Stock Market:
Reversing the trend from the past few months-in which the market would turn downward on the increasing threat of war-stocks soared during the first week of war, only to fall early this week.
1) Last Monday, when it was known that President Bush would go on television to give Saddam Hussein an ultimatum to leave Iraq or be invaded, the Dow shot up from below 7800 to close at around 8150, counter to recent trends. For months, news indicating war was more likely almost invariably drove down the stock market and suggestions that war was avoidable buoyed U.S. stocks.
2) Last Tuesday and Wednesday, as investors waited for the Wednesday night ultimatum to arrive, the Dow climbed slowly to above 8,250. A drop early Thursday reversed on news of the missile strikes on Baghdad.
3) Much of the buying was driven by investors' desire to position themselves well for an anticipated post-war rally. As the first hours of the war resembled the 1991 Gulf War-missile strikes that involve little threat to U.S. soldiers-confidence increased that the war could be swift.
4) A huge Friday rally, during the live broadcast of "Shock and Awe" on Baghdad, made last week the biggest one-week gain, percentage-wise, in over 20 years.
5) This all reversed abruptly on Monday. Driving down stocks was bad news from the Iraq front including hostages and casualties. None of this news suggested any significant strategic or tactical setbacks to the war effort-it merely darkened the previously sunny-and unrealistic-idea of the war.
6) This fickleness suggests the rally may be driven more by speculation and positioning than on any confidence about improvements in fundamentals of the U.S. economy. One worry for the long term: if too many investors bought last week in anticipation of a post-war rally, there could be little capital left over for that post-war rally to happen.
Postwar:
The debate inside the Administration about what to do with post-Saddam Iraq has already begun.
1) The debate is along the same lines as the internal battle of how and whether to go to war with Iraq: Vice President Dick Cheney and Defense Secretary Donald Rumsfeld vs. Secretary of State Colin Powell (with National Security Advisor Condoleezza Rice somewhere in between). Nobody wants a prolonged U.S. occupation of Iraq, but the question is: who runs the country?
2) Powell has made clear that he sees a major United Nations role in post-war Iraq, which is obnoxious to the advocates of U.S. domination in world affairs. Powell sees this course as essential to repair the damaged U.S. regard in international relations.
3) The Cheney-Rumsfeld position is to cut out the UN and quickly build a new government manned by anti-Saddam Iraqis, under American tutelage. In effect, this would be a unilateral approach without any international supervision.
4) This dispute is heightened by mutual finger-pointing between the Pentagon and the State Department over the Turkish fiasco, with Powell's critics claiming he should have made the trip to Ankara.
Cost of War:
The War supplemental has already helped Democrats slash the budget for the President's tax cut in half, and some Republicans are wary of further damage to budget plans caused by the uncertainties of war.
1) Bush's budget team and House Budget Committee Chairman Jim Nussle (R.-Iowa) separately tout their spending blueprints for eliminating deficits over time. Neither, however, takes into account the cost of war with Iraq.
2) These Republicans have defended their avoidance of this before by claiming they weren't certain there would be a war. Now, they simply say, they cannot estimate the cost of the war.
3) This makes budgeting nearly meaningless, though, and GOP equivocation on the topic harms the credibility of those calling for tax cuts. The ranking Democrat on the Budget Committee, Sen. Kent Conrad (D.-N.D.) has duly pointed out the "disconnect" in the GOP wartime budget that has no budget for war costs.
4) Senate Democrats were successful in their second run at reducing the tax-cut budget in half, in large part because of the size of the war supplemental-last week they had pared down the tax cut to be included in the budget by $100 billion, setting that money aside for war expenses.
5) Quietly, some Republicans worry about the costs of the war running up new records in deficits and giving Democrats ammunition in 2004.
6) Last week, the President informed appropriators of his request for a defense supplemental. The $75 billion price tag gave Democrats the push they needed to slash the tax-cut budget.
