasingly attractive.
In the foreseeable future, Wall Street is going to be living with renewed fear on the Vietnam front, uncertainty on the political front and fierce pressure on the financial front. That is to say, before the campaigning season is over, Wall Street will be testing, and very likely breaking through, the 1966 lows around the 730 mark on the Dow Jones Industrial Average. Prudent investors will respond as do all in- habitants of war-torn lands: they will head for the bomb shelters for the duration.
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