This is written before we know who won the presidency. An optimistic forecaster would assert that the readers know the outcome of the electio interrupta. A pessimist would predict that the issue will still be tied up in the courts. A realist would assert that the outcome is currently unknowable.
Writing about the unknowable is the province of the metaphysicist. Strategists must confine themselves to a discussion of probabilities, and the investment consequences of those possible outcomes. Here they are:
The poisoned chalice: The winner is seen by approximately 50% of the voters and members of Congress to have won unfairly, a modern Richard III. He is unable to implement his own legislative program and he fails to command respect abroad. The French and Russians ensure he cannot form coalitions to control menaces such as Saddam Hussein. When a global financial crisis hits, he cannot marshal the cooperation needed to contain it. His party is decimated in the midterm elections.
Grudging Gore win: Al Gore wins, and most voters breathe a sigh of relief. Congressional Republicans remain embittered by election night media treatment and by losses in court. They strike compromises on key issues, such as HMO reform and Medicare drug benefits, while preparing to gain control in 2002. When a global financial crisis hits, Larry Summers, pupil to the savvy Robert Rubin, tries to manage it, but finds his options constrained by domestic divisions.
Grudging Bush win: George W. Bush wins, and most voters breathe a sigh of relief. Congressional Democrats and the media remain embittered. Compromises come on key issues as in second scenario. When a global financial crisis hits, Lawrence Lindsay gets on-the-job training, and finds his options constrained by domestic divisions.
Deus ex machina: The winner is seen to have won mostly fair and square. The public unites around him, his poll ratings reach towering heights, and he is able to work with Congress to implement a stripped-down version of his election program. When a global financial crisis hits, he has the global prestige to rally the resources necessary to contain it.
Under none of the above theories do we get a full-blown assault on the Treasury. The surpluses remain intact during years of good growth and decent stock markets. The shimmering tension in Congress between spenders and tax-cutters enforces moderation, even on fire-eaters such as Thomas DeLay, John D. Dingell, Richard Gephardt and David Bonior.
Note that the most important difference is in response to a global financial crisis. Why is such a challenge inevitable? One might also ask, why is a tornado sometime in Oklahoma inevitable?
The world was blessed with the Clinton-Rubin crisis team during the Asian, Mexican, Russian and Long-Term Capital Management crises. That pair was smart, tough, savvy and instinctive. They were backed by the world's strongest currency, the world's strongest stock market, the world's strongest economy, widespread domestic political support and, of course, the Federal Reserve. When the Russian and Long-Term Capital crises converged, causing what was termed at the time "the worst financial and economic crisis since World War II," they managed it, with quite a little help from their friends at the Fed.
The next president will lack many of those advantages when the crisis erupts. The dollar's current strength derives less from the relative strength of the United States over Europe than to the price of oil and the intafada. The gap between continental European growth and the U.S. growth has narrowed. Nasdaq's collapse has dimmed the luster of U.S. stocks relative to European equities. If the president also is seen to lack domestic support, then the Fed will have to manage the crisis, along with other central bankers.
The crisis, when it comes, will involve an attack on the dollar. The United States goes $1.7 billion or so deeper into debt to foreigners each day on the current account deficit. To date, the United States has been able to attract foreign money to fund that deficit and the domestic savings deficit. In particular, it has been able to draw down Eurodollars to fund domestic loans in the banking system. Last year, U.S. banks increased lending by 15%, while core deposits grew just 2%. The difference probably was funded largely by repatriating Eurodollars.
If those foreign depositors decide the euro is ready to rally, they'll refuse to roll over their Eurodollar holdings. That's what happened in September and October 1987, precipitating the stock market crash. With Eurodollars now the largest source of global liquidity, any seize-up in that market would be painful.
Among President Clinton's most attractive attributes was his legendary luck. We can hope that this is transmitted by some form of apostolic succession to the next president, but we probably shouldn't bet the store on that belief. Mr. Clinton's luck was rooted in his magnetism, and neither Messrs. Gore nor Bush threatens any cardiac fibrillation.
Here's to good luck for the winner, whomever he may be. He -- and we -- will need it.
Donald G.M. Coxe is chairman and chief strategist, Harris Investment Management Inc., Chicago, and chairman, Jones Heward Investment Inc., Toronto
