Our Point of View

Will History Repeat Itself?  

There are all sorts of economic "experts" out there, but some are certainly better than others, and the best are right or even when they are wrong. Once such man - an expert on market cycles for a global macro hedge fund -- was bullish for a year through the end of April, but he has since turned seriously bearish.

Barton (not his real name) has seen and done everything in the markets, from risk-management to sales management, from bonds and equities to currencies and swaps, from New Jersey to Switzerland and Taiwan. He rarely rests -- sleeping just a few hours a day in the early morning -- as he scans the horizon of time and geography for events that might help or harm their positions.

He is negative on the market now for a couple of reasons. An arch-conservative, Barton has become highly concerned about the loss of confidence in President Bush, both domestically and overseas. He faults Bush for not working hard enough at his job and hiring badly, and then trusting his hirlings implicitly.

Because he deals with major European, Arab and Asian investors all the time, he understands how important foreigners are to our stock market. You see, most U.S. pension and mutual fund managers are already fully invested in our market. They steadily get more fund flows from U.S. workers' retirement plans every month, but that only really keeps the machine rolling at a steady pace. To get the market moving, Wall Street needs inflows from overseas fund managers.

Foreign investors are very sophisticated about U.S. politics. Most have gone to the best schools in America, travel here frequently and pay a lot of money for top consultants. They are not naive. Foreign investors care a lot about leadership They don't really care if a Democrat or a Republican is in control of the White House -- they just want someone firmly in charge so that they can have confidence their money is safe.

The Gallup Poll Presidential Approval Rating is now 34%. According to analysts, a low presidential approval rating can sometimes be a positive in a contrarian sort of way -- meaning that there is excessive pessimism afoot. Yet they hasten to add that when it is this low, "it's so bad that it's actually bad." During the rare period when the approval rating has been under 35%, the Dow Jones industrials have declined at a negative 6% annual rate.

Now, where it really gets ugly is when you notice that there is only one other precedent for the twin demons of low presidential approval and a midterm election year happening at the same time. That was in 1974, when the market would ultimately slide 45% to a 12-year low amid the Watergate scandal, impeachment hearings and the resignation of President Nixon, not to mention a gasoline-supply and price shock.

The Rise of Mercantilism

But that's not the only big problem that Barton sees. He also frets over what he refers to as "neo-mercantilism." Mercantilism, you may recall from economic textbooks, was the main paradigm that characterized world trade in the 16th and 17th centuries before capitalism shifted into high gear. It's a view that politicians, not business leaders, should guide international trade -- and that trade policy should serve strictly political ends.

Modern mercantilists include Vladimir Putin of Russia, Hugo Chavez of Venezuela, Evo Morales of Bolivia, and in some regards, the governments of Germany, China and Japan. Examples are Putin's withholding of natural gas from Europe; Chavez's takeover of foreign oil and gas interests; and Morales' nationalization of energy and mines.

Mercantilism is an unsettling type of economic warfare, says Barton -- an attempt to restore power to governments that was stripped from politicians by capitalism. You could almost call it the "weaponization of finance." If it swells, much of the market freedom that we know today will shrivel, he fears, as countries withdraw into their shells and restrict world trade.

On a more practical level, Barton says his models show that the industrial metals are four times more expensive than they have been historically, and consumer durables are twice as cheap as they normally are. He believes the gap will close.