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.