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Thursday October 27, 2005 - 00:30:14 GMT
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Libby/Rove Indictments Dollar/Bonds/Stocks Negative?

Libby/Rove Indictments Dollar/Bonds/Stocks Negative?

There is something neat in symmetry and there is nothing neater than a symmetric argument when trying to figure out what may or may not happen to US assets and the dollar on Thursday (or Friday) when the special investigator of the White House CIA-agent-leak announces preliminary findings which most insiders believe will include criminal indictments against President Bush's and VP Cheney's top aides de camp...Carl Rove and Scooter Libby. Other lesser knowns may also be indicted and charges are expected to run from disclosing the name of a CIA covert agent as well as conspiracy (to cover-up) and perjury (lying to a grand jury).

The neatly symmetric argument is that if corporate malfeasance is bad for a firm's stock where senior executives run amuck, it should follow that government malfeasance should impact negatively a country's debt and currency. If it were only so easy...exceptions are the rule not the exception.

The key question for markets on pending indictments (yes there is a possibility that the grand jury could not agree to bring any indictments), is how far up the food chain they run? Will Cheney be named as a co-conspirator, indicted or unindicted (recall Nixon was an unindicted co-conspirator when Congress moved to impeach over Watergate)? One does not get any closer to the top than Libby with the VP and Rove with the President. So even if Cheney has a firebreak around him on indictments or naming in a conspiracy without a formal indictment, a measurable degree of political uncertainty is introduced and while markets have had time to discount this, there is potential for US markets and the dollar to react...sag. Clearly the stakes for market weakness rises with the depth of the charges.

At the end of the day confidence in how the US is governed is reflected in part in the premium in the yield curve. If it turns out, through this investigation, that the justification for the war in Iraq was deliberately enhanced as in facts twisted, exaggerated or misconstrued, it would be a serious setback for global confidence, investor and otherwise, in the world's single superpower.

While it is too soon in the second term to write off the President's ability to move forward on key policy questions like tax reform, it may take a full house cleaning to resurrect this presidency. It is no wonder that in recent weeks insiders have rumored that Senator John McCain has been asked by the White House to consider replacing Cheney if the probe implicates the VP. This is nothing more than hearsay, but it is resonating. But a move away from a Cheney neocon government to a real politique government (Powell, Scowcroft, Bush41 approach) would be so far reaching and at this stage of the second term so out of character of President Bush that it is hard to imagine happening. Still there are a few who think this is the only way to salvage a second term, stem the GoP bleeding expected at the Mid-term election in November 2006 and leave the Republican Party presidential nominee with a shot at the White House in 2008. Katrina, Miers, Social Security reform, Iraq and now CIA-gate has nearly brought the executive branch to a halt. Not even jaundiced market pros can ignore this and I suspect there is a price to be born in US assets and the dollar. But then again investors have shown a propensity to overlook US political scandals. Monica-gate and the Clinton impeachment had similar implications for the nation and markets in Clinton's second term and asset prices were not severely impacted. And the same could be said for Reagan's second term and the sticky Iran Contra scandal.

So selling US bonds, stocks and the dollar on Thursday's or Friday's expected indictments is no most it is a day trade. But then again just as symmetrical assumptions rarely hold in financial markets, the past is equally disappointing as a guide to future market reactions.

David Gilmore


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