Monday, July 31, 2006

The Wartime Stock Market

The U.S. stock market and world equity bourses are important measures of fear, hope, security, and the health of the world’s economy. And while you might not know it from today’s magnified headlines about war, terrorism, higher oil prices, and rising interest rates, the stock market message is one of reasonable hope, confidence, and optimism about the state of the world.

Could it also be that world stock markets are rallying as Israel and its freedom agenda advances toward a Hezbollah-free Lebanese border, highlighting a significant defeat not only of the thuggish and cowardly Hezbollah murderers, but their totalitarian backers in Syria and Iran?

At the close of business last Friday -- after another violent week in the Middle East -- Bloomberg chronicled the impressive performance of world stock markets: U.S. share prices had their best gain since November 2004; Canadian and European stocks had their top weekly performances all year; British and Brazilian equities rose for the second straight week; Asian stocks posted their strongest gain in over a month; Japan was up 3.5 percent; and India surged near 6 percent.

The wartime stock market is saying that things might be better than most people believe.

Think of it: On the world stage, there is more capitalism, free trade, and economic interconnectiveness (to use defense analyst Thomas Barnett’s term for bringing the worse-off countries online with the best-off nations) than ever before. Because of this, literally hundreds of millions of share-owning investors are voting daily on the great issues of war, peace, prosperity, and hope for the future. And their vote is optimistic.

Here at home, many groused about the 2.5 percent GDP report for the second quarter: Bears called it the first step into recession while bulls argued for a soft landing and an end to Fed rate hikes. But the whole debate may be misrepresenting a fundamentally strong economy. After all, GDP grew by 5.6 percent in the first quarter, making for a two-quarter trend of 4 percent growth. Over the last year, GDP is trending at 3.5 percent, which is pretty impressive for a fifth-year recovery buffeted by high gas prices, rising interest rates, and the uncertainties of war and terrorism. Since the June 2003 investor tax cuts, growth has averaged 4 percent.

While there are traces of higher inflation, non-energy price increases are still running just above 2 percent, about the same as 2004 and 2005. It’s also worth noting that inflationary expectations have been pulling back ever since the Fed’s May 10 rate hike to 5 percent and late-June hike to 5.25 percent. Gold prices are down about $100, inflation-sensitive commodity stocks have dropped 11 percent, and the bond-market yield curve has inverted again, with short-term rates popping above long-term yields. These are all non-inflationary signals.

In fact, the bond market is saying the Fed has tightened enough. A model of inflation-indexed bonds now shows the real fed funds rate to be above the real 10-year bond rate. This suggests that money is becoming scarce and that inflation is much less of a threat than it was a year ago.

Along with lower tax rates, strong profits, and ample bank credit, the entrepreneurial-driven growth model of the eminent classical economist Joseph Schumpeter is alive and well. Wall Street economist Michael Darda calls this “The wellspring of entrepreneurial capitalism, innovation, and wealth creation in the dynamic capitalist system.” It’s also what Tom Barnett means when he talks about global interconnectivity. Economic freedom both inside and outside the U.S. remains a critical (though much underestimated) factor in the world economic outlook.

If freedom, democracy, individual liberty, and economic liberalization are all vital cornerstones of the successful City on the Hill experiment that is the United States, campaigns such as Israel’s only mark an expansion of this freedom. Israel may be a relatively small hill in global terms, but the battle it is waging is incalculably large on the world stage. As Israel inflicts more punishment on Hezbollah, the more Syria and Iran will have their Axis of Evil ears pinned back. This is a huge positive step for democracy and a big potential defeat for totalitarianism. Does the global investor class get it? How could it not?

For a long two weeks Israel and Hezbollah have been going at it hard, and world stock markets have chosen to climb. The backward-looking media pessimists won’t see this, but the real world, real money votes of the global investor class should be noted and digested by all the rest of us. Indeed, I believe world investors are thankful for Israel’s courageous efforts in the cause of freedom, independence, security, and hope for the future.

Of course, the stakes are very high in this game. But that is exactly why global investors are cheering Israel’s advance.

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

Showdown on the Fed with Michelle Girard, RBS Greenwich Capital senior economist, and Diane Swonk, chief economist with Mesirow Financial.

Our market panel includes Jeff Saut, Raymond James chief investment strategist, John Mauldin, president of Millennium Wave Advisors, and Keith Wirtz, CIO of Fifth Third Asset Management. They will debate how global unrest is affecting the markets.

John Barnes (BB&T analyst) will drop-in to talk about the transportation sector.

Our regular segment "Sunday Unspun" with Frank Newport of Gallup Polls will look at the Sunday morning talk show "spin" and set the record straight.

The morning after pill will be discussed with Charmaine Yoest from the Family Research Council.

A debate on global warming with Kim Strassel of the Wall Street Journal and David Doniger, director of the Climate Center Natural Resource Defense Council.

Today's Poll Question:

Are you concerned about global warming?

not at all

Friday, July 28, 2006

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

We'll begin tonight's show with money manager Mike Holland, chairman/founder of Holland & Company, who will offer his perspective on the economy and the stock market.

Mike will be followed by our market panel who will continue the market and economic discussion. Our guests include:

* Art Laffer, former Reagan Economic Advisor/President of Laffer Associates;
* Jared Bernstein, Economic Policy Institute Economist;
* Joe LaVorgna, Chief US Fixed Income Economist at Deutsche Bank; and,
* Brian Wesbury, chief economist at First Trust Advisors.

An interview with House Minority Leader Nancy Pelosi (D-CA) on her economic plan.

Senate Foreign Relations Committee Chairman Richard Lugar (R-IN) will discuss high oil prices, Chavez and more.

A Political Square-Off between "Godless" author Ann Coulter and "The Good Fight" author Peter Beinart.

Tonight's Poll Question:

How is the economy doing?

1) Full Steam Ahead
2) Soft Landing
3) Running Out of Gas

Cast your vote at

Kelo Was Un-American

I was glad to see the The Wall Street Journal editorial page weigh in on the side of private property rights today ("The Kelo Revolt"):

“The Supreme Court has written some despised rulings over the years, but last year's Kelo case is fast rising up the list of the worst. That 5-4 ruling gave local governments more or less unlimited authority to take private property, and the good news is that the political system is repudiating Kelo just about everywhere.

The latest venue is Ohio, where the state Supreme Court ruled Wednesday that a Cincinnati suburb cannot use eminent domain to seize private property for a $125 million commercial re-development. The states are acting at the invitation of Justice John Paul Stevens who, in his majority opinion for Kelo, wrote, "Nothing in our opinion precludes any State from placing further restrictions on its exercise of the takings power..."

Kelo was a dreadful decision.

It had anti-private property rights, anti-capitalist and anti-growth stains all over it, and the political system is repudiating it (as it should) just about everywhere.

Oklahoma’s Supreme Court repudiated it, now comes Ohio’s highest court, in addition to almost twenty states which have passed laws protecting property rights.

To put it simply: Kelo was un-American.

Thursday, July 27, 2006

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

A jammed-pack, all-star lineup of market guests will explore all the latest market news, including all the latest earnings announcements, as well as an energy discussion.

Our guests include: John Kilduff, Fimat USA energy analyst; Ryan Beck CIO, Joe Battipaglia; John Rutledge of Rutledge Capital; Dr. Bob Froehlich, chief investment strategist and vice-chairman at Scudder Investments; and Wharton's resident genius, Jeremy Siegel.

The incomparable Steve Forbes will debate inflation, the latest economic numbers and midterm elections with Alan Reynolds, senior fellow with the Cato Institute.

A look into the Chicago City Council decision mandating a wage floor for big box retailers with Alderman Joseph Moore, one of the forces behind the council's decision.

A look at a potential Congressional shakeup and its impact on investors with John Harwood, CNBC's Chief Washington Correspondent and UVA's Larry Sabato, "the most quoted college professor in the land."

Tonight's Poll Question:

Should big-box retailers be forced to pay their workers more than the minimum wage?

Cast your vote at

Kelo Takes One on The Chin

From The Weekly Standard:

“LAST SUMMER, in the case of Kelo v. New London, a bitterly divided U.S. Supreme Court upheld (and slightly expanded) the constitutionality of local governments' seizing private property for economic development via the "takings power" of eminent domain. But in his majority opinion, Justice John Paul Stevens took care to insert this sentence in the closing paragraphs: "We emphasize that nothing in our opinion precludes any State from placing further restrictions on its exercise of the takings power."

Wednesday morning, the Buckeye State did just that. In a unanimous 7-0 decision, the Ohio Supreme Court ruled in favor of Norwood property owners who were challenging the confiscation of their land through eminent domain. (Norwood is a suburb surrounded by Cincinnati.) It marked the first eminent-domain ruling by a state supreme court since Kelo, and will surely set a precedent for other states wrangling over this issue. "It gives guidance to courts for the future," says Dana Berliner, a senior attorney at the Institute for Justice, which litigated the case in behalf of the appellants….”

(This is a huge win for private property rights. Huge win for capitalism. The Supremes were crazy to rule the way they did on Kilo in the first place.)

It is Time to Begin

"...[M]ost of the peoples of the world -- including the United States -- still don't believe that radical Islamist terrorism is a grave, worldwide challenge to civilization.

And therein lies our great strategic failure to date. So long as most people -- certainly most Europeans, perhaps most Americans -- see Islamist terrorism as merely the more or less disconnected actions of a relatively small number of fanatics, then Europeans will never send their sons to fight and die to defeat it. And, of course, they particularly won't send their sons to risk death for the "Jewish state" of Israel or the "imperialist" United States. And who can ask any parents to risk sacrificing their sons for some foreigners -- whether despised or not?

...Until the American and European publics have become convinced of the present danger to them, we will continue to stumble, take half measures and fail to adequately defend ourselves. Before action, must come belief; before belief must come understanding; before understanding must come education and debate. In the beginning was the word. It is time to begin."

Tony Blankley, "Just Another Coincidence?"

Wednesday, July 26, 2006

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

An economic roundtable on the economy and the Fed.

Our guests include: Walt Williams, author/John M. Olin Distinguished Professor of Economics at George Mason; Ryan Beck CIO Joe LaVorgna; Dr. Irwin Kellner, chief economist for MarketWatch; and Martin Baily, Senior Fellow at the Institute for International Economics and former Chairman of the Council of Economic Advisors under President Bill Clinton.

A market discussion with John Augustine, Chief Investment Strategist for Fifth Third Asset Management and Russ Koesterich, senior portfolio manager for Barclays Global Investments.

Sen. Charles Grassley (R-IA) will discuss tax reform.

We'll also tackle the latest on online gambling with The Arizona Republic columnist Jon Talton. Walt Williams will weigh in with his take.

An energy debate between Rep. Steny Hoyer (D-MD) and Rep. Devin Nunes (R-CA).

Tonight's Poll Question:

What's impacting the markets the most this week?

The Middle East Crisis? The Fed? Earnings?

Cast your vote at

The U.N.'s Disproportionate Response

(My friend Claudia Rosett delivers a scathing indictment of the U.N. at National Review Online today. Claudia knows the U.N. better than most and was brilliant in exposing the corruption behind the U.N.'s Oil-for-Food program. Her latest column is right on the money. Well worth the read...)

"As Israel fights to defend itself against the Iranian-and-Syrian-backed terrorists of Hezbollah, are we really seeing a reckless, damaging and — yes — disproportionate response?

You bet. But not from Israel. It’s coming from the U.N.

...With its false promises, and disproportionate deals for “peace,” the U.N. left Israel exposed to the attack that has now come, and a war that Israel did not seek. Like America when attacked by al Qaeda, Israel has been fighting back. In response, U.N. officials have come close to trampling each other in their stampede to the media microphones — not to admit the U.N.’s own failure to stop Hezbollah, not to apologize for administering a phony peace that incubated this miserable war, but to denounce Israel....

...And when operations of the U.N. itself have come under the spotlight in recent years, in some cases for behavior as egregious as pedophiliac rape by peacekeepers, or complicity in the kickback rackets of Saddam Hussein, Kofi Annan, and his entourage have rushed to impose the omerta in-house, while urging the rest of us to wait upon due process, refrain from rash comments, consider the larger picture — and preferably just shut up and forget about it.

If Annan and his retinue feel a desperate need during this current crisis to express themselves, perhaps they should channel it into actually delivering some of that transparency they’ve been promising in their own operations. That would be good preparation in the event the U.N. Security Council decides, say, to impose sanctions on Iran, and needs the Secretariat staff to perform with at least slightly more integrity than was displayed under the Iraq Oil-for-Food program.

Right now it is the job of the world’s more responsible political leaders not simply to deplore the horrors of war, or construct another false U.N. peace leading to even worse nightmare ahead, but to seek real answers to the miseries and menaces of the Middle East. That is a task perilous, contentious, and rough enough, without a parade of unelected and largely unaccountable U.N. civil servants using public platforms to insinuate into the process their private prejudices."

Tuesday, July 25, 2006

Fighting For Their Life

The war news is coming in fast and furious.

Let me first begin by noting that a month into the hostilities which started in Gaza, and a couple weeks after the outbreak of the Hezbollah war, the S&P 500 is actually about unchanged with a nice little multi-day move right in here, based on good profits, a solid economic outlook, and growing expectations that the Fed’s restraint cycle is nearing an end.

My spiritual pal, Mayer Rothschild, is right: “Buy on the cannons, sell on the trumpets.”

Another spiritual friend of mine, Joseph Schumpeter, is also right: low tax rates, strong profits, and plenty of bank credit for business entrepreneurs is a great combination for economic growth. Mike Darda calls this “the wellspring of entrepreneurial capitalism, innovation and wealth creation in the dynamic capitalist system.”

Relative to record earnings, and moderate, normal interest rates, U.S. stocks are significantly undervalued according to gurus like Art Laffer and Elaine Garzarelli. I totally agree.

Barring a $100 oil price, from some sort of bizarre Iranian action—which can never be ruled out—stocks and the economy will outperform the usual chorus of pessimism. It’s still the greatest story never told.

But, I digress from the war. Here are a couple points that stand out for me from all the news reports:

First, is a wonderful headline from the AP: “Hezbollah Says Israeli Response a Surprise.”

Oh really? Tch-tch. It’s called fighting for your life. It’s called fighting for freedom and democracy. It’s called fighting against a bunch of terrorist thugs who want to wipe you off the face of the earth. It’s called fighting to enforce U.N. resolutions which Israel observed. It’s called searching for peace, but then fighting for your life when your enemy refuses to engage in any civilized peacekeeping.

The second point is, “There can no longer be a Hezbollah,” according to Israeli Foreign Minister Tzipi Livni, in a Der Spiegel interview published today. She goes on to say, “[T]here is a very significant difference between us and our enemies: We are defending ourselves against anyone who attacks us and use every means possible to prevent hitting civilians…the problem is that the Hezbollah hides some of its weapons in apartment houses.”

Even the UN agrees. Jan Egeland, a U.N. humanitarian official, charged that Hezbollah is fighting like cowards and causing hundreds of deaths of women and children in Lebanon.

So, while the usual leftist chorus of Western opinion makers agrees with Hezbollah over Israel’s response to the kidnappings and bombings from Hezbollah, the reality is, Israel is doing what it needs to do to protect their freedom in the face of evil.

Fortunately, President Bush has remained steadfast in his support for Israel’s effort to preserve their homeland security. And Secretary of State Condi Rice continues the mantra that their can be no cease-fire without a broader deal that cracks down on Hezbollah terrorist bases in southern Lebanon used to attack Israel. In Rome, Secretary Rice also said the situation cannot return to what it was before July 12th.

Rice and Israel would accept an international force along the border to stop Hezbollah from using it as a military staging area. Israel’s government has indicated that it would prefer and accept a NATO force. Anything would be better than the phony U.N. force that has been camped in south Lebanon for decades (where U.N. and Hezbollah flags fly side by side).

Perhaps, other Arab states like Egypt and Jordan can exert some pressure on Syria to stop arming and backing Hezbollah, but I wouldn’t bet the ranch on that. (Three dittos on Iran on the same subject. No, make that a hundred dittos.)

White House Press Secretary Tony Snow has said repeatedly that there must not be a Hezbollah victory by leaving them in place. Hezbollah, not Israel is the aggressor. That is the wrong that must be righted.

But the fact remains that it’s a tough fight for the IDF.

Israel is moving slowly on the ground to capture Hezbollah run villages, but it’s a very tough slog. Analysts like retired Col. Ralph Peters believe Israeli intelligence badly underestimated the huge volume of Hezbollah missiles supplied and funded by Iran and transported mainly through Syria.

So far, the war has not gone as well for Israel as both they and their friends (including me) had hoped. Hopefully in the next week or two, Israel can grind down the Hezbollah enemy. And, hopefully President Bush will continue to buy Israel the necessary time to complete this vitally important mission. I suspect he will.

The free world knows full well just how high the stakes are in this war. The more punishment Israel inflicts on the nefarious and cowardly Hezbollah, the more Syria and Iran will have their Axis of Evil ears pinned back.

The Arab Street in the Middle East (including the governments of Egypt, Jordan Saudi Arabia Kuwait Bahrain the UAE and so forth) loves a winner and hates a loser. Israeli strength and success will translate into another big step forward for freedom and liberalization in the Middle East.

It is precisely this political and economic freedom, so highly valued by Joseph Schumpeter for the creation of wealth and social progress, which is at stake right now in the Middle East.

Individual liberty is the cornerstone of the great and successful “City on the Hill” experiment in the United States. And while Israel may be a relatively small hill in global terms, the battle they are currently waging for their own freedom is incalculably large on the new millennium world stage.

That is exactly why we should be thankful for their courageous efforts for continued self determination and independence.

Hillary in Denver

I don’t agree with Hillary Clinton’s DLC program called the “American Dream Initiative.” It’s got a nice, snappy ring to it, but, I suspect at bottom, there’s a repeal of Bush’s pro-growth tax cuts in order to finance a lot of Democratic constituent, interest group pork. (Although, I do like the sections on private retirement savings accounts—more on this at a later date.)

The key political point here is this: Sen. Clinton is spearheading an increasingly energized Democratic platform response to the midterm elections, and I don’t see any semblance of a Republican congressional attack on her ideas.

Right now it strikes me that the GOP is snoozing. Democrats are guzzling highly caffeinated Starbucks coffee, while the Republicans sip their decaf. Democrats are working 24/7, while the Republicans are taking mid-afternoon siestas. It reminds me a lot of 1994, but obviously in reverse.

You can argue the policy wonk merits of Clinton’s speech, and even the Pelosi fiscal plan, but their political message is strong. “Clinton hits president on middle class” and “Not taking care of America” are the headlines in today’s lead NY Sun article. There is a good GOP response out there, both on the economy and national security, but I’m not hearing it.

The president is working hard, defending Israel, beefing up our troop structure to sweep Baghdad, and arguing the economic merits of his supply side tax cut plan, yet I don’t hear a peep from GOP congressional leadership.

Where are the responses to Clinton et al that might back up Bush? This concerns me. The GOP contents itself by squabbling over immigration. Well, I got news for you, that ain’t much of an election year plan.

Jack Kemp has it right: the governing party has to govern. Except for a handful of hotheads (my term), polls show the nation wants comprehensive, broad based immigration reform.

This is a big issue, and it’s a lot more important than Hillary’s idea of throwing more money at left wing college professors, or setting up a new and completely unnecessary mortgage finance program, or making a new run at a nationalized health care system.

But, can the Republicans govern? I’m looking for a first rate response to Mrs. Clinton. I’m listening very carefully, but I still don’t hear a thing.

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

A markets and economy discussion with Dow Chemical CEO, Andrew Liveris; Robert Smith, T. Rowe Price Portfolio Manager; Michelle Girard, RBS Greenwich Capital Sr. Economist; and Barry Ritholtz, President of Ritholz Capital.

Sen. Pete Domenici (R-NM) will discuss offshore drilling.

We'll take a look at the Democratic economic plan with Jon Alter, Newsweek Columnist/NBC News Analyst; The Wall Street Journal's Opinion columnist, John Fund; and Jared Bernstein, Economic Policy Institute Sr. Economist.

Sen. Kay Baily Hutchison (R-TX) will address immigration.

Tonight's Poll Question:

Should hedge funds be regulated?

Cast your vote at

It’s Called Genocide

When certain quarters criticize Israel’s supposed “disproportionate” use of force against Hezbollah, or make ludicrous calls for an immediate cease-fire as Israel seeks to defend herself, they really ought to take a step back and reflect upon the words of Hezbollah leader Hassan Nasrallah. He said:

“The Jews invented the legend of the Nazi atrocities…[We] cannot think of co-existence with them, of peace with them, or about accepting their presence, not only in Palestine of 1948 but even in a small village in Palestine, because they are a cancer which is liable to spread again at any moment.”


“If they [the Jews] all gather in Israel, it will save us the trouble of going after them world wide.”


Let’s be clear, this is not just about Israel. Hezbollah (and for that matter, Hamas, Iran, Syria, and the rest of the Holocaust denying Jew-Haters) have made their genocidal goals crystal clear. The fundamental objective of these crazy-ass Islamofascists is to wipe the Jewish people off the earth, once and for all, for all time.

That anyone would now try to stand in the way of Israel’s defense of herself utterly defies comprehension.

Monday, July 24, 2006

A Summer Evening in Connecticut

This past Saturday night, Judy and I hosted our annual summer dinner party at our home in Connecticut. As always, we were graced with the company of some outstanding minds who had much to say about the current economic and political landscape.

Here are a few of the more prescient observations presented over dessert:

John Myers, Head of GE Asset Management and Hilton Hotels board member, observed that there are more hotel rooms in Orlando, Florida, than in all of India. If that little kernel of knowledge doesn’t demonstrate the huge untapped development potential abroad, I’m not sure what does…

Mike Holland, my money-manager friend and frequent “Kudlow & Company” guest, pointed out a rather interesting statistic about the long-term performance of the housing market versus the stock market. While housing prices have certainly been on a tear over the past 5-6 years, over the long term, the real rate of return in housing has been only around 2 percent, while the stock market returned more than double that.

Michael Darda, the always astute chief economist at MKM Partners, continues to believe that the market is overestimating a growth and profit slowdown, while underestimating inflation. Profits and business loans, the wellspring of entrepreneurial capitalism, innovation and wealth creation in the Schumpeterian model, should continue to drive this expansion forward. With every yield on the Treasury curve now below the Fed funds rate, he expects a substantial rise in Treasury yields across the curve as inflation and growth trends surprise to the upside, upending the expectation of Fed rate cuts in 2007.

Hedge fund pioneer Jerry Fine (Steinhardt, Fine and Berkowitz) thinks that the market is overemphasizing the role of the Fed. At the end of the day, all that really matters is the mother’s milk of the economy—earnings, earnings, earnings.

On the political front, my friend Ben Elliott, Ronald Reagan’s chief speechwriter, reminded those present that God has a way of exalting the humble and making wise men seem like fools. Ben thinks God may be about to do so again, by turning the tables on those who revile George Bush, and have ridiculed him since day one of his presidency.

Ben added that the great surprise from the recent G-8 meeting was not that Bush said “s...,” but that he won the summit. Bush persuaded countries that consistently oppose America to sign onto the U.S. position supporting Israel and condemning Hamas, Hezbollah, Syria and Iran. If missiles attacked Miami, Chicago, Boston or Seattle, we wouldn’t ask our government to sue for peace.

He added that here at home, the President has an opportunity to define the 2006 election as a referendum on uniting America for victory against Islamofascism. The three keys will be first, defending our ally Israel fighting on the front lines. Second, pushing forward with Strategic Defense, now more important than ever. And third, keeping the economy strong, which starts with keeping tax rates low, because the best foundation for a strong military is a strong and robust economy....

Great stuff all the way around.

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

Our market panel will start us off with a look at the health of the market.

Our guests include: Liz Ann Sonders, Charles Schwab Chief Investment Strategist; Stefan Abrams, CIO at Trust Company of the West; and Wendell Perkins, portfolio manager of the Johnson Family Large Cap Value Fund.

Catherine Arnold, Credit Suisse pharma analyst will weigh in on the sector.

A look at the economy and Fed with Ethan Harris, Lehman Brothers' chief U.S economist and Mark Vitner, senior economist at Wachovia.

A political discussion focusing on Lieberman's re-election. Our guests include Peter Beinart, editor at large of The New Republic; Kevin Rennie, political columnist at The Hartford Courant; and Tom Bevins of Real Clear Politics.

We'll also take a look at the Middle East conflict with former Army Col. Ralph Peters and Gen. Barry Mccaffrey.

Tonight's Poll Question:

Who do you prefer in the Democratic Senate Primary in Connecticut?

Pro-war Lieberman or Anti-war Lamont?

Cast your vote at

"Can Israel Win?"

Like my friend, retired U.S. Army Col. Ralph Peters, I am a bit worried about the efficiency and success of Israel’s war effort. Ralph's recent article "Can Israel Win?" is an eye-opener and certainly deserves a read.

Here's a brief excerpt:

"...This is ultimately about far more than a buffer zone in southern Lebanon. In the long run, it's about Israel's survival. And about preventing the rise of a nuclear Iran and the strengthening of the rogue regime in Syria. It's also about the future of Lebanon - everybody's victim.

The mess Israel has made of its opportunity to smack down Hezbollah should be a wake-up call to the country's leadership. The IDF looks like a pathetic shadow of the bold military that Ariel Sharon led into Egypt three decades ago. The IDF's intelligence, targeting and planning were all deficient. Technology failed to vanquish flesh and blood. The myth of the IDF's invincibility just shattered.

If Israel can't turn this situation around quickly, the failure will be a turning point in its history. And not for the better."

(Incidentally, Ralph is a guest on "Kudlow & Company" tonight, where he and others will discuss the latest from the Middle East.)

Tech Deflation

Tech stocks have been getting killed as most folks know. There are a lot of reasons for this, but probably the most important reason is that tech prices continue to deflate big time. And if prices are falling, both because of intense competition and new technologies, it’s awfully hard to keep up profit margins.

Since 2000, chip prices are off 27 percent, and YTD 2006 versus 2005, chip prices are down another 5 percent. In the computer sector, since 2000, prices have dropped 58 percent, YTD they’re off 11 percent, compared to a year ago.

The consumer is of course, the big winner from these lower prices. But producers like Intel, AMD and Dell are naturally the losers. Compare this with industrial commodity prices that have been soaring in recent years. Of course, that is why industrial and commodities stocks have until very recently done extremely well.

This tech price deflation should slow down some of you inflation hawks out there. The chip stocks SOX index is off 30 percent or so, since early January.

Serious deflation.

Moderate Dems' Economic Agenda On Its Way

According to the AP, the Democratic Leadership Council is planning to unveil its economic agenda called “The American Dream Initiative” later today.

The plan is supposed to lay out the moderate Democratic strategy on education, health care, retirement and income. The article doesn’t say what the plan entails yet, so we’ll just have to wait until Sen. Hillary Clinton outlines its specific proposals sometime today.

The DLC is a centrist think tank which has some very good people in it. The DLC plan is their version of the GOP’s “Contract with America.”

But will it raise taxes on the rich? Will it increase government spending? Will it be like the Pelosi plan which rolls back investor tax cuts, allegedly in order to cut the budget deficit? (Remember, Pelosi wants to reinstate PayGo budget restraints which really could be a tax trap.)

Will there be any economic growth incentives? Or will it be anti-growth? Will it expand the economic pie, or will it redistribute the pie?

In California two years ago, Hillary Clinton appeared at a fundraiser and said:

"Many of you are well enough off that ... the tax cuts may have helped you. We're saying that for America to get back on track, we're probably going to cut that short and not give it to you. We're going to take things away from you on behalf of the common good."

That kind of socialist thinking, along with HillaryCare, has me awaiting the plan’s specifics with great interest.

Friday, July 21, 2006

Mr. Clinton Goes to Connecticut

According to recent news reports, former President Bill Clinton is headed to Connecticut this Monday to lend his support to embattled Sen. Joe Lieberman’s senate re-election bid.

The race between Lieberman, a three-term incumbent and multimillionaire Greenwich businessman Ned Lamont, has attracted considerable national attention. Of course, much of the focus and controversy surrounds Lieberman's support of our war in Iraq, which Lamont continues to attack. (Lamont actually writes on his campaign website, "I salute the patriotism and wisdom of Congressman Murtha...")

The most recent Quinnipiac poll shows that Limousine Liberal Lamont has pulled ahead of Senator Lieberman by four points, just outside the poll's 3.8 percent margin of error.

But, what’s interesting to note, is that in a three-way race with Republican candidate Alan Schlesinger, Lieberman would actually win big -- 51 percent to Lamont's 27 percent and Schlesinger's 9 percent.

Joe Lieberman is a good, principled man. He is sharp, and he has done a great deal of good for our country. While we don’t see eye-to-eye on every single issue, he deserves to be reelected.

Even Bill Clinton seems to know this.

More on Bernanke

Bernanke was a lot tougher in yesterday’s House Financial Services hearing. He was much more hawkish. In response to a question posed to him, he replied that the core inflation pickup is broad based, and not a statistical illusion from the owners’ equivalent rent component of the CPI.

Gold prices fell almost $10 dollars, nearly erasing Wednesday’s gain (which in some sense was based on a dovish misreading of Bernanke.) If the Fed is data dependent, and if Bernanke believes that the core inflation pickup is broad based, then more fed rate hikes are in the cards.

Reuven Brenner’s article on National Review Online (“What’s Wrong with Fed Policy”) makes the important point that the Fed should be using a liquidity management model based on commodities including gold, the yield curve and the dollar exchange rate to guide policy, rather than an interest rate and unemployment rate management approach.

My reading of the Fed is that they’re essentially using both. They will continue to target the Fed funds rate with one eye on the TIPS bond market yield model, with perhaps a glance at commodities and the dollar, but their other eye is unfortunately still trained on the Phillips Curve tradeoff between inflation and unemployment, with various references to capacity utilization, output gaps and other economic growth speed limits. This stuff is what gets the Fed into trouble because inflation is a monetary phenomenon.

Think of it this way, over the past ten years, non-financial productivity has grown at a 3.5 percent annual rate with labor force growth at least 1 percent annually. That means the economy’s potential to grow is actually about 4.5 percent per year. With continued low tax rates on investment, plus a capital goods investment recovery cycle in hand, the idea of economic capacity constraints makes no sense at all.

The reason the dollar is weak is because there is still a modest excess dollar liquidity position in relation to demand. I still don’t think it’s a huge excess, but I’d like to see a stronger dollar and a narrower TIPS spread.

All that said, the Fed will get there in the months ahead.

Thursday, July 20, 2006

Sucker Punchers

(Michael Rubin, resident scholar at the American Enterprise Institute and editor of Middle East Quarterly, offers a spot-on take at what’s going on in the Middle East and what needs to be done. Here’s a portion of his column available at National Review Online.)

[Arafat], like other terrorists and rogue leaders, ran to diplomats and the United Nations when he feared retaliation, the playground equivalent of sucker-punching a classmate when the teacher’s back is turned, and then crying for intercession as the victim fights back…

…The problem with the West’s policy in the Middle East is not lack of diplomacy, but rather failure to allow retaliatory violence and impose accountability…

…Not only is vengeance against terrorism sometimes necessary, but it is more likely to bring peace if it is disproportionate…

…When academics and commentators decry disproportionate force as an obstacle to peace, they replace analysis with platitude. Lasting peace is seldom made between equals, but rather between strong and weak. The United States ended World War II precisely because it was willing to use disproportionate force. In doing so, it allowed Japan to rebuild and thrive. England and France did not pull back from Germany and allow the Nazi regime to re-arm and try again. Wars are fought until they are won…

…Diplomacy that preserves a status quo in which terrorists win concession through violence ensures future bloodshed. Hezbollah is not a movement whose existence diplomats should intercede to preserve. While world leaders condemned Iranian president Mahmud Ahmadinejad’s Holocaust denial and threats to eradicate Israel from the map, they ignore that on April 9, 2000, Hezbollah leader Hassan Nasrallah declared, “The Jews invented the legend of the Nazi atrocities,” and argued, “Anyone who reads the Koran and the holy writings of the monotheistic religions sees what they did to the prophets, and what acts of madness and slaughter the Jews carried out throughout history... Anyone who reads these texts cannot think of co-existence with them, of peace with them, or about accepting their presence, not only in Palestine of 1948 but even in a small village in Palestine, because they are a cancer which is liable to spread again at any moment.” Nasrallah has made his aims clear. That anyone would intercede to enable someone whose goal is genocide to continue is irresponsible, if not hateful. Nasrallah later provided an answer to those progressive tempted to argue the problem to be Israel’s existence. To the Hezbollah leader, Israel is just one part of the fight. On October 22, 2002, Hassan Nasrallah told Lebanon’s Daily Star, “If they [the Jews] all gather in Israel, it will save us the trouble of going after them world wide.”

…There will be a role for diplomacy in the Middle East, but it will only be successful if it commences both after the eradication of Hezbollah and Hamas, and after their paymasters pay a terrible cost for their support…

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

We'll begin tonight's program with a look at the Fed and Ben Bernanke as he concludes his second day of testimony. Michael Darda, chief economist and director of research for MKM Partners and Michelle Girard, senior economist at RBS Greenwich Capital Management will join us.

Our market panel will take a look at earnings, tech, backdating stock options indictments and more. Our guests include Marketwatch columnist Herb Greenberg; Forbes magazine senior editor Elizabeth MacDonald; and Tim Strazzini, independent trader/CNBC’s “Fast Money” contributor.

Michael Thompson, director of research at Thomson Financial, will also discuss earnings.

The Wall Street Journal's Steve Moore will debate former labor secretary/UC Berkley professor Robert Reich on a host of topics including pensions and the penny's demise.

Tonight's Poll Question:

Does Ben Bernanke's testimony provide a real window for a monetary strategy or just window dressing?

Cast your vote at

Friedman on Government Spending

"There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income."

-Milton Friedman, Fox News interview 2004

Wednesday, July 19, 2006

Bernanke's Testimony

Some quick thoughts on Ben Bernanke’s testimony today:

The best thing I saw was his reference to a very healthy and sound business sector with high productivity, strong profits, plenty of cash, and a strong backlog of new durable goods orders, which suggests big capex spending in the future.

The testimony itself was fairly bland. It's an economic forecast-driven Fed outlook, based on the Fed's own models, that apparently show a sizable decline for economic growth in the second-half of this year, along with a moderating core inflation rate. Implicit in the forecast is about a 2.5 percent second-half growth rate that I think is too low. So, if Bernanke is operating policy through the economic growth rate, there will be one or two more tightenings this year. On inflation he could be right.

Bernanke's testimony was definitely not a supply-side approach to economics. He did mention a TIP-based forward indicator of inflation, but there's really no clear liquidity model that relies on sensitive market price indicators like gold, commodities, and the dollar. I do like the TIP model reference, which looks to me about 25 basis points too wide. I definitely favor a 5.5 percent fed funds rate target.

I was disappointed that Bernanke made no mention of the dollar. Nor did he mention lower tax rates on private investment as a spur to economic growth. Because of low tax rates, I continue to believe the economy will surprise on the upside in the month's ahead. That is why I think the Fed will feel compelled to raise rates a bit more. That being said, an investment-led expansion is counter-inflationary, as supply drives demand and more goods are available to absorb the existing money stock. Low tax rates are similarly counter-inflationary.

But this is a data-driven approach to Fed policy. Looking through the rear-view mirror, I preferred Alan Greenspan's seat of the pants approach, which left room for more scrutiny of market-based indicators of both inflation and growth.

All of this leaves me still nonplussed about our new chairman, who is very much a state of the art economic scientist. I just don't think scientific models are nearly as accurate as market-based price watching.

Tonight's Lineup

On CNBC’s “Kudlow & Company” tonight:

A look at Ben Bernanke’s testimony, interest rates and the Fed with Wayne Angell, former Federal Reserve Governor; Brian Wesbury, First Trust Advisors Chief Economist; Joe LaVorgna, Deutshe Bank Chief Fixed Income Economist; and Diane Swonk, Mesirow Financial Chief Economist.

We’ll explore what’s going in the market with Peter Schiff, Euro Pacific Capital President and John Rutledge, Rutledge Capital Chairman/former Reagan Economic Advisor.

CNBC’s Jim Goldman will deliver a report on earnings after the bell and the impact of earnings with numbers for Apple, eBay, Motorola & Intel.

A political discussion on the Middle East, Pelosi’s fiscal plan, and stem cell research.

Our political guests include "Godless" author Ann Coulter; Rep. Charlie Rangel (D-NY); Lawrence O'Donnell, "The West Wing" Executive Producer; and Jed Babbin, The American Spectator Contributing Editor.

Tonight’s Poll Question:

Does Ben Bernanke have your confidence?

Cast your vote at

Market Reaction to the Middle East

The financial markets have taken their finger off the panic button. Israel’s actions in Lebanon and the Gaza Strip are inspiring confidence, at least compared with where sentiment was a week ago.

Investors recognize that Israel is doing the world a huge favor by defanging Hezbollah and Hamas. These terrorist groups have long held Middle East peace and prosperity hostage to their suicide bombings, missile attacks and their insane demands for the eradication of the Jewish state.

The dollar and stocks are up from where they were just days ago when geopolitical jitters got the better of many market participants. The Dow is up over 200 points today, with the S&P 500 and Nasdaq following suit. Even the Israeli shekel has firmed and the Tel Aviv stock market has turned up, as have Arab bourses, indicating that the fighting in Lebanon and Gaza is being put into a larger, more favorable perspective.

Of course, any widening of the theater of warfare, such as direct military action against Syria, would likely be received nervously. Even though many on Wall Street know that something must eventually be done to stop Syria and Iran from further destabilizing the region and using terror groups as proxies in their fight against Israel, stocks would likely head lower, at least in the short run. Similarly, were Tel Aviv to be struck by missiles, the financial markets would also respond poorly, despite the fact that such an attack would surely redouble Israeli efforts to take out all of Hezbollah’s offensive capabilities.

Domestically, the Fed’s got one more rate hike to go at its next policymaking meeting on Aug. 8. The increase in the Fed funds rate is needed to defend the dollar, quell inflation expectations and stop the small up-creep in inflation.

While the rate hike would complete Fed Chairman Ben Bernanke’s policymaking task for the rest of this year and into 2007, he and Treasury Secretary Henry Paulson still need to speak up in defense of the greenback, making clear their commitment to a strong and stable dollar. This is especially important in light of the international tensions in the Middle East, Persian Gulf, Korean Peninsula and Indian subcontinent that have added new geopolitical risk not just to the dollar, but also to commodities and a bunch of leading currencies.

Tuesday, July 18, 2006

Freedom's Timeless Message

(This seems particularly timely in light of Israel's fight to defend herself.)

You and I have the courage to say to our enemies, "There is a price we will not pay." There is a point beyond which they must not advance. This is the meaning in the phrase of Barry Goldwater's "peace through strength." Winston Churchill said that "the destiny of man is not measured by material computation. When great forces are on the move in the world, we learn we are spirits--not animals." And he said, "There is something going on in time and space, and beyond time and space, which, whether we like it or not, spells duty."

-Ronald Reagan's Rendezvous with Destiny speech, October 27, 1964

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

We'll begin with a Fed/Interest rates/Economy discussion with Former U.S. House Majority Leader Dick Armey; Rep. Spencer Bachus (R-AL) and Rep. Barney Frank (D-MA) and other guests.

A look into the markets with renaissance-man Ben Stein; Barry Ritholtz, President of Ritholz Capital; Susan Byrne, Chairman/CEO of Westwood Holdings; and Joe Battipaglia, Ryan Beck CIO.

CNBC's Jim Goldman will report on the latest tech earnings.

Bear Stearns retail analyst Dana Telsey will offer her perspective on the sector.

Tonight's Poll Question:

Will a Fed rate hike be good or bad for the GOP in the mid-term elections?

Cast your vote at

Finish the Job

While roughly half of Hezbollah’s military capability has been wiped out since the Israeli response, a number of reports suggest it will take Israel a few more weeks to destroy Hezbollah’s military capability.

I say go for it.

If this Israeli campaign takes another week or two, or three, then so be it. Hold back the diplomacy until the job is completed. No phony cease-fires. Get the job done. Clean out Hezbollah once and for all and put these evil thugs out of business. It needs to be done.

Then, once the mission is completed, some kind of ceasefire deal can be arranged.

Believe it or not, the Israeli stock market was up 2.1 percent today, and the Arabia Titans Index was up 0.6 percent today. The Dow Jones opened up 50 points higher on good earnings reports. The dollar remains firm. Gold is down $5-6 bucks after falling $16 bucks yesterday. Oil is up slightly.

The point of all these quotes is to suggest that world business is going about its business. Israel’s actions to clean out Hezbollah are being viewed as a big positive for world peace and economic stability.

Israel in Perspective

Tough neighborhood...

Times Shrinks

It looks like “all the news that’s fit to print” is shrinking by at least 5 percent.

In a bid to cut costs, The New York Times (aka “The Queen of Saboteurs”) has announced plans to reduce the size of its newspaper by 1 ½ inches. The move means the closing of a printing plant and the loss of 250 jobs.

Does this also mean modern liberal leftism is being cut by 5 percent?

Monday, July 17, 2006

Tonight's Lineup

On CNBC’s “Kudlow & Company” tonight:

Our market panel will discuss the market impact amidst the Middle East crisis. Our guests include: Trust Company of the West’s CIO Stefan Abrams; Barry Hyman, senior market analyst at EKN Financial; and Quentin Hardy, Silicon Valley Bureau Chief for Forbes magazine.

CNBC’s Fred Francis - live from Gaza City - will deliver the latest on the Middle East.

We’ll take a look at defense industry stocks. CNBC’s Jane Wells will bring us an update along with additional perspective from Patrick McCarthy, defense analyst at Friedman, Billings, Ramsey & Co. and Chris Donaghey, Aerospace & Defense analyst at SunTrust Robinson Humphrey.

An economic debate between Brian Wesbury, Chief Economist for First Trust Advisors and and Joe LaVorgna, Chief US Fixed Income Economist at Deutsche Bank.

Also, Frank Newport from Gallup Polls will set the record straight on our own "Sunday Unspun" segment. Frank will take a look at various incorrect poll statements issued by various politicians, and provide what the polls are really saying.

Tonight's Poll Question:

What's impacting the markets the most this week?

Middle East crisis? Ben Bernanke? Tech earnings?

Cast your vote at

Where Are the Dems?

A few quick thoughts here on the political fallout from the war in Israel…

Are Jewish Democratic senators willing to offer Israel their full backing like President Bush has done? Also, will this latest conflagration help Connecticut’s Joe Lieberman?

Clearly, Lieberman, an outspoken hawk, is an outstanding U.S. senator. He understands history and what’s at stake here. He deserves to be reelected. Will this be a wakeup call to Connecticut voters? Will they come to their senses and reelect Lieberman?

Another thought: does anyone in their right mind think this is the correct time to withdraw troops from Iraq?

I haven’t heard a lot from the Dems recently on this whole issue. So, where do they stand? What’s the Democratic game plan here? They haven’t said much.

The fact is, you cannot separate the Iraq war from the Israeli war. It’s all part of WW4 (as Norman Podhoretz calls it.) Syria comes into play, and Iran, and certainly Iraq.

This is yet another critical national security test for the Dems. Will they fumble the ball yet again? Will they stumble on in their notoriously weak-kneed approach to national security?

We shall see…

"We Are All Israelis Now"

From my latest column at National Review Online, "Israel’s Moment, the Free World’s Gain":

"All of us in the free world owe Israel an enormous thank-you for defending freedom, democracy, and security against the Iranian cat’s-paw wholly-owned terrorist subsidiaries Hezbollah and Hamas. Israel is doing the Lord’s work. They are defending their own homeland and very existence, but they are also defending America’s homeland as our frontline democratic ally in the Middle East. Commentary’s Norman Podhoretz was exactly right when he coined the term World War IV to describe the global terror conflict. Repeatedly hostile actions by the totalitarians in Iran, Syria, Hezbollah, Hamas, and North Korea are all connected. So are the recently foiled terrorist-cell-block plans in Canada, the U.S., London, and elsewhere around the globe. We are fortunate to have a staunch ally like Israel to assist us in this fight..."

(Click the link above to read my column in its entirety.)

The Boom Continues

Today’s industrial production report was incredibly strong—twice what Wall Street expected. Business is booming. The front-page story in this weekend’s Wall Street Journal about a recession threat was just plain silly.

Friday, July 14, 2006

Israel Takes Its Gloves Off

I have been thinking all day about the Israeli defense of freedom and democracy, and their attack on the terrorist groups Hamas and Hezbollah. I think Israel is doing the whole world a great service. To the extent that the Israeli defense forces can wipe out terrorist sanctuaries, training grounds, organizational headquarters and personnel, they are making the world a safer place.

Yes, of course, no one likes war or the collateral damage that accompanies war. But in their own defense, Israel is doing the kind of things to Hamas and Hezbollah that is being silently applauded throughout the Middle East.

Moderate Arab governments in places liker Egypt, Jordan and Saudi Arabia hate Hamas and Hezbollah almost as much as Americans and Israelis do. The Saudis have even criticized Hezbollah and implicitly, Syria, for having started this fight.

The usual pacifist hand wringing in places like France and socialist Spain and Italy is to be expected. No surprise there. Calls for Israeli restraint may sound great in the smoking rooms and coffee tables in Western Europe and throughout the halls of the United Nations, but there has been absolutely no restraint from the terrorist groups that started this fight.

Israel is doing what it has to do for their security and self-preservation. They have every right to defend themselves (as they did twenty-five years ago when the Israeli air force launched a preemptive strike that decimated Saddam’s nuclear reactor in Osirak). And, as a byproduct, they may very well help the Iraq war and the cause of peace throughout the Middle East. This is the unspoken word that I believe is reverberating in that part of the world.

And if Iran—which is the primary source for terrorist financing and equipping—wants to disrupt oil supplies with some silly action in the Strait of Hormuz, then so be it. The U.S. and Israeli forces will destroy the Iranian air force and navy in maybe 30-35 minutes.

Meanwhile, the handwringers here in the U.S. worrying about long-term damage to the economy and stock markets are just that—Nervous Nellie handwringers. Oil prices will come back down as soon as this short war is completed.

Fundamentally, American business has never been healthier, or more profitable. Lower tax rates have spurred a tremendous boom in private investment that continues to spread throughout the economy. Job hiring will continue spurring family incomes. In the face of wartime uncertainty and the geopolitical risks that are temporarily driving up oil prices, stock markets have temporarily slumped.

But oil supplies are more than ample. Prices will soon drop when the Israeli defense forces eventually rest their case, and once the inevitable diplomacy takes over to clean up the hopefully decimated remains of these totalitarian terrorist groups. They will pay dearly for their manic hatred of democratic, freedom-loving nations.

When the dust clears, as it will before long, the world will thank Israel for its courage. Some nations like the United States will be more vocal, others will be quiet. But everyone will soon see that Israel’s furious response in the face of senseless terrorist attacks will make the world a better place.

Tonight's Lineup

On CNBC’s “Kudlow & Company” tonight:

We’ll begin tonight’s show with a discussion centering on the markets and economy amidst uncertainty and global turmoil.

Our core market panel includes: Jeff Saut of Raymond James; Jeffrey Kleintop from PNC Wealth Management; Herb Greenberg from Marketwatch/CNBC; and Russ Koesterich of Barclays Global Investors.

We’ll also be joined by an economic panel to address a number of issues including retail sales, import prices, Japan's rate hike, oil, the Fed, and the overall US economic outlook. This panel includes Diane Swonk from Mesirow Financial; Lincoln Anderson of LPL Financial Services; and, Michael Mussa from the Institute for International Economics.

Former Labor Secretary Robert Reich and the WSJ’s Steve Moore will talk about Nancy Pelosi’s fiscal plan, jobs and whether to get rid of the penny.

Tonight’s Poll Question:

Should the US Treasury eliminate the penny?

Cast your vote at

Israel Has Every Right to Protect Itself

Israel is doing exactly what is has to do. It’s messy, but it’s appropriate. Israel has every right to defend itself. Their freedom, democracy and independence depend on it. Their very existence is at stake.

Israel did not start this. It was Hamas who attacked in Gaza and kidnapped the Israeli soldier, setting the stage for this latest flare-up. And it was Hezbollah that further stoked the flames when they crossed the Lebanese border and kidnapped additional Israeli soldiers. It is Hezbollah raining missiles inside Israel. Israel must respond.

In the name of self-defense, Israel must do everything within its power to protect itself from Hezbollah and Hamas. Clean out their sanctuaries, their terrorist training camps, weapons caches and the terrorists themselves. They must do this; they are right to do this; and they’re going to do this. This is Israel’s deal and they have every right to protect themselves.

Much praise is due President Bush for his support of Israel. He deserves enormous credit for defending our democratic ally. Bush refuses to publicly ask the Israelis to pull back. This is the right policy. Israel, of course, is the only true democracy in the Middle East.

Bear in mind that much of what these terrorist groups are doing is at Iran’s behest. They are financed by Iran and they are armed by Iran. Perhaps Syria has a small piece in all of this, but the real dough comes from Iran and its crazy-ass mullahs. That’s the deal.

American hawks will argue that the U.S. should be taking out the terrorist harboring governments in Iran and Syria. These countries are run by ruthless dictators. They’re statists; they’re anti-capitalists; they’re anti-human rightists. These people have absolutely no morality. The model for these malcontents is anything but religious. It has zero to do with Mohammed or Jesus, or whoever. Their model is based upon evil, brutal, dictators like Stalin, Hitler and other totalitarian murderers.

However, the reality is that it is highly unlikely the United States will take military action against either Iran or Syria. We may be moving closer towards economic sanctions, to discourage Iran’s pursuit of nuclear weaponization, but the military option simply does not appear to be on the table. Perhaps economic sanctions will bring Iran to the negotiating table, but right now everything looks further and further away from that.

As for Syria, they seem to have fallen off the radar screen. I just don’t understand why Condi Rice has stopped the pressure on Baby Assad that she was applying a year ago during the Lebanese elections. There doesn’t seem to be any talk about Syria anymore. Despite the fact their country is a hotbed of terrorist activity and probably has weapons of mass destruction (either of their own, or weapons stored in Syria that were moved there with the help of Russians on the eve of the American regime change in early 2003). Even in the court of world opinion, the U.S seems to have taken the pressure off Syria. This is discouraging.

The U.S. is not going to come in with troops. The Israelis are not getting help from anyone. This is not news in the history of that great nation. It is their story.

The great reality here is that Israel must do what it has to do.

Thursday, July 13, 2006

Tonight's Lineup

On CNBC’s “Kudlow & Company” tonight:

We will begin the show with a thorough discussion of what’s going on inside domestic and international markets.

Our extensive lineup includes: Ryan Beck CIO Joe Battipaglia; Dynamic Mutual Funds portfolio manager Noah Blackstein; independent trader/CNBC’s “Fast Money” contributor Tim Strazzini; T. Rowe Price portfolio manager Robert Gensler; and Fifth Third Asset Management President/CIO Keith Wirtz.
Resource Traders Alert editor Kevin Kerr will drop in to discuss oil prices.

We’ll have an inflation debate between Trend Macrolytics CIO Don Luskin and JP Morgan’s senior economist Jim Glassman.

And we’ll also take a look at what’s in the works between GM and Nissan.

Tonight’s Poll Question:

A big part of the campaign by Democrats to take back control of Congress is that they would impose some fiscal discipline on a budget process that's run amok.

Would a Democratic Congress curb spending more than the current GOP Congress?

Cast your vote at

Inflation Conundrum or Paradox?

Bonds are saying inflation is manageable, but gold and commodities are saying inflation is going to be a very serious problem.

Check out Jerry Bowyer's excellent article (“The Financial Paradox of Our Time?”) which attempts to get to the bottom of this important issue.

A snippet:

“My friend Rich Karlgaard, the omnivorous and 'air-apatetic' publisher of Forbes magazine has declared that the simultaneous existence of a flat (and, sometime, inverted) yield curve and high gold prices is "the financial question of our time." I agree. Supply side economists who have lived in blissful peace with one another (at least as far as economic issues are concerned) are now split. They have fundamentally different views on the state of our economy, and what the Fed should be doing. Since the days of Ronald Reagan the supply-siders have been driving the policy debate and have, generally, forecast the pants off of the Keynesian establishment. But now they're forecasting different things. Some of those think you should focus on the gold market and some put more emphasis on others markets; bonds, for instance.

In the past it hasn't really mattered whether you are a gold watcher or a bond watcher, because these markets have been saying pretty much the same thing, but lately they haven't…”

Wednesday, July 12, 2006

Tonight's Lineup

On CNBC's "Kudlow & Company" tonight:

We'll begin the show with a look into the markets. Our market panel includes Barry Ritholtz, President of Ritholz Capital; John Augustine, Chief Investment Officer at Fifth Third Asset Management; and John Rutledge of Rutledge Capital.

Are we stuck with a do-nothing Congress? We'll take a look at the budget, immigration, social security and other issues with Sen. Sam Brownback (R-KS); Sen. Byron Dorgan (D-ND); Rep. Paul Ryan (R-WI); and Rep. Xavier Becerra (D-CA).

Nationally syndicated columnist Joel Mowbray will address escalating tensions in Israel.

A look at the economy with Tim Kane, economist at The Heritage Foundation and Robert Shapiro, former Clinton undersecretary of commerce/co-founder and chairman of Sonecon, LLC.

Tonight's Poll Question:

Will the 'do-nothing' label haunt Republicans in the congressional elections?

Cast your vote at

Sometimes in Life

Sometimes in life, there are times when you need to beat a dead horse. Heralding the indisputable success of the 2003 tax cuts is one of those times.

Three springs ago, a cadre of lefty tax hikers insisted that President Bush’s tax cuts would unleash something just short of economic Armageddon. They appeared on our television screens, in our newspapers, on the radio and all over the blogosphere, proclaiming—over and over again, with absolute certainty—that Bush’s tax cuts would devastate the U.S. economy.

There was no question about it they stubbornly maintained.

Bush’s reckless tax cuts would cost Americans their jobs! Economic growth would suffer! The budget deficit would soar to the stratosphere!

Were these folks ever wrong.

As The Wall Street Journal points out today:

“Yesterday's political flurry over the falling budget deficit shows that even Washington can't avoid the obvious forever: to wit, the gusher of revenues flowing into the Treasury in the wake of the 2003 tax cuts. The trend has been obvious for more than a year (see our May 23, 2005, editorial, "Revenues Rising"), but now it's so large that Republicans are trying to take credit while Democrats explain it away...

The real news, and where the policy credit belongs, is with the 2003 tax cuts. They've succeeded even beyond Art Laffer's dreams, if that's possible. In the nine quarters preceding that cut on dividend and capital gains rates and in marginal income-tax rates, economic growth averaged an annual 1.1%. In the 12 quarters -- three full years -- since the tax cut passed, growth has averaged a remarkable 4%. Monetary policy has also fueled this expansion, but the tax cuts were perfectly targeted to improve the incentives to take risks among businesses shell-shocked by the dot-com collapse, 9/11 and Sarbanes-Oxley....”

As for the class warfare zealots on the left still lobbing their tired claim that tax cuts only benefit the rich, here’s an interesting fact worth mentioning: The top 1 percent of America’s most successful earners are paying a higher and higher proportion of tax collections. In ballpark terms, the top 1% of income earners (those earning roughly 17% of total income) pay roughly 35% of the tax collections. Of course, that’s the way the system should work under a progressive tax code.

And the fact remains that lower tax rates across the board means higher tax revenues, especially from these top earners and investors. All this of course, is the result of an ever-expanding economic base triggered by low tax rate incentives and rewards for work, investment and risk taking.

So actually, as the WSJ smartly mentions, “If liberal Democrats are really determined to soak the rich -- and we don't doubt it for a second -- they'll also vote to make the tax cuts permanent.”

The bottom line here is that Bush’s pro-growth tax cuts worked. After all the dust settled, the supply-side was right.

The Bush tax cut trifecta:

1. The economy has grown at a 4.0 percent annualized rate since the tax cuts were passed.
2. Unemployment is well below 5 percent since the tax cuts were passed.
3. And, to top it all off, Uncle Sam’s coffers are overflowing in tax revenues.

Shout it from the mountaintops.

Tuesday, July 11, 2006

Tonight's Lineup

On CNBC’s “Kudlow & Company” tonight:

We are pleased to have General Motors’ CEO Richard Wagoner on our program to discuss the state of affairs at GM.

In addition to the interview with Mr. Wagoner, we will cover a host of other economic and market related issues with assorted guests including Laffer Associates President, Art Laffer and Robert McIntyre from Citizens for Tax Justice.

Tonight’s Poll Question:

GM’s CEO Rick Wagoner says the automaker is on track with its turnaround plan. On May 8, the company revised its first-quarter earnings to post a tidy profit.

But not all shareholders are pleased, including billionaire Kirk Kerkorian, who has urged the board to consider a tie-up with automakers Renault and Nissan Motor.

What grade would you give Rick Wagoner?

A? B? C? D? F?

Cast your vote at

Eating Crow

Back in the spring of 2003, shortly before President Bush signed tax cuts into law and unleashed this remarkable economic boom, Minority Leader Nancy Pelosi (D-CA) had this to say:

“None of these tax cuts is affordable. None of them creates jobs, and they are not fair. All of them do damage to our long-term economic growth and contribute to the national deficit.”

Huh? Mrs. Pelosi could not have been further off the mark if she tried.

Let’s break down that ridiculous statement.

“None of them creates jobs…” Actually, since the passage of Bush’s tax cuts, over 5 million jobs have been created in the U.S. Unemployment dropped from 6.3 percent to 4.6 percent. Simply put, Americans are working.

“All of them do damage to our long-term economic growth…” Wrong. The economy has grown at a 4.0 percent annualized rate, way above historical averages. $13 trillion of new wealth has been created during this time.

“All of them…contribute to the national deficit.” Wrong again. Amid a surge in tax collections, the Bush administration cut its estimate of this year's budget deficit today by 30 percent to $296 billion. The projected shortfall is down from the $423 billion deficit the White House forecast five months ago and represents 2.3 percent of gross domestic product, according to the OMB. Government revenue has risen 13 percent so far this year, driven by higher than expected tax receipts as the economy grew at an annual rate of 5.6 percent in the first quarter, the fastest in almost three years (when the tax cuts were introduced). Individual tax receipts were almost $60 billion higher than expected because of the rise in personal income. Corporate tax receipts were over $50 billion higher than expected.

Despite stubborn naysayers like Mrs. Pelosi, the pro-growth, supply-side tax cut formula is a winner. It has been proven right, yet again.

The numbers tell it all. American workers thrive and businesses flourish when they’re able to keep more of their income. Treasury Secretary Hank Paulson was absolutely right in his confirmation hearings, low taxes really do change behavior. And, as the New York Sun pointed out yesterday, “It’s official – Arthur Laffer wins.”

Perhaps now, after analyzing the overwhelming evidence against them, Mrs. Pelosi and the rest of the high-tax aficionados will finally see the light.

I won’t hold my breath.

The Plan is Working

More than two years ago, when President Bush announced his aim to start significantly shrinking the budget deficit, many critics guffawed. The called the goal an impossibility, a na├»ve and futile effort that would be undermined by the fat-cat Republican tax cuts. But now the plan is working. Driven by a surging national economy, tax revenues are increasing and the deficit is rapidly shrinking. Despite the strong and ugly updraft of federal spending, the deficit is on track in the next few years to continue falling until it approaches 2 percent of GDP. This is below the 2.5 percent that has been the national average since 1970, demonstrating that the alarmist critics were simply wrong when they claimed that the tax cuts would lead the country into economic ruin. There is a lesson here, and it is vindicatory of the central claim of supply-side theory: Easing the national tax burden spurs economic growth and expands the revenue base, significantly mitigating the revenue loss that results from tax cuts. The national economy is a dynamic system, and it responds to the incentives and disincentives imposed on it by government policies. So the president has the right idea with his pro-growth policy of tax slashing—now if only he could take that hatchet to the bloated body of federal spending.

From National Review, "The Week..." July 17, 2006

Monday, July 10, 2006

Paulson at Treasury

President Bush gave the “Full Monty” to Hank Paulson’s swearing-in ceremony at the Treasury Department this morning. Not only did Bush go across the street to honor the new Treasury man, the President gave a full dress-up speech to boot.

He talked about keeping taxes low, bringing federal spending under control, maintaining free trade, avoiding excessive regulations, and keeping America competitive by rewarding innovation, risk-taking and enterprise. The President remarked, “America is the most innovative nation in the world because our free enterprise system unleashes the talent and creativity of our people.”

Mr. Bush also touted the strong economy by citing low unemployment, high productivity, rising wages, and higher living standards.

All this occurs against the backdrop of new reports that show the success of supply-side tax cuts and the rapidly expanding economy.

Lower tax rates on investment, working through the expanded economic pie, are bringing tax receipts about $250 billion above last year’s levels— a nearly 26 percent increase. This will bring the budget deficit down by as much as $100 billion and, in fact, our estimates suggest about a $250 billion deficit for FY 2006. This would represent about 2 percent of GDP.

Personal withholding taxes are rising nearly 10 percent and non-withheld income taxes (capital gains and dividends) are rising about 20 percent. Corporate taxes are up about 17 percent. It’s too bad federal spending is still growing around 8 or 9 percent, because if spending were closer to 5 percent growth, we’d probably have a balanced budget next year, or close to it.

As Brian Wesbury reminds us in his Monday morning outlook piece, Hank Paulson, during his confirmation hearings, explicitly pointed out that tax changes affect economic behavior. So there can be no question that the Laffer curve’s incentive effects are working strongly as the economy is highly responsive to record low tax rates on capital.

As for Mr. Paulson, he told the large audience at this morning’s swearing in ceremony, “we need to pursue economic and regulatory policies that are responsive to today’s world…we must always remember that the strength of the U.S. economy is linked to the strength of the global economy.”

Paulson pledged not to retreat from the global stage and argued that expanded world trade and investment is very important for the U.S., as well as our international partners.

There can be no question that Mr. Bush’s visit to the Treasury on behalf of Paulson’s first day in office signals that the new Treasury man will have more policy clout than his predecessors.

How this translates to currency policy for the dollar remains to be seen. So far, in his confirmation hearings and this morning’s swearing-in, Mr. Paulson has been silent on this very important topic.

In today’s trading, gold fell almost $8, while the greenback was relatively steady. For those of us concerned about a slight inflation creep, a stronger dollar would be the right policy course. So would be a 5 ½ percent fed funds rate target. A strong dollar signal from Paulson would be most welcome.

Remember, the Reagan formula of low tax rates and a strong dollar unleashed non-inflationary growth for basically 25 years. Keeping this formula intact would be a huge plus for future economic growth for years to come.

Tonight's Lineup

On CNBC’s “Kudlow & Company” tonight:

We’ll begin the show with a look into the economy and the start of Hank Paulson’s tenure at Treasury. On board to discuss will be Brian Wesbury, First Trust Advisors Chief Economist; Jared Bernstein, Economic Policy Institute Sr. Economist; and Rep. John Spratt (D-SC).

A thorough look into the market with Bob Froehlich, DWS Scudder Vice Chairman & Chief Investment Strategist; Jeff Schappe, BB&T Asset Management Chief Investment Strategist; and Gary Shilling, A. Gary Shilling & Co. President.

Rich Greenfield, media analyst from Pali Capital, will discuss AOL’s restructuring and Disney’s triumph with their "Pirates of the Caribbean" franchise.

Frank Newport, Gallup Poll Editor in Chief, will clarify assorted polling mischaracterizations in our “Sunday Unspun” segment.

A poltical debate with Ann Coulter, "Godless" Author; Lawrence O'Donnell, "The West Wing" Executive Producer/former Senate Finance Committee Chief of Staff; Hugh Hewitt, Nationally Syndicated Talk Radio Host; and Peter Beinart, The New Republic Editor.

Tonight’s Poll Question:

Is the U.S. economy slowing?

Cast your vote at

Friday, July 07, 2006

Stronger Jobs

At first blush, today’s jobs number looks soft at 121,000. But so far, unreported by the mainstream media, is that household employment rose a gargantuan 387,000. This comes on top of last month’s 288,000 gain. Over the past three months, household employment is up 242,000, compared to 108,000 for the corporate payrolls number.

Many economists downplay this smaller household survey, but they shouldn’t. It is the household survey that picks up small business job creation, particularly owner-operated businesses. This category is responsible for roughly 2/3 of all jobs created in the United States.

Because of the strength in the households, the unemployment rate remains at a historically low 4.6 percent.

What is more, total private hours worked rose 0.4 percent in June, and average hourly earnings rose 0.5 percent, both very strong numbers. Combining the two gets a proxy for wage and salary income that is now 6.6 percent over the past year, compared to only 1.5 percent in early 2004.

Of course, big corporations facing high healthcare costs and globalization pressures to downsize are clearly not hiring as rapidly as small entrepreneurial firms. But the reality is that the jobs picture is much better than these corporate payroll numbers suggest. That is one reason why the economy remains stronger than conventional economists would have us believe.

Thursday, July 06, 2006

Mopping Up Baghdad

Over dinner Sunday night at Bill and Pat Buckleys’, I had a chance to visit with the formidable Henry Kissinger. Of course, we talked about the world situation, especially Iraq. Henry the K made a very clear-eyed point that I want to pass along.

He said this was exactly the wrong time to withdraw troops from Iraq. With a new government, and a greatly enlarged Iraqi fighting force, now is the time to clean up Baghdad and other cities that are still heavily controlled by Baathist insurgents and various terrorist forces.

In order to do this properly, in what may be our last chance, the Iraqi security forces need the help of American forces. So therefore, it would be completely wrong to withdraw the very American forces that will crucially assist the Iraqis in this endeavor.

General Casey had been on the Sunday talk shows earlier in the day, flirting with the idea of troop withdrawals, as he so often does. Kissinger expressed disappointment in this. He felt that Casey was a very “political” general. Instead of talking about troop withdrawals, Casey and other senior generals should be talking about cleaning up Baghdad.

This, in his view, was the absolutely essential point in the Iraq war right now. All our efforts and thinking should be aimed directly at mopping up this operation.

Wednesday, July 05, 2006

The Bush Boom

Conventional demand-side economists keep talking about an economic slowdown. (See today’s WSJ front-page story).

These folks are stubborn if nothing else. They ignore the huge success of supply side tax cuts that lowered the marginal tax rate on capital to the lowest level in history.

Private business investment continues its surge. It remains an explosive engine of growth creating jobs, incomes and consumer spending.

The thought here is very simple: Low tax rates on capital benefit both businesses and consumers. In fact, a combination of record low taxes and record high profits is the key to understanding our current economic boom, which is the greatest story never told.

Just take a look at today’s factory orders report for May. It shows that order backlogs are surging at a 13 percent rate. This is yet another indicator of the business boom.

Moreover, the ADP jobs report hints at a much stronger than expected jobs gain in Friday’s report—368,000 new jobs in June, compared to street consensus of only 160,000. (This is the largest monthly increase in employment since the ADP index was created five years ago.)

Yet, the demand-siders continue their doom and gloom. They’ve predicted four or five growth pauses in the last three years, as the economy shrugged off their pessimism and roared ahead. They have been wrong over and over again. And all signs suggest they will continue to be wrong.

Low tax rates work. Just look at the economy.

Corzine’s Budget Crisis

Here’s a novel thought for New Jersey Governor John Corzine amidst New Jersey’s fiscal floundering:

Why not cut spending instead of raising taxes?

Corzine can’t even get a tax hike through his own Democratic legislature. At the rate he’s going, Mr. Corzine is destined to become the new Jim Florio of New Jersey.

The Governor ought to pay close attention to today’s Wall Street Journal editorial (“Democrats for Tax Cuts”) which details how a number of state legislatures across the nation are discovering the proven benefits of pro-growth tax reform. Just look at what’s going on in Rhode Island.

“…Only last week, the very blue state of Rhode Island adopted one of the most sweeping pro-growth tax reforms in any state in recent years. Democrats, who control 70% of the state legislature, teamed up with Republican Governor Donald L. Carcieri to enact a plan that allows residents the choice of a flat tax that cuts the top tax rate on high income earners to 5.5% from 9.9% if they voluntarily give up deductions. In an instant, Rhode Island has gone from the state with the third highest income tax rate in the nation to the 27th, according to the Tax Foundation.

For good measure, the state also cut property taxes, passed a tax credit of up to $1 million for businesses to help fund private school tuition, and reformed the health insurance market by allowing small businesses to buy "stripped down" health insurance free of many costly mandates. The latter could save employers 25% while expanding the number of insured workers.

Just as impressive is the economic logic that Rhode Island Democrats used to justify the tax cuts. "Our high tax rates make us uncompetitive," says Democratic House Speaker William Murphy. "Business leaders with incomes of more than $250,000 look at Massachusetts and see a 5.3% income tax, Connecticut with a 5% tax, and Rhode Island with a 9.9% tax. They make a choice on where to move and create jobs, and that difference in tax rates is a big factor in where they go." Art Laffer couldn't have said it better….”

This is the solution to New Jersey’s problem. It’s also the solution for New York State.

In fact, New York’s GOP gubernatorial candidate John Faso should adopt the Kudlow tax reform commission's 5-percent solution proposal that would massively overhaul New York State taxes. Drop the top corporate and personal tax rates to 5 percent and abolish capital gains, dividends and estate taxes.

New Mexico’s Democratic Governor Bill Richardson hit the nail on the head when asked by the WSJ how he thought Democrats could regain its competitiveness with the GOP.

His answer?

"We have to be the party of growth and the American dream, not the party of redistribution."