The lunatics are indeed running the asylum as investors once again ignore
bad economic data anticipating not the beginning of the War with Iraq but its
conclusion.

The theory of the moment is that the war in Iraq, rather than any other economic
factors, is driving the market. As a result, yesterday’s worse than expected
decline in manufacturing, and today’s worse than expected decline in factory
orders, were both ignored as traders bid the market higher as the Third Infantry
Division closed in on Baghdad. (This, of course, completely ignores that fact
that the peace is likely to be far more expensive, problematic and uncertain
than the war itself).

However, those who were looking for a repeat of the 1991 Gulf war experience
were proven wrong. After the bombs dropped in 1991 the market took off and
never looked back. This time, after a brief rally, the market quickly traded
below its pre-invasion level. Proving that hope really does spring eternal,
the Wall Street “perma-bulls” have re-written their rally scripts
to predict a victory rally rather than an invasion rally. Such Pollyanna outlooks
will once again be proven wrong, as America’s severe underlying economic problems
will persist regardless of which regime rules Iraq.

Friday’s release of the March employment data will mostly likely also come
in weaker than anticipated, particularly in the manufacturing sector, as the
American industrial base (in what may be characterized as the world’s largest
banana republic) continues to disintegrate. As we have already rallied quite
a bit in the last two sessions, it seems unlikely that the advance will continue
in the face of even more bad economic data.