Wednesday, August 31, 2011

An Interview with Pimco's Bill Gross

Last night I had the pleasure of speaking with Pimco's Bill Gross, one of America’s most famed investors, on CNBC’s Kudlow Report. Mr. Gross has generated big buzz over his admission that betting against U.S. debt was a mistake.

The full interview transcript and video follow below.


And most important, at the top, PIMCO's Bill Gross, one of America's most
famous and successful investors. He's generating big buzz today with his
superimportant and much talked about interview in The Wall Street Journal and
elsewhere. Mr. Gross says he has, quote, "lost sleep," end quote, over a bad
bet on Treasury rates. He acknowledged that selling all his funds, Treasury
holdings last February was a, quote, "mistake." And he went on to say, and I
quote, "We try to be very intellectually honest and honest with the public,"
end quote.

All right, for my part, I just want to say to my old friend Bill Gross that I
have nothing but admiration for his taking ownership and admitting a mistake.
We all make them. And by the way, he's setting a very good example for the
rest of us. That's just my take.

Anyway, it is always a real pleasure, especially tonight, to welcome back to
the show a special Kudlow exclusive, Bill Gross. He's founder and co-chief
investment officer of PIMCO.

All right, Bill. You admit to a big Treasury bond miss. Rates this year went
way down, not up. Can you tell us, please, why the interviews right now and
what message are you sending?

Mr. BILL GROSS: Well, I, you know, I think at PIMCO we always try and be
open with the press and the public. I mean, isn't that what voters want from
their politicians? Mohamed El-Erian, our CEO, write several op-eds a week. I
tweet daily and publish a monthly investment outlook, which came out this
morning, by the way. So we try to give an honest answer to an honest

And by the way, in terms of the interview with the Journal and with the FT,
what I said was that--something that I think all bond and--bond managers would
say if they were honest. They would say, `Wish I'd own more Treasuries.' To
say otherwise would be to say something like you'd wished you bet on the Miami
Heat instead of the Dallas Mavericks. I mean, it's obvious who won, right?

KUDLOW: Obviously wrong. All right, well, anyway, you're very outspoken and
I respect you for it.

Listen, you were here--I looked back--June 8th we spoke. So what's that?
Three months ago. At that point, Bill, you repeated the call to get out of
bonds. Now the bonds rally more or less from 3 percent to 2 percent, today
they're at 2.20. What went wrong? How do you assess what went wrong with
your bond call?

Mr. GROSS: Well, first of all, I didn't say get out of bonds. I said get
out of Treasuries and move...

KUDLOW: Treasuries.

Mr. GROSS: ...and move into Canadian bonds and to Australian bonds and other
alternatives. What went wrong in terms of the Treasury call from 3 percent
down to close to 2 percent? Well, the economy slowed down dramatically. We
had a freeze-up, so to speak, in terms of Washington with the politicians and
policy options. It was recognized that fiscal stimulation, you know,
certainly wasn't going to be something undertaken for the next six to 12
months, if at all. It was recognized that the Fed was running out of policy
options and so the economy was slowing down and was--seemed to be slowing
almost permanently in terms of a 0 to 2 percent growth category.

KUDLOW: Have you basically lost confidence in the economy? You mention, I
think, in the FT article, Bill, you call it, quote, "a new normal minus." Have
you lost all confidence in our capacity to grow the economy?

Mr. GROSS: Well, no. You know, but the problem I have with the free market
capitalism, Larry, which is your philosophy, is not with the concept. In
fact, you know, PIMCO is an epitome of its historical thrust. We're very
successful and because of free market capitalism. But the problem I have is
with its apparent exhaustion in the face of three equally dynamic economic
influences. Let me mention them briefly.

First of all globalization has weakened American and developed economies by
syphoning off investment and, more importantly, jobs to emerging nations at
1/10th the wage cost. Take China, for example, Free market capitalism, in
other words, is working for China, it's working for Brazil, but it's not
working for America or Euroland.

Secondly and just briefly, free market capitalism depends on a balanced market
between labor and capital. And clearly we're reaching a point where
impoverished Main Street cannot afford to buy the goods that capitalism so
magnificently produces. So I think there's an exhaustion here in terms of
free market capitalism that has worked so well for 20 to 30 to 40, 50 years,
but now is reaching structural impediments that prevent, you know, strong
growth that we're used to.

KUDLOW: I want to come back to that towards the back end, Bill, but I just
want to narrow down for a moment. I want to drill down. According to the
reports, you are buying Treasuries. You're accumulating Treasuries. You have
a net positive exposure for the first time. Let me ask you, what if the
bond--the Treasury market has discounted a recession that doesn't happen? Are
you chasing the market? Is there a risk that the rate hikes that you foresaw
this year might still come to pass if the economy surprises on the upside?

Mr. GROSS: Well, that's possible. We read in the Fed minutes today of the
last meeting that the--that the two-year 0 percent or 25 basis point Fed funds
level is conditional, and we know that there are hawks, that there are doves,
and that should the economy recover to a 2 to 3 to 4 percent rate, that, you
know, perhaps inflation looms larger in terms of a threat. So anything is
possible. What I would say at the moment, though, is since the economy is
really moving closer to the zero level, since inflation probably will come
down gradually, you know, the Fed is at 0 percent for the next two years and
perhaps even longer than that, and that determines significantly the level of
Treasury rates in five-year space, 10-year space and even 30-year space.

KUDLOW: But, you know, it's interesting. We had Byron Wein on, a
distinguished investment guru on his own part. He predicted the S&P would
rally to 1400. OK? It's just over 1200 today, as you know, If that sort of
thing happened with better corporate profits, even consumer sentiment, which
tanked today but people are still buying washing machines and cars, retail
sales are holding up. If you had a big rally in stocks, the risk trade is
back on. That'll come out of Treasury bonds, and those could--that could
drive those bond rates back to 3 percent. You're buying bonds now. Are you
worried that there's a potential for whiplash?

Mr. GROSS: Well, I'm suggesting that the probability--that the high
probability is for interest rates to stay low for a long time. I mean, Byron
Wein basically is a a mean reversion cyclical type of--type of analyst. What
we're suggesting is that there are structural impediments to the US economy to
develop market economies that will prevent growth in the 3 to 4 percent

Let me ask you, in terms of consumerism, in terms of the US consumer, if
unemployment stays at 9 percent plus and if wage gains--if real wage gains are
nonexistent, then were is the spending power coming from? It has to come from
the consumer as opposed to businesses. Businesses are waiting on the
consumer. The consumer is waiting on business. We have what we call a
liquidity trap. So what we're suggesting is not a reversion to the mean, not
a cyclical upthrust, but basically a structural impediment that produces
growth in the 0 to 2 percent category for a long time. Not just in the US,
but in Euroland, as well.

KUDLOW: All right. So let me--have you had any trouble with your fund--I
guess the Total Return Fund, because of the bond miss this year, rates went
down instead of up? Have people withdrawn from the fund? What are your
customers saying right now?

Mr. GROSS: We have a $245 billion customer base. You know, that customer
base is growing. We just got a billion dollar contribution from a large
corporation this week. There's been no lack of confidence. You know, to
suggest that a six to seven month timeframe for the PIMCO Total Return Fund,
which has produced results for the last 20, 30 or 35 years, is, you know, a
stretch of the imagination. We continue to produce fine results for our

KUDLOW: Oh, that's what everybody says. That's--everybody I talked to today
on this story said exactly what you said. Your record down through the years
has been superb.

Let me ask you this, are you still buying some corporate bonds and are you
still buying foreign bonds? You talked to me about that when you last

Mr. GROSS: Well, corporate bonds of the highest quality, yes. And that
would be A and AA-types of corporates, not high-yield bonds because they don't
do well, you know, if we near the recessionary level of 0 percent. In terms
of foreign bonds, let me just cite the comparison: a five-year Treasury in
the United States at 1 percent, actually little bit less; in Canada 1.7
percent; in Euroland 2.1 percent; in Mexico 5.4 percent; in Brazil 11 percent.
And these are countries, by the way, Larry, which have what we call clean or
dirty shirts. Mexico has half the debt of the United States. Brazil has half
the debt of the United States and has treasury reserves as opposed to
deficits. And so these are countries with higher yields and better balance

KUDLOW: All right, last one. I'm going to come back to where you were on the
breakdown of free market capitalism, which is fair enough. I would
acknowledge that America's economy has been on the decline now for about 10
years. But I ask you, Bill, everybody is so profitable. Businesses are so
profitable, so much cash. Banks have more liquidity than they know what to do
with. Is it possible there's a buyer's strike, that there's a capital strike,
that the spending and taxing and regulatory threats out of Washington are
really the problem, not the free market capitalist system?

Mr. GROSS: Well, I'd have to say that that doesn't help. I mean, let's come
together on that point that regulation and too much of it--that taxation in
terms of the necessary reforms that probably lie ahead, you know, don't help
either in terms of the current economic environment. What I would say in
terms of corporate tax reform is, yes, let's reform taxes, let's reform
corporate taxes and let's reform individual taxes. But at the same token,
let's not lower them, because corporate taxes are 10 percent of total federal
revenues. They're at an all-time low, Larry. And to suggest that
corporations are the poor baby in this particular story, I think, is an

KUDLOW: All right. I'm going to leave that for the next discussion we have.
We have much more to discuss on corporate tax reform. But, Bill Gross, thank
you for your honesty. Thank you for your forthrightness.

Mr. GROSS: Thank you, Larry.

KUDLOW: And thanks for coming on tonight. I appreciate it.

Mr. GROSS: Yeah.

Monday, August 29, 2011

Irene’s Broken Windows

Get ready for a bunch of demand-side economists to tell you that the post-Hurricane Irene rebuilding phase is actually a good thing for future economic growth. But don’t believe it.

Who has it right?

Joshua Shapiro, chief U.S. economist at MFR, Inc., delivered my favorite quote on the subject to the New York Times: “If you’re in the middle of recession, you just wander around blowing up buildings, and that would be your path to prosperity. And clearly that’s not the case. It’s not the case with a natural disaster either.”

Echoing this thought, Ian Shepherdson, the chief U.S. economist at High Frequency Economics, bluntly noted on CNBC’s website that “no one is made better off by the destruction of their home or workplace.” He acknowledged the benefits of reconstruction work, but he dismissed the idea that somehow this is a net win for the economy.

It sounds to me like both of these gentlemen are recalling the parable of the broken window, introduced by French free-market philosopher Frederic Bastiat in an 1850 essay called “That Which Is Seen, and That Which Is Unseen.” While Bastiat agrees that repairing broken windows is a good thing, encouraging the glazier’s trade and income, he argues that it is quite different from the idea that breaking windows is a good thing, in that it would cause money to circulate and encourage industry in general.

Why? Because a shopkeeper who spends money to fix broken windows cannot spend or invest that money on new ventures.

“It’s not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library,” wrote Bastiat. “In short, he would have employed his six francs in some way, which this accident has prevented.”

In other words, the business people who are spending to fix the damage of Hurricane Irene are not spending or investing that money on brand-new ventures or start-ups, or on ordinary goods and services. That’s the real economics of Hurricane Irene.

There was a lot of damage incurred along 1,100 miles of U.S. coastline. Tragically, 28 deaths have been reported so far. There were toppled trees, power-line disruptions, and flooding on damaged roads. Homes, commercial buildings, and factories all stopped for at least a couple of days. In some sense, the human distress has been even greater than the economic distress.

On the other hand, lost sales, foregone consumer spending, and temporary stoppages of production and employment will all be recouped in a relatively short period of time. Mark Zandi of Moody’s Analytics suggests that the economic toll will be in the billions, but not the tens of billions. (Remember, total U.S. GDP is roughly $15 trillion.) So there’s no black-swan event here that will throw our fragile economy into a double-dip recession.

Yes, the economic blow from Irene is noticeable, but it’s temporary. In fact, what makes this economic setback even less worrisome is that it occurred over a weekend. You really didn’t even lose two days of economic activity.

Restaurants, retailers, baseball games, and Broadway shows all shut down, but only for a short bit. And actually, there was a lot of consumer buying in the days leading up to Irene. People went to Home Depot and Lowe’s to find stuff to board up their windows. They went to Costco for food. And they went to Wal-Mart and Dollar General for all sorts of things.

When the final tally is in, Irene may or may not qualify as a top-ten hurricane. But the history of such disasters is that the national economy rebuilds and snaps back shortly thereafter. Nonetheless, the economic rebuilding essentially gets you back to where you were before the storm. Unfortunately, there is virtually no net new investment from all of this.

That said, if President Obama tries to use Hurricane Irene as an excuse to pour tens of billions of new infrastructure dollars into the economy, he’s barking up the wrong tree.

For just as Bastiat’s seen-and-unseen analysis holds for the shopkeeper repairing his window, it also holds for the impact of massive government spending on the whole economy. It’s a huge mistake, and a consequence of our fiscal profligacy, when private money is not spent on new investment because funds are absorbed by big-government borrowing.

If we are to restore strong economic growth and job creation we require measures like pro-growth tax reform or regulatory rollback and repeal. In this sense the new House Republican plan just released by Majority Leader Eric Cantor to repeal job-destroying regulations -- especially on labor and the environment -- makes a lot more sense than throwing money at FEMA for new infrastructure banks.

Breaking fiscal windows is just as ineffective as breaking the shopkeeper’s pane of glass.

Friday, August 19, 2011

An Interview with Richard Fisher

Richard Fisher, Dallas Fed president, explains his dissent on two more years of a zero interest rate target. He believes the Fed has created enough liquidity, but it's tax and regulatory barriers that have blocked growth and job creation. He also responds to GOP attacks on the Fed. You're looking at a future Treasury secretary here.

LARRY KUDLOW, host: Welcome back to this special edition of THE KUDLOW REPORT. We're continuing our discussion of today's stock market route, this time from the perspective of the Federal Reserve. We are honored to have a very special guest joining us this evening. Here now for an exclusive CNBC interview Richard Fisher. He's president and CEO of the Federal Reserve Bank of Dallas. Richard, welcome. You picked a hell of a day.

Mr. RICHARD FISHER: Well, wait, wait, wait. Not only am I president of the Federal Reserve Bank of Dallas, but I've been a friend of Larry Kudlow's for over 30 years, since we were embryos.


Mr. FISHER: So we started out as babies, of course.

KUDLOW: Thank you for that. I appreciate it. All right, Richard, let me just get your general impressions. Today was another plunge in stocks. We're in the throws of a 16 percent correction. What's your reaction to this kind of correction? What do you think is behind it?

Mr. FISHER: Larry, I'm a central banker. I thought your panel, by the way, earlier was very informative and very helpful. The message on that panel that don't panic. I'm a central banker. The Federal Reserve does not panic. I think we watch things carefully. You and I both know that markets are manic-depressive mechanisms. There are always some trip wires there, depending on what people are looking for. I'd just like to make two comments.

One is on Philly Fed Index. It's a wonderful index. You might wish to note to your viewers that its correlation with the PMI, that is the manufacturer's index, is .08. The two of the Fed indexes that have a good correlation are the Empire State, and then, even more than that, believe it or not, is the Dallas Fed's manufacturing survey. So I think there's a bit of an overreaction there.

And then secondly, one of the key points that was made is you have to think about the kind of dividends that are there. As I understand it, if the numbers I looked at correctly today, 60 percent of the S&P 500 is out yielding the Treasury 10-year. So I think your panel's advice don't panic is very good. Certainly we at the Central Bank have to look at things in a very calm, steady-handed way, and we'll continue to do so.

KUDLOW: Richard, I guess a two-edged question. Number one, your assessment of the outlook for recession. You had a bunch of banks today, Morgan Stanley earlier...

Mr. FISHER: Mm-hmm.

KUDLOW: ...and I'm told, as we're on the air day, Citi is downgrading its economy, its economic forecast, as is JPMorgan. Do you think--do you personally think we're going into recession?

Mr. FISHER: I've said from the very beginning this is will be a slow slog. I think it'll continue to be a slow slog. You pointed out some numbers earlier, Larry, in terms of the retail sales number, the production numbers. There have been setbacks to that in terms of various surveys. But I still think we have positive momentum. I'm not saying it is sufficient momentum to create the kind of jobs we want to create in America, but I do think we're going to have a positive third quarter. And my own personal feeling is, at least before the debt ceiling negotiations took place, I was looking for 3 percent or so in the third quarter. Still want to see that. I don't know much a retardant that comic opera was on people's willingness to commit capital to build into hire or to consume. But I'm still of the feeling that we're going to have positive momentum, Larry.
KUDLOW: Well that sort of leads to my next question. It's a puzzlement question. I've never seen so much cash and liquidity around.

Mr. FISHER: Boy, you're right.

KUDLOW: Banks have more money than they know what to do with. Corporations have more money than they know what to do with.

Mr. FISHER: Mm-hmm.

KUDLOW: And yet they all seem immobilized, not investing it, not taking risks, not hiring. Why is that?

Mr. FISHER: Mm-hmm. Well, my opinions are pretty well known there. It's not because of monetary policy. We have filled the gas tank. We got lots of fuel in there. Someone needs to step on the peddle and gauge the transmission mechanism, and I really do think the corporations have been discouraged from doing so. Obviously they're worried about weak demand. But remember, we're a consumption driven country. Unless you hire people, you can't have more consumption because you won't have more employment. And there's so much confusion on the regulatory side. There's such an uncertainty, Larry, in terms of what kind of tax regime, what kind of spending and what kind of subsidies are going to be added to, taken away, what the incentives will be that come out of this group of 12, or if they fail, will be laid down. That, to me, is not only depressing production, hiring, CAPEX and all the good things we need to see, it's also scaring the heck out of the consumer.
If you had watched that whole debacle of the debt ceiling negotiations, I would have turned to--as I did--to my wife, `Honey, we just can't afford to go on this vacation,' or, `We can't afford to buy that gizmo or that service.' I think it is a retardant. We have to get more certainty. Business operates under conditions of uncertainty, as you know. That's the way capitalism works. But extreme uncertainty freezes decision making, and I'm afraid that's the position we're in.

The Central Bank has reliquefied the system. That's what the Federal Reserve has done. The fiscal authorities, however, have to incent people, or at least help incent people, to have the confidence to go ahead and engage, expand the economy, in addition, of course, to seeing the whites of the eyes of a stronger recovery. But it can't occur unless businesses are incented to invest and hire more people.

KUDLOW: Well, in terms of Federal Reserve...

Mr. FISHER: I have very strong feelings about that.

KUDLOW: Yes, I can tell. And that, you know, I hear you on that. I get that. I hear you completely.

Mr. FISHER: Yeah. Good.

KUDLOW: But I want to--let me bring it back to the Federal Reserve. You did dissent from the last meeting.

Mr. FISHER: Yes, I did.

KUDLOW: The two year extension of the zero interest rate target. In Midland, Texas, yesterday--apparently, according to all the reports.
Mr. FISHER: Mm-hmm.

KUDLOW: You said that that zero interest rate target for two years reduces business incentives to grow and hire. Could you expand on that, because it sounds like you're suggesting the Federal Reserve's interest rate policy, the zero target is itself a disincentive, an obstacle, and may be adversely affecting the stock market?

Mr. FISHER: Well, this is my personal opinion, but there could be the unintended consequence that in addition to not knowing how you're going to be taxed or what kind of spending patterns are going to change, how it's going to affect not only your company, but your consumer base. Now you know that you can wait to borrow because the rates are going to be locked in at very low levels for a two year period. So my suggestion is and one of my arguments was that this might well further retard recovery and commitment. Again, you can't have recovery unless we have employment go up, unemployment go down. We will not have that unless people decide to expand. And right now there's almost no incentive to expand, and I was worried--this is my personal opinion--obviously I was in a minority and I respect the majority of my colleagues--that this would be a further retardant.

KUDLOW: Haven't all these zero interest--it's been several years now that we've had a zero interest rate. Hasn't it just benefited the speculators, the traders, the hedge funds? Not that they're bad people, but I just want to say, if you can borrow at zero and invest in anything with a higher yield, you win. At the same time, it's doing great damage to savers. I mean, isn't this a lopsided policy?

Mr. FISHER: Yep. Well, again, I've voiced concern about that. There's always a cost-benefit analysis takes place. Clearly one of the costs--and we're all aware of it--is the people that played by the rules, as they got older--like you and me, Larry--began to save more, shorten up on a yield curve, particularly those who don't have the benefit of sophisticated advice, have really been hammered here because it--they're getting low, in fact, negative real returns on their investment, and I think it's hurting the poor, and I think it's hurting those savers, and I think it's hurting the middle class that have played by the rules, socked away some money for retirement. And that's one of the prices we pay to try to reliquify the system.

I'm a little concerned as to how tolerant those people will be over the long term unless they see a pickup over time in the returns on their savings. But...

KUDLOW: Well, I think there's...

Mr. FISHER: It's very, very hard for retirees, and you and I agree on that front.

KUDLOW: I think there's a--I think there's a demoralization going on out there by savers and by businesses.

Mr. FISHER: Mm-hmm.

KUDLOW: But let me ask another question. I'm not going political on you, I just want a general sense. Out on the campaign trail, many if not most of the Republican candidates...

Mr. FISHER: I know what it is.

KUDLOW: I'm not going to name names, just because they're--because really many of them are attacking the Fed, sometimes in very harsh terms. I think what people want to know, not so much whether this guy is right or that lady is wrong or whatever. They want to know what kind of impact this has, these attacks on the Federal Reserve.

Mr. FISHER: Well, first of all, I come from Texas, Larry, so I come from the history of Wright Patman and Henry B. Gonzalez, and at least one of the individuals you refer to is a Texan--at least two of the individuals you refer to are Texans. I understand their sentiment--that's sort of the way we're geared down here--but I worry about it from the standpoint of if they're pointing fingers at us, I'm worried they're not focusing on really need--is needed here, which is to change the whole fiscal mix to reboot the way we tax, spend, incentivize and get our economy moving again. That's what they do as leaders if they're running for the White House, as president, working with the Congress of the United States.

As far as the impact on our decision making, whether it's Chairman Bernanke or whether it is the rest of us that sit around that table, we just don't pay attention to this. I think it's very, very important you have a central bank.

KUDLOW: No attention whatsoever?

Mr. FISHER: It is independent.

KUDLOW: Front page story, no attention whatsoever.

Mr. FISHER: That it is...

KUDLOW: I mean, they're trying to put monetary policy and Fed and...

Mr. FISHER: That this...

KUDLOW: ...the dollar square in the middle of the campaign, Richard. You're saying it has no impact at all on the Fed?

Mr. FISHER: I think it's very important that we resist the temptation to react to that criticism any way, shape or form. We know, historically, when legislatures have taken over central bank functions, you end up with Argentina...republic, nationalist China and so on. So if we don't allow it to permeate our thinking, we just do what we're suppose to do for a living, then I think we'll stand in the best stead.

KUDLOW: All right, Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas. We appreciate your views very, very much. It's great to have you visit with us again. All the best.

Thursday, August 18, 2011

On CNBC's Kudlow Report Tonight

Please join us at 7pm ET tonight on CNBC.

- Mike Holland, Holland & Company Chairman; The China Fund Board of Directors (CHN)
- Jim Iuorio, Director, TJM Institutional Services
- Art Hogan, Lazard Capital Markets Managing Director
- Joseph Grano, Centurion Holdings CEO; Former UBS Wealth Management USA Chairman & CEO

- Richard Fisher, Dallas Fed President & CEO

- David Malpass, Encima Global President; Fmr. Bear Stearns Chief Economist; GrowPac Chairman; Fmr Reagan Deputy Asst Secy of Treasury
- Bill Rhodes, Fmr. Citi Senior VP
- Bill Isaac, The Secura Group Founder & Chmn; Fmr. Fifth Third Bank Chmn; Fmr. FDIC Chmn

- CNBC’s Bob Pisani
- CNBC’s Rick Santelli
- Bob Lutz, Former GM Motors Vice Chairman; CNBC Contributor
- Warren Meyers, DME Securities Vice President of Floor Operations & CNBC Market Analyst

Wednesday, August 17, 2011

An Interview with Austan Goolsbee

Departing Council of Economic Advisers chairman Austan Goolsbee defends Obamanomics. I push back. But he's for pro-growth tax reform. I'm for it. So where's the President?


So now I am personally honored to be joined for an exclusive interview by the
former chairman of the President's Council of Economic Advisers, that being
Austan Goolsbee. He is returning to the faculty of the University of
Chicago's Booth School of Business this week. An old friend of the show.

Good evening, Austan. Let me just say congratulations on your government

Mr. AUSTAN GOOLSBEE: Hey, thank you, Larry, and it's great to be back and
see you again.

KUDLOW: All right, that's the good news. The bad news, Austan, as you well
know, America is not working. Many fear a double-dip recession. There has
already been a debt downgrade. What is your man, President Obama, going to
do? Can you tell us what he's going to say in this so-called new economic
growth plan?.

Mr. GOOLSBEE: Well, you know, I'm not going to give away any secrets. It's
his to make. You and I, Larry, for many, many years, have been the growth
guys. And while we may disagree on this or that or some other policies,
fundamentally we got to get the country growing if we're going to be
generating jobs, and we saw that last year when the economy was growing at a
faster clip. We added more than two million jobs, as well as the stock market
was doing well and you were starting to see more business investment. As we
slowed down this year, we took a hit on all of those fronts. So hopefully
it's going to be in the style of the education, innovation and investment,
which I kind of think is--has got to be the fundamentals of any growth

KUDLOW: Yeah, but Austan, I don't--look, let's go back to basics. The $800
billion stimulus package hasn't worked. The $2 1/2 trillion Fed stimulus
package hasn't worked. Cash for clunkers hasn't worked. These green energy
ideas hasn't worked.

Mr. GOOLSBEE: Well...

KUDLOW: Your president is out there talking about raising taxes on
millionaires and billionaires.

Mr. GOOLSBEE: Well, let's--now hold on a second, Larry.

KUDLOW: What kind of message does that send to entrepreneurs and free
enterprise business people who, frankly, are immobilized and don't want to
create jobs, Austan? Isn't it time to turn over a new leaf and start
something new?

Mr. GOOLSBEE: Have you been saving this all up since I've been--last been
on, Larry?

KUDLOW: Only for you, my friend. Only for you, because you're such a good

Mr. GOOLSBEE: Well, look--look, what I will say is this, I don't agree--if
you start looking at the impact of various programs. We avoided a depression,
which was a scary moment, but all of that stuff was two-and-a-half years ago.
If you look at the president cutting the capital gains rate to zero for people
starting their own businesses, cutting taxes 17 different times for small
business, I'd a thought you'd be for that stuff, Larry.

KUDLOW: Those are not tax cuts. You see, the whole...

Mr. GOOLSBEE: How is that not a tax cut?

KUDLOW: One of my problems with your line of thinking is you believe that
little teensy-weensy, temporary, targeted tax cuts; and from what I gather
from our John Harwood, you're going to go there again. Another one year
payroll tax cut will not do it, Austan. Don't you understand, businesses
think longer term. Is there anybody in the White House that's ever worked in
a business that sees a five-year horizon, permanent reductions in tax rates
work? These teensy-weensy tax credits never work, Austan. That's why we're
at 1 percent growth in the economy.

Mr. GOOLSBEE: Look--oh, you and I are both for a low rate and a broad base.


Mr. GOOLSBEE: Now when the president has proposed...

KUDLOW: Where is that? Where is that, Austan?

Mr. GOOLSBEE: Well...

KUDLOW: Where is his broad base? Yes, let's start there.

Mr. GOOLSBEE: Go ask the members...

KUDLOW: We can agree on that.

Mr. GOOLSBEE: ...of Congress. When the president proposed a grand bargain
with a low rate and a broad base, they said, `What do you mean broaden base?
We don't want to broaden the base. That would be a tax increase.'

KUDLOW: Well, but if you lowered the rates and broaden the base, if you
rolled back regulations, if you stopped the National Labor Relations Board
from attacking businesses, Austan, you would see companies spending the
several trillion dollars of cash that they're not spending now, my friend.

Mr. GOOLSBEE: Well, now, hold on, Larry. You see that same accumulation of
cash in other countries that have totally different policies than we have in
the US. So I think it's very unlikely to attribute that to the policy
decisions that are taking place in the US, first of all. And second of all,
you have seen that the president has actively been trying to streamline
regulations. And just going back to the policies that led to the downturn
hardly strikes me as the wisest course of action.

KUDLOW: I don't see...

Mr. GOOLSBEE: We ought to do some third thing.

KUDLOW: Well...

Mr. GOOLSBEE: And I think you will likely see the president proposing that.

KUDLOW: I mean, I don't see--you've tried all this big government spending
and regulate. Why not have flat tax reform? Why not roll back regulations?
Why not put yourself in the position of a small business, Austan? They're
worried about Obamacare. They're worried about...

Mr. GOOLSBEE: Look, the president has done that.

KUDLOW: They're worried about Dodd and Frank. Why not understand that
community banks are afraid to make a loan because of overregulation?

Mr. GOOLSBEE: Well, Larry, again, I think you're being highly unfair. The
president has cut taxes for small business 17 times. It's not my job to come
down and get in a big battle over things that happened two
years--two-and-a-half years ago in the stimulus. If you look from this point
forward, what do we need to grow? As I look at what the administration is
doing, where they are in those areas where streamlining of regulation can be
effective, trying to streamline the regulations. They're trying to cut taxes
for small business. And they're trying to make the investments. It seems
like you were making fun of an infrastructure bank.


Mr. GOOLSBEE: That's one of the only things that the Chamber of Commerce and
the labor unions agree on...

KUDLOW: I don't care if the chamber is for it.

Mr. GOOLSBEE: ...that the infrastructure will be critically important.

KUDLOW: Austan, you spent a lot of money.

Mr. GOOLSBEE: With...

KUDLOW: And the president himself said those jobs were not shovel ready. I
don't think an infrastructure bank or any other form of additional spending is
going to help grow the economy and unleash entrepreneurship, with all do

Mr. GOOLSBEE: Well, you know...

KUDLOW: And I want to ask you about another one. Is the president going to
extend unemployment benefits for another 99 weeks, because many economists, as
you well know, believe that this kind of unemployment benefit extension is
actually keeping unemployment high?

Mr. GOOLSBEE: Well, the evidence that I've seen on that suggests that it's
not keeping unemployment high. You have to be looking for a job to get
unemployment benefits. If you stop looking for work, you are no longer
eligible to receive and benefits. And though it's come down substantially, we
still have more than four-and-a-half people looking for a job for every job
that's out in the economy. So I, you know, I think that's a little unfair to
be trying to pin our economic problems on the fact that we're trying to give
people some time to help them find a job.

KUDLOW: All right, my last one is--look it, you've been very patient. I
appreciate that. But this is such important stuff, Austan. You've a good
man. We've known each other long time. All this green energy stuff has been
an abject value. You're never going to do more than 1/2 percent or 1 percent
of American energy. Why doesn't that administration come out full throated
for American energy production? We've got the oil shale. We've got the
natural gas shale.

Mr. GOOLSBEE: We did.

KUDLOW: No, see...

Mr. GOOLSBEE: How can you say that?

KUDLOW: They don't...

Mr. GOOLSBEE: They did. Domestic production is the highest it's...

KUDLOW: They refused to call off the EPA dogs.

Mr. GOOLSBEE: ...been since the--for many years.

KUDLOW: I understand. But they refuse to call off the EPA dogs that are
investigating the infras--the fracking structure and the water levels. And
this is one of the great job...

Mr. GOOLSBEE: Wait, look, look.

KUDLOW: ...creators of all time.

Mr. GOOLSBEE: Look, we have to--we have to promote domestic energy
consumption. We have to do that in a way that's safe. We don't want to have
the biggest oil spill again that has ever been had. We don't want to poison
the ground water. But the president, as I've viewed it, the administration
believes that we can do that in a safe way, and domestic production is ramping
up quite dramatically. Now it seems like you're making fun of some of the
alternative energy stuff, but if you look at China, if you look at Europe and
if you look at a lot of the faster growing regions of the world, they're
heavily investing in it.

KUDLOW: It's been a dismal failure in Europe.

Mr. GOOLSBEE: (Unintelligible)...alternative energy.

KUDLOW: It's been a dismal failure in Spain. It's been a dismal failure in
Europe. I say, Austan, if the market...

Mr. GOOLSBEE: It seems like in China and Brazil it's been quite a success.

KUDLOW: If the market wants to produce clean energy, it'll produce clean
energy. Natural gas from shale is clean energy.

Mr. GOOLSBEE: Look, I agree with that.

KUDLOW: I just don't see why we don't...

Mr. GOOLSBEE: I agree with that.

KUDLOW: the EPA dogs off. That's one of these regulatory issues.
Call the National Labor Relation dogs off of Boeing, Austan. In other words,
some of this stuff, there's very little presidents can do. I get that.


KUDLOW: But the signals, the messages, is it pro-confidence or
anti-confidence? We have got to get America working again and right now it's
not happening. I'm going to give you the last word, my friend.

Mr. GOOLSBEE: OK. All I'll say is if you look at countries where it
is--where they are rapidly growing, they're investing in their infrastructure.
They're investing in their educations. They are trying to streamline
regulations but they're not neglecting key investments. The president when
he's out looking at fiscal consolidation for the long-term, but making the key
investments that are pro-business, I really think that's the--what we should
be doing, and I feel that that could be certainly a bipartisan thing.

KUDLOW: Well, all right. I say make it pay more after tax for all business
ventures. But, Austan, we've ran out of time. You're very kind to come on
the show. It is a pleasure to see you.

Mr. GOOLSBEE: Great to see you, Larry.

KUDLOW: I hope you'll come back now that you're going back to college.

Mr. GOOLSBEE: You bet.

KUDLOW: And I appreciate it very much. You know I have the highest regard
for you. Austan Goolsbee.

Mr. GOOLSBEE: It's great to see you.

On CNBC's Kudlow Report Tonight

Please join us at 7pm ET tonight on CNBC.

- Austan Goolsbee, Fmr. Council of Economic Advisers Chmn.; University of Chicago Economics Professor

- Anthony Scaramucci, Founder and Managing Partner of Skybridge Capital
- Brian Kelly, Brian Kelly Capital President
- Mort Zuckerman, N.Y. Daily News Publisher; U.S. News & World Report Chairman & Editor-in-Chief

- CNBC’s Eamon Javers reports.

- Steve Moore, Senior Economics Writer for WSJ Editorial Board; "Return to Prosperity" co-author
- Howard Dean, (D) Vermont, Former Vermont Governor; Fmr. Chmn., Democratic Nat'l Cmte.,Fmr. Democratic National Committee Chairman

- Brian Wesbury, First Trust Advisors Chief Economist
- Don Luskin, CNBC Contributor; Trend Macro Chief Investment Officer

- Rich Galen, Republican Strategist
- David Freddoso, "The Case Against Barack Obama" Author
- Matt Miller, Washington Post Online Columnist; Public Radio's "Left, Right and Center" Host

Tuesday, August 16, 2011

Perry’s Red-Hot Bernanke Slam

Gov. Rick Perry scorched the political pot on Tuesday with a red-hot rhetorical attack on Fed-head Ben Bernanke. When asked about the Fed reopening the monetary spigots, Perry said, “If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we — we would treat him pretty ugly down in Texas.”

And that wasn’t all. In a more controversial slam, Perry said, “Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous — in my opinion.” (Italics mine.)

Pretty rough stuff. Very aggressive language. And undoubtedly way too strong. It was poorly received in the financial world.

No, Ben Bernanke is not a traitor. This is a policy dispute; it’s not a matter of patriotism. However, and this is an important however, the rest of Perry’s statement suggests that his analysis of Fed policy is right on target. In other words, wrong words, right analysis.

The Texas governor, who by some polls is the new Republican presidential frontrunner, went on to say, “We’ve already tried this. All it’s going to be doing is devaluing the dollar in your pocket. And we cannot afford that.”

Well, to me that is exactly right.

Let’s take a quick look at Bernanke’s QE2 record of pump-priming: The dollar fell 12 percent on foreign-exchange markets. The consumer price index jumped over 5 percent at an annual rate. And the $600 billion cheapening of the greenback led to skyrocketing commodity prices, including oil, gasoline, and food. That oil-price shock is one of the principal factors behind the 0.8 percent first-half economic stutter. As a result of the jump in inflation linked to QE2, real consumer incomes slumped badly and consumer spending fell substantially.

Before QE2 the economy was growing about 2.5 percent, even though it was already blunted by numerous tax and regulatory obstacles. But the cheap-dollar oil shock came perilously close to pushing us into recession.

So it turns out that Governor Perry — even with his overly strong language — is a pretty sharp economic and monetary analyst.

In fact, Perry’s analysis actually channels recent Fed dissents by reserve-bank president’s Dick Fisher of Dallas, Charles Plosser of Philadelphia, and Narayana Kocherlakota of Minneapolis. They object to a two-year extension of the Fed’s zero-interest-rate policy, and in so doing have set down an opposition marker to a potential new shock-and-awe quantitative easing that many fear will be announced on August 26 when Bernanke speaks to the Jackson Hole Fed conference.

What makes Governor Perry’s position even more interesting is his disagreement with former governor Mitt Romney. When I interviewed Mr. Romney this past April, he essentially defended Ben Bernanke and dollar depreciation. “Well, you know, I think Ben Bernanke is a student of monetary policy,” Romney said. “He’s doing as good a job as he thinks he can do in the Federal Reserve.”

Meanwhile, in Tea Party circles on the campaign trail, Mr. Bernanke is a much disliked figure. Rightly or wrongly he is blamed for bailing out Wall Street. Also, many view Bernanke’s massive money-creation, along with President Obama’s massive federal-stimulus spending, as another failed big-government attempt to revive the economy.

Tea partiers and many others fervently believe in lower spending, reduced tax burdens, and a regulatory rollback to strengthen small businesses and the private economy. They’re against Uncle Sam just throwing money at problems.

So in this sense Governor Perry’s red-hot riposte at Bernanke may be shrewd politics, as well as a much needed defense of stable money.

The former Air Force captain piloted C-130 missions in Central and South America, North Africa, and all over Europe. He’s a fierce devotee of American exceptionalism and greatness. My hunch is, just like Ronald Reagan, Governor Perry views a collapsing-dollar threat as more evidence of American decline. And he is very much opposed to any of that.

Monday, August 15, 2011

On CNBC's Kudlow Report Tonight

Please join us at 7pm ET tonight on CNBC.

- Dick Bove, Financial Strategist; Rochdale Securities
- Milton Ezrati, Lord Abbett Senior Economist & Market Strategist
- Michael Farr, Farr, Miller & Washington/CNBC Contributor

- Robert Reich, Fmr. Labor Secretary; "Aftershock: The Next Economy and America's Future" author; CNBC Contributor; Univ. of CA., Berkeley
- Steve Moore, Senior Economics Writer for WSJ Editorial Board; "Return to Prosperity" co-author

- CNBC’s John Harwood reports from Cannon Falls, Minnesota.


- Jimmy Pethokoukis, Reuters BreakingViews Money & Politics Columnist; CNBC Contributor
- Tony Fratto, CNBC Contributor; Fmr. White House Deputy Press Secretary
- Barry Nolan, Fmr. Comm. Dir. for House/Senate Joint Economic Committee ('09 - '11)

- Jared Bernstein, Fmr Chief Economic Advisor to the Vice President Biden
- John Tamny, Editor, Forbes Opinions and RealClearMarkets

- Steven Cortes, Founder Veracruz LLC

Friday, August 12, 2011

On CNBC's Kudlow Report Tonight

Please join us at 7pm ET tonight on CNBC.

- Stephanie Link, Director of Research & Vice President of Strategy for The
- Don Luskin, CNBC Contributor; Trend Macro Chief Investment Officer
- Lincoln Ellis, Linn Group (CME) Managing Director
- Harry Rady, Rady Asset Management CEO and portfolio manager

- Robert Heller, Former Federal Reserve Governor
- Wayne Angell, Former Fed Reserve Governor

- CNBC’s Eamon Javers reports from Washington.
- Greg Abbott, Texas Attorney General


- Ron Kruszewski, Stifel, Nicolaus & Co.President & CEO
- Wilbur Ross, WL Ross & Co.
- Jim LaCamp, Macroportfolio Advisors Sr. VP, Portfolio Manager

- Jimmy Pethokoukis, Reuters Breakingviews: Money & Politics Columnist; CNBC Contributor
- Mark Simone, WABC Radio Talk Show Host
- Keith Boykin, Former Clinton White House Aide; Democratic Strategist; CNBC contributor

- Jim Iuorio, Director, TJM Institutional Services

Thursday, August 11, 2011

On CNBC's Kudlow Report Tonight

Please join us at 7pm ET tonight on CNBC.

- Jim Iuorio, Director, TJM Institutional Services
- Dan Genter, head of RNC Genter Capital Management
- Steven Weiss, Author, "The Billion Dollar Mistake" & Fast Money Contributor
- Vishall Bhuyan, Nariman Point LLC portfolio manager

- Andrew Ross Sorkin, "Squawk Box" Host
- David Goldman, Fmr. Head of Fixed Income Research at Bank of America
- Charles Dallara, Former Treasury Assistant Secretary

- Randy Kroszner, Fmr. Fed Governor; Univ. of Chicago Prof. of Economics

- TJ Rodgers, Cypress Semiconductor CEO

- Jared Bernstein, Fmr. Chief Economist to V.P. Joe Biden; CNBC Contributor
- Jimmy Pethoukoukis, Reuters Breakingviews: Money & Politics Columnist; CNBC Contributor

-Jack Bouroudjian, CNBC contributor

An Interview with Super Committee Member Senator Pat Toomey

Here’s the first super-committee interview with newly appointed member Sen. Pat Toomey (R-PA). He's a supply-sider and tea-party backer with rather minimal expectations for the super-committee, although he does believe they can pick up another trillion of budget cuts without raising taxes.


The House and Senate Republicans named their picks for the 12-member super
committee charged with tackling the country's debt crisis. This has all
happened in the last 24-48 hours. Joining us now, first on CNBC interview, we
have Pennsylvanian Republican Senator Pat Toomey. He will serve on the

Senator Toomey, old friend, welcome back. Let me just ask you, before we get
down to nuts and bolts on your assignment, so many people say to me, `You all
elected representatives, House and Senate, ought to come back to Washington
and start working on spending, on debt, on economic growth. Why are you all
taking this vacation? We need help. The market needs help. The national
psychology needs help.'

Senator PAT TOOMEY: Well, be careful what you wish for, Larry. You know,
when Congress is in session, it's not always the optimal thing for the
markets. But let me say this, the folks on this committee, I think, will
begin discussions before September and hopefully be able to really hit the
ground running soon.

KUDLOW: Will you begin those discussion in Washington, Senator?

Sen. TOOMEY: Well, I suspect we'll be doing it by conference call and by
phone call before we get to Washington, but of course we'll continue in-person

KUDLOW: What do you want to come out of this? Let's talk spending cuts to

Sen. TOOMEY: Well, Larry, you know, the mandate from the legislation is at
least $1.2 trillion. Frankly, I hope we can do more than that. I hope we can
accomplish more because the deficit magnitude that we have is much bigger than
that. But the other thing that's equally important to me is that whatever we
do is pro-growth. You know, we've got to have solidly pro-growth policies.
You know, I tend to look at things from the supply side, looking for ways to
make it less expensive to do more production. I think that's what creates a
demand and keeps an economy moving. So if we can do--if we can do some
meaningful deficit reduction on at least the scale that's called for in the
legislation and do it in a way that encourages economic growth, that would be

KUDLOW: Is it possible, Senator, to put side by side spending reduction,
entitlement reform and tax reform? Is that possible or are the expectations
for this super committee too high?

Sen. TOOMEY: Well, it's possible but it's very tough. That's a big
combination. Our legislation does authorize that level of activity. And
frankly, there's some low-hanging fruit. This tax code is so incredibly
inefficient, it's so costly, it's such a dead weight burden on the economy, we
could simply it, get rid of so much of the junk, lower marginal rates, and I'm
convinced that would have a very powerfully pro-growth impact. That would be
good for the deficit, the revenue would increase in that fashion. So I hope
we can tackle all of those things, but, you know, time will tell.

KUDLOW: Just two quick points. The stock market, which is crashing right
now, as you well know. You use to be in the financial world.

Sen. TOOMEY: Right.

KUDLOW: So many people are worried that we're going to have root canal
spending cuts but they're not going to be accompanied by lower tax rates, and
therefore we're going into recession, that Washington may be causing this
recession, Senator. Do you have a quick thought on that?

Sen. TOOMEY: Well, I think a lot of policies out of Washington have been
contributing to the problems we have, especially on the regulatory side. The
uncertainty of the size of these deficits and whether that's going to lead to
higher interest rates, inflation, higher taxes, that's not constructive. So
making some progress here, I think, you know, could go a long way to
encouraging the kind of certainty and confidence that people need.

KUDLOW: Is it possible that this super committee can surprise us, deliver
more deficit reduction, the right way, as you say, shrinking government,
promoting growth, and we get our AAA rating back from S&P? Do the members of
this committee have any sense of how to get that AAA rating back?

Sen. TOOMEY: We haven't--we haven't met yet as a committee. You know, we
were just--membership was just announcement today, as you know. So it's a
little early to project just how ambitious we can be. But I can tell you it's
my hope that we will strive to do more than the minimum required by this
legislation. We need to do more than that to get back that AAA, although I'm
skeptical about why S&P reached the decision it did. I just want us to bring
spending under control and do it in a pro-growth policy.

KUDLOW: All right. Senator Pat Toomey, a newly appointed members to the
deficit reduction super committee. We wish you all the best of luck, Senator.
Thanks very much.

Sen. TOOMEY: Thanks, Larry.

Wednesday, August 10, 2011

More Jackson Hole Shock-and-Awe?

Ben Bernanke’s shocking FOMC announcement on Tuesday -- that its zero-interest-rate target would be extended for two more years through the middle of 2013 -- drove Dow stocks up over 400 points. But this new policy had no stock market carry-over on Wednesday, when the Dow plunged over 500 points.

But we have not heard the last from Ben Bernanke -- not by a long shot.

Buried in the last paragraph of this week’s surprise FOMC announcement was this huge statement: “The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability.”

This is a brand-new statement. And in all likelihood it was purposefully open-ended. A Fed source suggests that this sort of stuff is usually left out of sight and buried in Fed committee minutes, released well after the FOMC meeting, and not put boldly in the actual policy statement. So clearly, it’s very important.

What might it mean?

When Bernanke speaks at the Fed’s Jackson Hole, Wyoming, meeting on August 26, he could conceivably launch a real shock-and-awe stimulus program. If you go back a year, when Bernanke first announced QE2 at Jackson Hole, sources tell me that the original debate over the quantity of bond purchases had a $2 trillion balance-sheet expansion on the table. Inflation hawks beat that number back to $600 billion. But now the rest of that $2 trillion -- or $1.4 trillion -- could conceivably be on the table for a new QE3 announcement by the Fed.

A new round of Fed bond purchases would likely be aimed at pinning long-term interest rates down as much as possible. In other words, the Fed will be buying 10-year paper and maybe even 30-year paper to get those yields down even more (10-years are currently around 2 percent). The idea would be to reduce the attractiveness of government bonds and get investors into riskier assets like stocks, or perhaps even new-business and venture-capital start-ups where potential yields look even more attractive. There may even be some job-creation in all this.

Plus, the Fed’s potential Jackson Hole shock-and-awe program could include the removal of the 25-basis-point Fed payment on the $1.6 trillion excess bank reserve now on deposit at the central bank. If the banks no longer earn a safe 25 basis points, they might conceivably lend more.

And if long-term rates come down as per Bernanke’s target bond purchases, mortgage rates might come down even more to the benefit of future and current homeowners.

Politically, inside the Fed, three regional bank presidents dissented from the unprecedented Fed decision to keep its target rate down for two more years. But the inner circle of Fed power -- Ben Bernanke, Janet Yellen, and William Dudley -- has enough votes from other Fed board governors and reserve-bank presidents to jam through almost any shock-an-awe it wants. All this could be announced formally at the next Fed meeting on September 20, but Bernanke himself is likely to let the cat out of the bag in Jackson Hole toward the end of this month.

The trouble with all this is that it didn’t work the last time with QE2, and it will have no permanent effect on the slumping economy. Targeting bond yields and printing more money simply distorts asset prices throughout the financial markets. We’ve seen this movie before. And it didn’t play well. The Fed’s shock-and-awe risks another round of dollar depreciation. It’s part of the message of skyrocketing gold prices right now.

Unleashing dormant animal spirits in this economy can only come from the fiscal side, with low-tax and regulatory reforms to provide new economic-growth incentives and lower the cost of doing business. A pro-growth package from Washington is what we really need. It should be part of the next round of budget cuts, included in the work of the super committee during phase two of the debt deal.

Without those new incentives for growth, the Fed can print all the new money in the world and the federal government can spend itself into oblivion, and none of it will resurrect the economy.

On CNBC's Kudlow Report Tonight

Please join us at 7pm ET tonight on CNBC.

- Boris Schlossberg, director of currency research at GFT
- Russ Koesterich, Global Chief Investment Strategist for BlackRock's iShares
- CNBC’s Bob Pisani
- CNBC’s Rick Santelli

- Rodgin Cohen, Sullivan & Cromwell Law Firm Chmn.
- Ted Truman, Peterson Institute for International Economics; Senior Fellow; Fmr. Assistant U.S. Treasury Secretary
- David Malpass, Encima Global President, Fmr. Bear Stearns Chief Economist, GrowPac Chairman

- Alfred Broaddus, Fmr. Richmond Federal Reserve President

- Kelly Evans, Walll Street Journal Columnist
- Jim LaCamp, Macroportfolio Advisors Sr. VP, Portfolio Manager
- Doug Lebda, LendingTree Founder & CEO
- Robert Johnson, RLJ Companies Founder & CEO; CNBC Contributor

- Sen. Pat Toomey, (R) PA

- CNBC’s Emily Chan reports from Hong Kong

- Jon Najarian, Co-Founder,; Fast Money Contributor

Tuesday, August 09, 2011

Bernanke to the Rescue

Damn the torpedoes! Up periscope! Full speed ahead! Ben Bernanke and the Fed to the rescue!

In a startling move Tuesday, the FOMC announced that its zero-interest-rate target would be extended for two more years through the middle of 2013, marking the first time the target rate has ever been pegged to a date certain.

After one of the most vicious market plunges in memory over the past two weeks, stocks soared 429 points on the news. And bond rates plunged, with the 10-year Treasury closing at 2.27 percent.

Forget about S&P downgrades. Forget about the recession threat. The stock market loves Ben Bernanke!

In effect, this is a giant step towards QE3 bond purchases and new-money creation. In fact, traders are already nicknaming this latest Fed action QE3 Lite.

But not everyone is thrilled. For the first time since November 1992, three FOMC members dissented from the committee’s decision. Inflation hawks Dick Fisher of Dallas and Charles Plosser of Philadelphia were joined by the usually moderate Narayana Kocherlakota of Minneapolis in coming out against the action.

Mr. Plosser’s dissent did show a preference for an exceptionally low fed-funds level for an extended period of time. But not for the Fed’s stamping a date certain on that policy for the middle of 2013.

So markets and the economy can expect ultra-easy money for at least two more years. But remember, after inflation, the fed funds rate is already negative. And if and when the Fed starts buying bonds again to expand its $2.6 trillion balance sheet -- by injecting a like-amount of cash into the banking system -- monetary policy will be ultra-ultra easy.

The Fed’s logic? “Economic growth so far this year has been considerably slower than the Committee had expected,” according to the Fed statement. And more recently, “inflation has moderated as prices of energy and some commodities have declined from their earlier peaks.”

So Bernanke acknowledges that the economy is sputtering and he hopes and prays that an easy-money zero-interest-rate policy for two more years doesn’t depreciate the dollar and drive up energy and commodity prices all over again. Recall that QE2 sunk the greenback and generated about 5 percent inflation, which ate away at the first-half economy, which came in at less than 1 percent in real terms.

When Bernanke unofficially ended QE2 and ruled out QE3 at his April 29 press conference, it led to an 18 percent stock market correction that lasted until Tuesday’s big rally. And who am I to argue with a 429 point stock rally?

Well, if I had my druthers, I would promote growth through flat-tax reform, a regulatory rollback, lower spending, and a steady King Dollar linked to gold. In other words, more incentives for private-sector entrepreneurs and small businesses. But like many I suspect the Fed would have no problem presiding over a cheaper dollar, which over time is an inflationist policy -- a tax hike on the economy.

But then again, the Fed didn’t ask me.

On CNBC's Kudlow Report Tonight

Please join us at 7pm ET tonight on CNBC.

- CNBC’s Sharon Epperson reports.

- CNBC’s Bob Pisani
- Anthony Scaramucci, Founder and Managing Partner of Skybridge Capital
- James Bianco, President, Bianco Research
- Brett Arends, Wall Street Journal Columnist

- Lee Hoskins, Former Cleveland Federal Reserve President
- Wayne Angell, Fmr. Federal Reserve Governor
- William Ford, Fmr. Atlanta Fed President; Middle Tennessee State University
- CNBC's Steve Liesman

- Francesco Guerrera, WSJ Money & Investing Editor

- Zane Brown, Lord Abbott Fixed Income Strategist
- Kelly Evans, WSJ Economics Reporter
- CNBC’s Bob Pisani

- Steve Moore, Senior Economics Writer for WSJ Editorial Board; "Return to Prosperity" co-author
- Jamal Simmons, The Raben Group; Democratic strategist; Fmr. Press Secy to Wes Clark, Sen. Bob Graham & Sen. Max Cleland Comm. Dir.

- Scott Nations, Nations Shares Chief Investment Officer; Options Action Contributor

Monday, August 08, 2011

No Time to Panic

During a period like this, with stocks plunging almost on a daily basis, it’s clear that fear and shock are ruling the roost. But fear can be overdone. As someone who has been around awhile and has seen many sell-offs, let me offer some advice: Do not panic. Market corrections come and go. They are not the end of the world. Most times they are actually healthy.

The S&P downgrade is a fiscal warning, not an economic event. And the growing fear of U.S. recession may not pan out. There are still plusses out there, believe it or not.

Our financial system is in vastly better shape than it was in September 2008. Vastly better shape.

The Federal Reserve is highly accommodative, as illustrated by the upward-sloping yield curve. Using the yield-curve measure alone, the chances of recession based on historical analysis are very low.

And energy prices are coming down, with oil moving toward $80 a barrel. Oil analyst Peter Beutel points out that gasoline prices in the last two weeks have fallen by 35 to 40 cents. Adding in other oil-related savings, the energy-price drop amounts to a $100 billion tax rebate for consumers.

Plus, corporate profits will continue to rise while business balance sheets are pristine and chock full of cash. Consider the combination of solid productivity, moderate wage rates, and falling commodity prices. These are all plusses for the economy and stocks.

So in light of all these factors, it seems to me that the economy can hold up. It’s not the kind of rapid growth I’d like to see. But it’s not the deep and dark recession that seems to be embodied in the stock market plunge.

Whether or not one agrees or disagrees with Standard & Poor’s decision to downgrade the federal government’s credit rating, the agency’s message was never about U.S. debt default. Instead, S&P was warning that U.S. fiscal trends are deteriorating and our future debt trajectory is going up, not down.

Serious entitlement reform is not yet on the table. Nor is pro-growth tax and regulatory reform. And since none of this is brand-new news, I don’t think people should be shooting the messenger.

Getting our debt and spending under control is very important. But the fact remains that warnings from S&P, and even lesser warnings from Moody’s, could spur Washington into taking more aggressive action. So could the market sell-off itself.

Now, if the Paul Ryan budget had passed the Senate and had been signed into law by the president, that combination of tough spending control, transformative Medicare reform, and pro-growth tax reform would have gotten us out of this fix. Alas, it was not to be. But tax rates are not going up, no matter what President Obama keeps telling us. Tax hikes would never get past the House Republicans.

Also, I think there’s a big overreaction going on to the problems in Europe. The most likely scenario is that the leaders of the European Union and the European Central Bank will take whatever stabilization steps are necessary while at the same time pushing for serious fiscal reforms.

In addition, Europe’s economy suffered the same oil shock last winter and spring that suppressed the U.S. economy. And as that energy shock recedes, both economic zones will do better.

Actually, the stock market correction here in the states can be traced back to April 29, the day Ben Bernanke announced that QE2 would end on time and there would be no QE3. Since then, the S&P 500 has lost 17 percent as the Fed introduced a less-accommodative policy. Now, the central bank is still loose, but it is no longer adding to its balance sheet. So in some sense what should have happened has happened: Cyclical stock sectors have corrected significantly lower, along with commodities, and the whole stock market has had to adjust.

Most importantly, the dollar has stabilized. While in the short run a stronger dollar and lower commodities (except gold) may have hurt the market, in the longer term they create a foundation for non-inflationary growth.

I am not a market timer, and I do not have a monopoly on stock market and economic wisdom. So readers should take this for what it’s worth. I am not wildly optimistic, but I am not near as pessimistic as the market is right now.

The American free-enterprise system can weather these shocks, and I believe favorable political and policy changes are on the way. It will take time. But time heals. Longer-term investors would do well to think about the many stock market opportunities that are opening up as a tough correction runs its course.

Saturday, August 06, 2011

More Obama Spending Won't Do It

There he goes again. Out on the campaign trail, President Obama is proposing more federal spending as his answer to sluggish growth and jobs. That won’t do it, Mr. President.

He wants more infrastructure spending, undoubtedly in the form of an infrastructure bank. That’s a terrible idea. It’s borrowed from Latin America, where bloated and corrupt bureaucratic construction agencies have helped bankrupt any number of countries in the past.

He wants to lengthen 99-week unemployment insurance, although numerous studies have shown that continuous unemployment benefits are associated with higher unemployment.

And he wants to extend the temporary payroll tax credit, which is not a permanent reduction in marginal tax rates, has no incentive effect, has not worked so far, and is really a form of federal spending -- not real tax relief.

Earlier this week, when he signed the debt-ceiling bill, the president ranted on about the need to raise tax rates on successful earners, investors, and small businesses. He’s trying to bring back tax hikes as part of the phase-two special committee seeking additional deficit reduction, even though his own party rebuffed him on this in the late stages of the debt talks. All this is a prescription to grow government, not the economy.

What the economy needs, Mr. President, is a strong dose of new incentives, with pro-growth tax reform that flattens marginal rates and broadens the base for individuals and businesses. This includes moving to territorial taxation that ends the double tax on foreign earnings of U.S. companies. Plus, we desperately need a complete moratorium on federal regulations. As Sen. Barrasso recently noted, the government put out 379 new rules on business in July alone, amounting to $9.5 billion in additional costs.

None of these pro-growth reforms are in sight. So the stock market is going through a nasty 10 percent correction over fears of another recession (and European debt default).

But at least we got some good news on jobs. The July jobs report came in stronger than expected. It’s not great. But at least nonfarm payrolls increased 117,000 -- as the prior two months were revised upward by 56,000 -- while private payrolls gained 154,000.

That’s definitely not a recession reading. But neither is it a strong performance. If the economy were really rebounding, we would be creating 300,000 new jobs a month.

In the report, the unemployment rate slipped to 9.1 percent from 9.2 percent. But that’s mostly because nearly 200,000 workers left the civilian labor force. Another negative is the household employment survey, which fell 38,000 in July after dropping nearly half a million in June. That survey measures job creation among small owner-operated businesses or the lack thereof.

Yet when looking at the new jobs report, along with reasonable gains in chain-store sales and car sales, plus the ISM Purchasing Managers reports (which stayed above the 50 percent line), I repeat my thought that we are not headed for a double-dip recession.

Over two years of so-called economic recovery, growth has averaged about 2.5 percent. It fell to less than 1 percent in the first half of this year, largely from a commodity-price shock that included oil-, gasoline-, and food-price spikes. That price shock resulted mainly from the Fed’s QE2 depreciation of the dollar -- a big mistake. It eroded real consumer incomes and spending.

Lately, the dollar has stabilized and energy prices have come down quite a bit. That will reduce inflation and support better consumer spending. Businesses are already highly profitable and cash-rich. They are investing some of that, but not nearly enough to create sufficient new jobs. Who would, with all these Washington policies?

Finally, the Fed remains ultra-easy with excess liquidity and a zero interest rate.

So it looks to me like we will return to the sub-par 2.5 percent growth trend rather than dip back into recession. However, at this pace, unemployment may hover around 9 percent right up to election time next year.

More spending won’t do it Mr. President. Tax and regulatory incentives will.

Thursday, August 04, 2011

No Recession

Stocks and bond yields are sinking as Wall Street disses the debt deal and instead focuses on a likely double-dip recession.

Everyone is gloomy. But is this pessimism getting a little overbaked?

Granted, the economy is sputtering, with less than 1 percent growth in the first half of the year. But if there is a recession in the cards, it will be the first time one occurs when the yield curve is steeply positive (an ultra-easy Fed) and corporate profits are strong.

And since we do have ultra-easy money and strong profits, I don’t believe we’re heading into a recession. Nor do I believe stocks will continue to swoon.

The principal reason for the sub-par first-half economy is the rise of inflation, which severely damaged real incomes and consumer spending. We experienced a mini oil shock, which has dampened the whole economy. Actually, it’s worth remembering that oil shocks and inverted yield curves, along with falling profits, are the most important leading indicators of recessions. We don’t have this right now.

Fortunately, oil and gasoline prices have come down well below their highs. That’s going to take pressure off the economy.

Of course, QE2 backfired as the dollar sank and the inflation rate temporarily jumped 5 or 6 percent. However, as energy prices have eased back down, the inflation rate as measured by the consumer deflator has fallen, and is up only 1.3 percent annually for the past three months. If the dollar can hold its current level and energy prices remain quiescent, the economy will be okay.

Not great. The second-half economy could grow by 2.5 to 3 percent. There are so many tax-and-regulatory threats out there that it’s hard to expect much more growth. But at least it’s not recession.

Recent reports from the ISM purchasing managers for manufacturing and services are not signaling recession. Car sales have actually bumped up. And at least employment is rising, although slowly.

It’s all sub-optimal, but it’s not recession.

Meanwhile, profits are at record highs as a share of GDP. Second-quarter earnings are coming in much stronger than expected. For some reason investors have chosen to ignore profits. But they’re still the mother’s milk of stocks and the economy. Stocks may well be undervalued right now.

At roughly $95 a share profits for 2011, stocks are running near a 13-times price-earnings multiple, which calculates to a near 8 percent forward-earnings yield. Compare that to a 2.6 percent 10-year Treasury bond or a 5.5 percent Baa investment-grade corporate bond, and you can see that stocks have good value. The equity-risk premium is very high.

At the same time, corporate credit-risk spreads are relatively narrow while financial conditions in general are vastly less stressful than they were a couple of years ago. This is not the stuff of recessions.

Regarding the debt-ceiling deal, no one is thrilled about it. But it is a step in the right direction: no tax hikes and at least some spending cuts. The level of discretionary spending will come down $72 billion over the next two years. Even if the budget caps don’t hold beyond that, it’s still a budget cut without a tax increase.

Some of the Paul Krugman left-wing Keynesian types think small budget cuts will throw us into recession. Not a chance. The GDP is roughly $14 trillion, and total budget spending is moving toward $4 trillion. So these are relatively modest cuts. Plus, if government spending more works to grow the economy, why hasn’t massive government spending already worked to grow the economy? Here’s the dirty secret: Smaller government is good for growth.

We will see what phase two of the debt deal brings. It will be an uphill climb. But at least the strong possibility exists that another $1.5 trillion will be taken out of the spending baseline. That’s not nothing.

And of course, Treasury-debt default was avoided.

Slowly but surely the Tea Party Republican coalition is turning the tide on spending. Too bad President Obama was out once again this week attacking millionaires, billionaires, businesses, and oil and gas with his usual soak-the-rich class-warfare redistributionism. This kind of politics has helped generate a capital strike by profitable and cash-rich businesses. It’s pure folly, and it’s holding back the animal spirits. Stocks dropped 100 points after Obama’s press conference on Tuesday, when he once again blasted free-enterprise incentives.

Which brings me to a final point: What’s missing from the whole budget debate is a true pro-growth tax reform that would flatten rates and broaden the base for individuals and companies. A fresh round of incentives would do wonders for our ailing economy.

Unfortunately, we’re going to have to wait until the 2012 election before we see any of that. In the meantime, despite an anti-growth administration, the free-market economy will continue to muddle through.