The Reagan Bull Market Jude Wanniski August 1, 1980

Executive Summary: The Republican National Convention in Detroit both clarified and amplified Ronald Reagan's commitment to a positive Presidential campaign based on classical approaches to economic growth. Reagan's offer to Ford, doomed from inception, finessed the Easter Establishment's attempt to subvert the populist heart of the Reagan campaign. The convention dynamics made George Bush the wisest possible choice by Reagan for his running mate, elevating RR above Ford as the undisputed party leader, de jure and de facto. A Reagan landslide in November is now probable, along with effective control of Congress. If Reagan can avoid several pitfalls, his election can quickly translate into major fiscal, monetary and regulatory reforms in 1981. This scenario suggests potential corrections or hesitations in the bull market now underway, but as the pitfalls are avoided, the breadth and duration of a major advance should be realized.

The Reagan Bull Market

It is hard to imagine the Republican Party emerging from its national convention in Detroit in a more formidable position, poised for decisive victory at the presidential and congressional levels this November.  Except for the early platform struggle over the Equal Rights Amendment, and to a lesser extent the anti-abortion plank, there was not a discordant note struck on the issues. Reagan's militancy on the most controversial plank in the platform — Kemp-Roth's 30 percent tax rate reduction as a symbol of the supply-side approach to economic growth — signaled to the party's leadership that it would be even more difficult to push him around on lesser issues.  Rep. Jack Kemp, Rep. David Stockman and others on the supply-side team shaped, almost dictated, the entire platform along classical lines.  The over-arching idea of growth and opportunity deriving from the energies of the people, rather than manipulation by elites, pervaded the convention.  Unity, party consensus, while still fragile, was almost palpable.  The negative appeals that have been the hallmark of Republican conventions were absent throughout. It was Reagan who set this mood, demonstrating repeatedly that he is instinctively a consensus rather than a coalition political leader — appealing to all Americans rather than a definable segment. His buoyant acceptance speech ("We have to move ahead, but we're not going to leave anyone behind.") set the tone for the entire Republican fall campaign; after 50 years the GOP is struggling, so far successfully, to become the party of the people.  And Reagan's manner of selecting George Bush as his running mate was even more important than the selection itself to the success of the coming campaign.

Going into Detroit, the greatest threat to GOP success in November was the possibility that George Bush would be forced upon Reagan, and that Bush would turn out to be the Walter Mondale of 1980 — a gangplank for the eastern establishment.  This was the "boarding party" theory that, in one metaphor or another, provided a conceptual basis for understanding the classic chess game that took place in Detroit between the populist and elitist wings of the GOP.

In 1976, goes the theory, Jimmy Carter ran for the Democratic nomination as the Populist from Plains, and as a man of the people instead of a pillar of the Democratic Establishment, he soared to success.  His high-water mark, though, was at the Democratic Convention at Madison Square Garden, at which he made his first decision as the Democratic nominee.  He selected Fritz Mondale as his running mate.  Mondale, whose style is that of a passive follower rather than an active leader, became the "gangplank" over which the establishmentarians rushed in taking over the Good Ship Carter.  Carter had postured vaguely against Big Business, Big Government, Big Labor. Now, rushing over Mondale's form was George Meany, the AFL-CIO, the Brookings Institution, Ralph Nader, the Trilateral Commission, and the entire Eastern liberal elite.  Running against the Eastern conservative elite and Gerald R. Ford, Jimmy Carter became more and more specific, less populist and more elitist as the campaign progressed. He barely won in November after having led by more than 30 points in July's public-opinion polls.  Thereafter, Mondale became the conduit that staffed the Carter Administration with the Best and Brightest elitist acolytes.

In 1980, it has been Ronald Reagan, Western populist, easily knocking off the candidates put up by the establishment:  John Connally, favored by Big Business; Howard Baker, the favorite of "moderate" Republican careerists in government; George Bush, favorite of the non-ideological "regulars" in the party, the Ford "shadow government;"  John Anderson, favored by the liberal wine-and-brie set.

Also as in 1976, the populist (Reagan) comes out of his nominating convention more than 30 points ahead of his likely establishment opponent of the other party (Carter).  Will this be his high-water mark?

In advance of the Detroit convention, the Boarding Party theory suggested that Reagan would suffer if Bush were forced upon him and became a Mondale-like gangplank.  The Reagan campaign would soon be taken over by the "regulars," the American Enterprise Institute, Georgetown's Center for Strategic International Studies, the Trilateral Commission and the Business Roundtable.  Jerry Ford, senior statesman, would remain de facto leader of the GOP, issuing pronouncements from Palm Springs.  The populist elements inside the Reagan campaign would be diluted, if not submerged, and the pattern of the campaign would follow that of 1976.  Reagan would seem less attractive to the electorate which would turn to John Anderson in greater -numbers.  Instead of winning decisively, Reagan would perhaps lose by not assembling an Electoral College majority.  The nation would face four more years of drift.

Ford arrived in Detroit on July 12, acting the role of Party Leader.  He let loose a general blast at the Platform Committee for its position on the ERA, as if to pick a fight.  And he again offered his view that the election would probably be decided in the House of Representatives.  This was all psychological war, though with Ford implying that unless Reagan would take a "moderate" (one of his lieutenants) as his running mate, Reagan would be solely responsible for the Goldwater-like debacle that would surely follow.  Mr. Ford also let it be known that George Bush was his choice.

Reagan was also engaging in "psywar." He let it be known that he didn't feel right being "pushed" toward Bush, that he thought that Bush may have "clutched" in New Hampshire, and that his personal favorite was Jack Kemp.  Nancy Reagan let it be known that she did not look upon George Bush with great warmth, and that while Sen. Paul Laxalt of Nevada was her personal favorite for V..P., her second choice would be Kemp.

Ford had been characterizing Kemp as "just as conservative as Ron," but in the week of July 7, Kemp had been shattering the notion that the convention was divided along "right-wing" and "moderate" lines. The division was forward-looking populism with fresh ideas versus backward-looking elitism with stale ideas.  As chairman of the foreign and defense policy subcommittee of the Platform Committee, Kemp snuffed out several incendiary amendments — dealing with Taiwan, the Panama Canal, protectionism, the Trilateral Commission — that would have split the convention over old debates.  His chief ally in the House, Rep. David Stockman, chaired the energy subcommittee, and Grafted a plank tailored to the incentives of energy entrepreneurs.  Kemp's inner-city bill, applauded by blacks and Hispanics, was endorsed in the platform.  Union-baiting boilerplate that had been standard in GOP platforms for decades was excised.  And Senator Roth, chairman of the monetary and fiscal policy subcommittee, fashioned a plank out of classical economic lumber.  It even included Kemp's language calling for a return to a monetary standard aimed solely at maintaining the dollar's value.  Indeed, it was Jack Kemp's platform that the GOP was adopting.

Thus, as Mr. Ford arrived in Detroit, George Bush's stock was down and Jack Kemp's had soared.  The strategists for the first Reagan-Ford meeting, on both sides, surmised that Ford's best move was to go into the meeting with three names, and use Bush as a battering ram.  That is, Ford would propose Bush believing he would be rejected, and follow with Donald Rumsfeld and Guy Vander Jagt as acceptable alternatives.  If Reagan rejected the alternatives, he would essentially be spurning a marriage with the Ford "moderate" wing, as Goldwater had done in 1964 vis-a-vis Rockefeller/Scranton, and the Eastern Establishment would feel justified in sitting on its hands as it did in 1964.  Yet if Reagan accepted one of the three names, Ford would emerge in an elevated position as de facto leader of the GOP, having been able to force his choice — a gangplank for the Eastern Establishment — onto the ticket. In the bizarre psywar of the proceedings, the grapevine even buzzed with the surmise that Ford, if rejected, might pack his bags and depart Detroit.  All the pressure was on Reagan and there seemed to be no escape.  It was against this backdrop of wargaming that Reagan confounded Ford by offering him the No. 2 spot on the ticket.

We may never know if Reagan ever believed the so-called "Dream Ticket" was possible, or if his calculus was strategic.  My assumption, on the spot, was that Reagan knew the idea was doomed from inception — but that he could safely make the offer knowing it would be rejected. All Reagan had to do was imagine Ford suddenly realizing he would be trading in his golf sticks and Palm Springs, at age 67 and a lifetime of public service, for humdrum ribbon-cutting in Washington's humid summers and nasty winters.  Ford would have had to ask for more, and that would be the end of it.  If Ford had not asked for more, then what? Then, the ticket would have worked.  It only unraveled because of the way Ford reacted to it.  In either case, Reagan elevated himself by making the offer that Ford would not make to him in 1976.

The Kemp supporters in Detroit, who had been following this scenario, believed that it would work to put Kemp on the ticket. Once the "Dream Ticket" fell apart, Ford could not pack his bags. Nor could he put forward three names.  His leverage would be gone, not only for the moment, but into a Reagan Administration.  No longer could he casually potshot Reagan at all; in the public mind, he is now somehow in Reagan's debt.

In other words, Reagan emerges as the de jure and de facto leader of the unified Republican Party.  Having finessed the Establishment on the Vice Presidency, he can have his pick and get not a murmur of protest.  And he can easily pick Kemp.  The problem, though, was that at that moment Reagan and his populist firebrands had won everything.  They had the presidential nominee, the platform, the publicity, the rhetoric, and now Ford's formal eclipse as party leader.  The Old Guard was left standing naked, except for their socks.  But now, at this moment, when Reagan could pick anyone, he chose not to order the Old Guard out of their socks by picking Kemp.  He played the good shepherd and chose Bush, not as a gangplank over which would rush stale ideas, but as a conduit to a critically important segment of the Republican family.  There is, after all, no way a Reagan administration could function without the support and personnel of the establishment.  But it is critical that Reagan not let his populist ideas be homogenized by the great Washington blender, as Jimmy Carter did.  So far, Reagan has resisted the blender, which is partly why he has a 31-point lead over Carter at the moment.  The pressure on him to do nothing, play it safe, run out the clock, is enormous.  The most encouraging post-convention news coming out of Reagan's campaign is that he is worried about his lead and the tendency to want to run out the clock.

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These developments have been extremely encouraging to the financial markets.  The bulls at last have a solid foothold, with the prospect of a Reagan/Republican landslide in November to parallel Harding's 1920 victory or Roosevelt's 1932 triumph, both of which ushered in bull markets.  Reagan's substantial lead in the public-opinion polls is not quite similar to Carter's 34-point spread over Ford in July 1976.  Carter's lead was built by being vaguely populist and it declined as he became specifically elitist. Reagan's lead has been built by being specifically populist.  He will lose ground by backtracking into fuzziness. 

His acceptance speech in Detroit is the basic campaign document, a winning document if he remains faithful to it.  The bears must bet that Reagan will stumble along the way, and either lose or win without a clear mandate and effective control of Congress.  There are indeed several pitfalls that Reagan can stumble into during the next three months. If he avoids them all, a Dow of 1100 on Election Day is a reasonable target.  There would, of course, be corrections and hesitations along the way as the market observes the inevitable temporary setbacks.  Here are some of the most important dangers:

1.  Reagan's chief strategist, Richard Wirthlin, is also his pollster.  This is a dangerous mix.  Polling can only tell a candidate what the electorate believes today, not what they will believe given new information.  Current data suggest that the appropriate strategy is to make "Carter the issue."  Indeed, $16 million is budgeted for media advertising focusing on Carter's leadership failures.  This will not help Reagan, because it gives the electorate no new information.  Nor does it help GOP congressional candidates since they are not running against Carter, but against individual Democratic candidates.  Reagan's ideas of governance must be made the issue, consolidating the new information in the Republican platform and his acceptance speech.  GOP congressional candidates must grab the coat-tails of the ideas, not the man.  There is plenty of time to make these corrections.

2.  The independent groups that intend to spend $50-to-$60 million on media advertising to savage Carter are a danger to Reagan because they are outside of his control.  Reagan's own instincts are perfect when he >says he will not permit George Bush to take the low road and will himself ignore Carter's ad hominem attacks on him.  But he cannot control the independent groups, which plan to fill the autumn airwaves with negative assaults on Carter.  Yet the electorate will tend to hold Reagan responsible.  This problem can be partially offset by Reagan-Bush declamations against the independent effort.  Imagine Eisenhower planning the invasion of Europe without having absolute control over the strategic placement of his troops.

3.  Reagan's strength as a political leader is in advancing ideas and concepts of government rather than pushing laundry lists. The issue must remain economic growth versus austerity,  the people versus the elite.  But Carter will attempt to embroil Reagan in laundry lists, debating nuts and bolts and decimal points.  Reagan's staff must avoid its own impulse to engage in the laundry-list debate, answering decimal point for decimal point, or the conceptual vision will be pushed out of the arena.

4.  George Bush is not yet "on the wavelength," as he himself put it.  If he doesn't get on the wavelength rapidly, Reagan will have to spend his own resources in the crunch of the campaign to bail Bush out.  Bush needs a supply-sider on his campaign plane.  He has to take an afternoon to read Kemp's book "An American Renaissance: A Strategy for the 1980s," for a quick, mainline dose of what Reagan is all about.  Bush has to do this on his own.  Reagan will never issue "marching orders."

5.  Bush was CIA director for two years.  The underground opposition may try to pin every evil deed on the planet that occurred during Bush's tenure on him personally.  It's starting already with buzzing about the assassination of Chilean Ambassador Letelier.  Bush must remain serene or he will deflect attention away from Reagan's winning issues.  He should trust the national press corps — which has already dug into the charges and found nothing — to inter them.

6.  Reagan starts out with the potential to win all 50 states. He can do it if he doesn't write off any state at the outset.  He must not drop his national strategy and fall back on a regional strategy. "Councils of war breed timidity and defeatism," Douglas MacArthur observed after he polled all of his advisers and found that not a single one supported his idea of a landing at Inchon.  Alexander the Great conquered the world and Vince Lombardi conquered the NFL by going after the opposition's strength.  Reagan should go to Massachusetts, and Georgia.  He can win it all.

7.  If Carter is not the Democratic nominee — if the Democrats tear themselves up in Madison Square Garden and hand off to Mondale or Muskie — a Reagan landslide will be more easily achieved. It is not the man, Carter, but the Democratic idea that is collapsing.

A Carter substitute would collapse the Anderson campaign and elevate Reagan's chances in Massachusetts, and with Carter gone, Reagan would sweep the South, Georgia included.  But if the Reagan advisers who are now contemplating making "Carter the issue" are thrown into confusion and begin pushing regional, coalition strategies, the advantage Reagan gets out of Democratic disarray would be reduced.

Reagan's own instincts will help him sidestep all these potential pitfalls, but very often the candidate is swept into them by staff decisions he doesn't know about.  That is, Reagan may believe he is going after New York by being scheduled there for speeches. But if his media strategists decide to go low-risk, and mentally write-off New York, New Jersey and Connecticut, this will be reflected in the New York media "buys," and the ideas just won't get through. The best guarantee that this won't happen is the fact that Northeast Republicans will be watching this play with eagle-eyes, as will the Democrats, who would quickly spread word that Reagan has "written off" the Northeast.

If the campaign does not fall into any of these traps, Reagan would surely have his mandate and effective control of Congress.  The financial markets would become more buoyant, more bullish, having then only to await the transition, the naming of the Cabinet, and the boldness of the legislative agenda.  The Reagan bull market, now underway, can be broad and enduring.

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