A Short-Sighted Cheer for Easy Money [Larry Kudlow]
Wall Street loves easy money. That’s what I conclude from today’s 200-point stock market rally, which started early and gathered force, pushing the Dow back over 10,000 at the close of trading.
Oddly enough, stocks roared at yesterday’s opening by nearly 150 points, a response to the GOP sweep in New Jersey and Virginia. The government’s health-insurance takeover plan looks dead after the elections. Nancy Pelosi is walking off a cliff with her Saturday vote in the House. I don’t think she’s got the numbers. Post-election, Blue Dog Democrats are going to have a hard time voting for big tax hikes, big spending, big government, and a $500 billion Medicare cut. Independents, seniors, and affluent suburbanites all moved to the GOP column on Tuesday, a negative referendum on the Democrats’ big-government scheme.
For whatever reason, stocks sold off yesterday afternoon — right after the Fed signaled easy money for as far as the eye can see. To quote the Fed: “exceptionally low levels of the federal funds rate for an extended period.” Today, however, it looks like stocks took another read of the zero interest rate and the exploding Fed balance sheet and decided that there will be at least another six months of pump-priming and dollar-creation from the central bank.
Of course, gold keeps rising. It’s now $1,090. But the Fed doesn’t care about gold — or the declining dollar, or rising commodity prices, or even the higher inflation expectations that are being built into the Treasury bond market.
Fed head Ben Bernanke is targeting the unemployment rate and something called “substantial resource slack.” He is ignoring the financial and commodity-price indicators which are all signaling that the target rate is too low and the rate of money-creation is too high.
Back in mid-2008, after the dollar plunged and oil prices exploded, the CPI inflation rate peaked at nearly 6 percent — this, despite the fact that the U.S. economy was already in recession and slack resources were by then suffering from recessionary underutilization. Oil prices already have jumped to $80 a barrel in response to today’s cheap dollar, and retail gas prices at the pump have moved up nationwide from $1.80 to close to $2.70. That’s a tax hike on consumers and the rest of the economy. It’s one of the many consequences of dollar neglect.
So while the stock market is cheering easy money, the cheering is very short-sighted. I wouldn’t buck the tape, but I regard the Fed’s policy as a storm cloud over stocks and the future economy. The financial-market emergency and deep recession are over, but you wouldn’t know it from the Fed’s behavior. Even a 2 percent fed funds rate would be accommodative today, as Andrew Bary of Barron’s has written. But the Fed will have to hit the breaks a lot harder in the future if it continues its bubble headed policy at present.
One more thought. The highly volatile go-stop-go-stop Fed policy of the last ten years is exactly what has wreaked so much havoc. The Volcker-Greenspan Fed of the early 1980s to the late 1990s was much more stable and pro-growth. But over the last decade the Fed’s pillar-to-post policies and Phillips Curve obsession with unemployment rather than inflation has caused nothing but trouble.
This is one of many reasons why I think the Republican party should return to its Reagan roots as the hard-money party. Hard money will protect consumers and businesses, and would complement a low-tax-rate fiscal approach. A steady King Dollar is a strong incentive for investment, production, and employment, and of course price stability.
But in the meantime, investors are riding the easy money wave to higher share prices.
Stocks loved last night’s election returns. President Obama and Nancy Pelosi got their ears pinned back over big spending, taxes, the health-care takeover, cap-and-trade, and well, the fact that government is getting too darned big under this crowd in Washington.
The health-care insurance companies roared right up from the open. Investors are making a bet that the government-insurance option is in even bigger trouble after last night’s Republican victories. A Wall Street Journal news story also suggests that the big health-care bill won’t get done this year, and that it will be pushed into next year’s midterm calendar. Blue Dogs everywhere (and especially in Virginia) can read the election returns as accurately as any pundit. And they are not going to vote to jack up taxes, slash Medicare, and launch even more government spending and deficits.
While it’s true that the GOP didn’t take all three races last night, NY-23 was darn close for an outsider like Doug Hoffman. Jon Corzine lost in New Jersey despite multiple Obama trips to the state, and Virginia’s Bob McDonnell is emerging as a new Republican star.
But these big state races were about economic and fiscal discontent among the voters. That’s a theme that will last a long time — especially if Team Obama and Nancy Pelosi are stubborn in pressing forward with their government-control agenda. The investor class doesn’t like government interference, and neither does the stock market.
So the GOP now has an opportunity to rebuild and rebirth Reagan-like libertarianism with a strong free-market message that Washington should just leave us alone. Social issues didn’t play a role in New Jersey and Virginia. It was all about the threat of socialism lite. The social issues will emerge next year in certain districts, and as a pro-lifer I’m glad of it. But the overarching theme to rebuild the Republican party right now has to be about free-market economics and hopefully a supply-side message of lower tax rates to spur jobs and strong economic growth.
And it would be a shame if the GOP doesn’t take up the issue of the declining dollar. This is becoming an economic symbol of America’s decline. Rabid big-government spending and borrowing is a principal cause of the greenback’s fall. And the policy statement from today’s Federal Reserve meeting shows that the doves won again, while the hawks lost big-time. This speaks to continued dollar decline and new record highs in the nominal gold price.
A few weeks ago, Barron’s columnist Andrew Bary had it exactly right: The financial-meltdown emergency is over. Yet the Fed persists in running an emergency money-creating policy with a zero target rate that is completely inappropriate as the economy moves into a mild recovery. The Fed seems to think that too many people working is inflationary, and that with today’s high unemployment it’s okay to keep priming the money pump. This is nuts.
Inflation is caused by bad money as the result of excess money-creation — that is, the creation of dollars that the global markets do not want, just as we’re creating government bonds that the same markets don’t want. Financial, currency, and commodity-price signals are telling the Fed that they are way off course. But Bernanke won’t listen.
The weakening fate of the dollar is a good political issue, and Republican’s should not overlook it. It links back to big-government overspending. Reagan knew this. Today’s GOP should relearn it.
The Economics of a Three-Race GOP Sweep [Larry Kudlow]
Against the backdrop of high unemployment and a public revolt against a Democratic health-care bill — which would significantly increase taxes, slash Medicare spending, and massively raise health-care spending elsewhere in a government takeover of our leading growth sector — a three-race sweep by Republicans is very much in play this Election Day.
The Intrade pay-to-play betting/investment parlor shows big wins for Bob McDonnell in Virginia and Doug Hoffman in upstate New York’s 23rd congressional district. The New Jersey race for governor is too close to call, with the probabilities swinging wildly. Late last night, Chris Christie’s victory probability was 56-46 over Jon Corzine, a 16-point gain for the Republican. This morning, Christie showed a 55 percent chance of victory, with Corzine at 47.
It’s interesting that early signs of economic recovery are not helping the Obama Democrats. This is largely because of the 9.8 percent unemployment rate, which is expected to move higher. Even the crazy jobs-saved-or-created campaign is having no discernable impact while the Obamacons try to fight the unemployment rate.
If you go to recovery.gov, the official stimulus website, you’ll find that there has been $207 billion in stimulus spending through October 30, 2009 — including $84 billion in tax benefits, $52 billion in contract grants and loans, and $71 billion in entitlements. So even if we give my friend Jared Bernstein his highly flawed “one million jobs saved or created,” that’s $207,000 per job in an economy where the average wage is about $46,000. Not good. Wasteful and ineffectual spending. (In reality, tax credits are spending. For incentivizing, you need marginal tax-rate cuts.)
Mike Flynn of Breitbart’s biggovernment.com notes that the government pumped $170 billion into the third-quarter economy. But GDP grew by only $150 billion. As I said, ineffectual spending.
That doesn’t mean the economy isn’t rebounding. It is. Glitches and all, third-quarter GDP popped up 3.5 percent at an annual rate after inflation. Statistically, the recession is over. That’s good. And it corroborates the big stock market rally over the past seven months. This is going to be a business-led recovery as self-correcting firms build profits on top of huge cash flows.
Yesterday’s ISM manufacturing report for October also confirms the growth trend with a recovery reading of 55.7, the strongest since April 2006. And this morning’s factory orders for September also show a stronger-than-expected gain. Even car sales are expected to rise in October by more than ten million, at least one million better than September. Ford, which refused to take TARP bailout money, reported a surprise increase in profits.
But the depreciating dollar remains a storm cloud over recovery. So are scheduled tax-rate increases and health-care legislation that will slam individuals and firms with higher tax burdens and higher tax costs for job creation.
And then there’s the Federal Reserve. With gold up another $25 — setting a new nominal record of $1,079 — the Fed will release a policy statement tomorrow, one that is likely to continue a program of massive money-pumping and a zero interest rate.
This whole Obama policy mix of huge government spending and a depreciating greenback is all wrong. It’s pro-inflation, not pro-growth. For a true economic recovery, we need a stable King Dollar and lower marginal tax rates to incentivize job creation.
Jimmy Pethokoukis and others have noted that the first recovery quarter under Reagan was better than 8 percent, not 3.5 percent. In fact, the average real GDP growth rate for the first quarter of the ten post-war recoveries is 7.3 percent.
So the economic-recovery story, and even the stock market rally, won’t bail out the Obamacons today, although it remains to be seen whether a free-market, anti-tax-and-spend message will emerge from a three-election sweep by the GOP. If so, it could doom the so-called health-care reform that has become a symbol of the leftward-tilting, big-government, economic-control policies emanating from Washington.
GDP Up, Dollar Down, Troubles Remain [Larry Kudlow]
Today’s report of 3.5 percent GDP growth for the third quarter ending in September signals the end of the long recession. Although there are glitches in the GDP story — including the one-time impact of Cash for Clunkers and the erratic bouncing around of disposable income from quarter to quarter (largely a result of government handouts), the fact remains that the economy is improving and that the big stock market rally is confirmed.
Wall Street economists like Joe LaVorgna and Michael Darda expect 4 percent growth in the quarters ahead. My own view is that this will be a business-led recovery, not only in terms of capital-spending investment, but also business-to-business transactions. Corporate cash flows are very strong and profits are improving. Economy-wide productivity is very high. And let’s not forget the Fed’s highly expansionary policies, with a zero target rate, a steep Treasury curve, and a growing balance sheet.
All of which raises an important policy point. As the economy recovers, where’s the exit strategy for all this stimulus? To protect the dollar, the Fed should be raising its target rate, or at the very least hint at raising it by changing the wording of next week’s policy statement.
Gold roared up today as the greenback fell again. Stocks are mounting a huge 200-point rally as of this writing. World markets are anticipating an inflationary recovery in the United States. And never-ending federal debt creation from more and more government spending adds to the greenback’s woes.
Restoration of King Dollar would be a tax cut for the whole economy. Think of it in oil terms: Crude oil jumped $2.40 today to $80 a barrel. If the dollar keeps sliding, oil is going to keep rising. And that’s a tax hike for the economy. It would block recovery. But if King Dollar were restored to its thrown, oil and other commodities would stay put, amounting to a de facto tax cut — a spur to growth.
President Obama had a tepid response to today’s GDP report, as the administration contemplates more spending for a second stimulus package. That’s exactly what currency markets do not want to see.
Meanwhile, Treasury man Geithner talks about ending the too-big-to-fail policy for banks. But his idea sounds suspiciously like TARP in perpetuity — where the government would take over failed banks, mostly at taxpayer expense, with some of it paid for by other bank insurance assessments. But TARP in perpetuity, stimulus in perpetuity, and easy-money in perpetuity is a fiscal/monetary overload that will reduce our potential to grow.
It is a great thing that the financial meltdown is over and the Great Recession has come to an end. But profligate policies will surely undermine the private free-enterprise economy’s valiant efforts to recover.
Supply-Side Health-Care Solutions with Sen. Mitch McConnell [Larry Kudlow]
Last night I had the pleasure of speaking with distinguished Senate Minority Leader Mitch McConnell on whether this high-tax, high-premium, deficit-ridden government takeover of the U.S. economy can be stopped.
An Interview with Jon Kyl on the Back-from-the-Dead Public Option [Larry Kudlow]
Here’s my interview from last night with Arizona senator and Republican Whip Jon Kyl. Kyl, one of the soundest thinkers in the Senate, takes apart Harry Reid’s new-fangled government-insurance option.
David Goldman: The Dollar Is Toast and It Won’t Help the Stock Market [Larry Kudlow]
Market commenter David Goldman was on the show last night, explaining the bubble that’s formed in toxic, low-rated tranches of commercial real estate, as well as the rapid march by Asian nations to get out from under the dollar trap. Joining him were CNBC’s Rick Santelli and Politico’s Eamon Javers.
Here’s a question: If unemployment is the problem, then why aren’t supply-side tax cuts, along with tougher government budgetary restraints, a possible solution?
Top Obama economic advisor Christy Romer delivered a very gloomy forecast to Congress late last week. She said that unemployment will remain at a “severely elevated level” and that the U.S. jobs market will stay painfully weak next year. She was just being honest. Romer even said the Obama stimulus plan will not contribute much to economic growth next year.
So the administration is searching for a jobs-recovery plan, just like the rest of the country. Meanwhile, big-government spending and temporary tax credits have not worked, by the administration’s own admission. That’s basically what Ms. Romer was saying.
So why not try something different? Why not go for lower tax rates across-the-board on individuals, businesses, and investors? Why not go for permanent tax cuts that will create new growth incentives? To paraphrase economist Art Laffer, if it pays more, after tax, to work, produce, and invest, folks will work, produce, and invest more. It’s worked in the past. And I believe it will work again.
Incidentally, this idea of cutting spending and cutting tax rates is attracting a lot of attention in many of the key state races right now — like the governor’s race in New Jersey, where unemployment is also hovering around 10 percent. The idea is also looming large in Virginia, as well as in some of the early skirmishing in California.
If it’s happening in the states, when will Washington finally get the message?
Is the government’s insurance plan back from the dead?
Here’s my interview with Kay Bailey Hutchison, Texas Republican senator and gubernatorial candidate, on the government’s attempt to takeover the U.S. health-care system.
Kemp’s Keys to Growth and Exceptionalism [Larry Kudlow]
I believe that free-market capitalism — on the supply-side and along with King Dollar — is the best path to prosperity. That’s the model my late dear friend Jack Kemp successfully espoused to President Reagan more than 30 years ago. It’s the incentive model of economic growth. It conquered the inflation of the Carter years, and launched a 20-year prosperity that saw the creation of 45 million new jobs and a twelve-fold stock market increase. It’s the model that expanded the investor class to 100 million strong through the Clinton 1990s.
I spoke this week at the launch of the Jack Kemp Foundation in Washington, and I emphasized this model along with the universal, timeless economic principles on which it is based. Today this model seems all but forgotten in the nation’s capital, but I firmly believe it is just what we need to reignite American economic growth and exceptionalism.
Here are the model’s critical components:
First, a sound dollar — King Dollar.
Second, low and flat tax rates to incentivize positive economic behavior by making it pay more, after-tax, to work, invest, and take risks.
Third, free trade.
Fourth, limited government.
Fifth, market-driven solutions to ameliorate poverty and provide everyone with new opportunities to climb the ladder of success.
Jack Kemp believed in growing the economic pie, not redistributing it. And he believed in growing it large. He would have hated today’s notion of a “new normal” — of 2 percent growth and high unemployment.
He also disagreed with raising top marginal tax rates, and he certainly would have opposed the extravagant spending-and-borrowing schemes that we’re saddled with today. We’ve clearly gone off the supply-side path — off the winning path that Jack helped build.
Growth, empowerment, opportunity, and incentives — those were Jack’s key words. Now, more than ever, these principles must be revived. They are essential to America’s greatness. To her boundless optimism. To her prosperity and success.
Last night I had the pleasure of speaking with Larry Lindsey, the former director of the White House Economic Council, about the state of the supply-side revolution, as well as the steady decline of King Dollar.
An Interview with Gov. Tim Pawlenty [Larry Kudlow]
Is the dollar’s demise a sign of global declinism for America? Will this decline blow up the bull-market economic recovery?
Joining me to discuss this last night was distinguished Minnesota Republican Gov. Tim Pawlenty. Mr. Pawlenty also happens to be a leading GOP presidential contender for 2012.
Fed chairman Ben Bernanke delivered a big speech yesterday and never mentioned the beleaguered dollar. Not once. This is just incredible — beyond the pale. And so for now, the story remains the same: Gold and commodities continue to boom, while the greenback plunges further.
Let’s be clear here: Mr. Bernanke is playing with fire. He is creating and fueling yet another speculative bubble that could spell doom for the bull-market recovery. This is why I’ve been calling it a storm cloud.
One last point here. The dollar’s demise is a sign of global declinism for America. This could be the worst part of the whole story. If the Obama administration wants to undermine American leadership and exceptionalism, and treat this country like all the other C-students around the world, they are sorely mistaken.
When the U.S. leads, the world prospers. When the U.S. declines — as in the 1970s — the world falls apart. The dollar therefore becomes a symbol, as well as a reality.
The Value Added Tax: A Hidden New Tax to Finance Much Bigger Government [Larry Kudlow]
Here’s a terrific new video from my friend Dan Mitchell over at the Center for Freedom and Prosperity Foundation. Dan explains why a value-added tax would be a dangerous money machine for big government. He also discusses the evidence from Europe showing that VATs actually lead to higher income taxes.
Dow Hits 10,000 as Storm Clouds Gather [Larry Kudlow]
Dow Jones 10,000 arrived on Wall Street today for the first time in a year. It’s a milestone of sorts, and it certainly represents a vote for investor confidence in economic recovery. Blowout profit reports form Intel and JPMorgan helped fuel today’s 145 point gain. So did a retail sales report that excluding Cash for Clunkers was actually quite strong.
Profits are the mother’s milk of stocks, business, and the economy. And top-line sales revenues now appear to be bolstering the corporate cost-cutting effort. As long as these earnings keep coming in strong, stocks will keep rising. My hunch is that we’ll move back to pre-Lehman levels — to over 11,000 on the Dow and over 1,200 on the S&P. And backed by an easy-money Fed, the economy will probably grow in a mild V-shape of something like 3 to 4 percent for the next year or so.
But storm clouds are gathering. And a big one is the sinking dollar. No one in the Obama administration or at the Fed seems to care about it. In fact, they are probably applauding the lower dollar as a sort of 1970s way of boosting exports and the manufacturing heartland in the Midwest. But the falling dollar is bad for consumers. And it ultimately will cause higher inflation, as signaled by the rising gold price. There also are future tax hikes and the explosion of spending and debt. All of this is why it’s hard for me to be a long-term bull.
The great market boom of 1982 to 2000 was basically characterized by low marginal tax rates and King Dollar. Unfortunately, the 21st century has seen a weak dollar and more recently rising tax rates that are coming due in 2011 (if not sooner). In other words, the prosperity-inducing Mundell-Laffer supply-side model is being reversed.
As Art Laffer put it to me, we are stealing demand and production from the future. So even as we get a V-shaped recovery now and into next year, 2011 may pay the piper for both low growth and higher inflation.
Stocks could have another four to six months to rally. And that’s great for increasing the wealth of the investor class, and maybe even enhancing the animal spirits a bit. But the policy mix is wrong. Health-care entitlements and taxes punctuate the wrong-way policy mix. And what’s left to be seen is whether the Republicans can successfully challenge the Democrats with a true supply-side economic-growth and job-creating platform.
You know I’ve been crusading to save the greenback and restore King Dollar. But new entitlements that open the door to a government takeover of the health-care sector are no way to do it. Not surprisingly, as the Baucus Bill made it out of the Finance Committee yesterday, the dollar fell once again and gold jumped (closing at $1,064). Not good. Smells like the 1970s.
Just look at two ominous headlines in the news: First is the global shift out of the dollar and into commodities. Second is the dollar losing its reserve status to the yen and the euro.
In the second quarter ending in June, central banks around the world invested 63 percent of their new cash reserves into euro and yen, and put only 37 percent into dollars. Over the past six months, the dollar has lost 15 percent while gold has climbed nearly $150. If this continues, spiking inflation and interest rates will choke off the bull market in stocks and do serious damage to the economy. It could happen fast.
How to solve this problem? In supply-side terms, cut tax rates for new growth incentives. Meanwhile, the Fed must drain cash to remove dollars from the financial system and the Treasury must simultaneously buy dollars in the foreign-exchange markets.
And Washington must stop its explosive spending and borrowing. Some statutory — or even constitutional — limits should be set.
That the dollar is the world’s reserve currency is a tremendous asset for the United States. We must stop the fall of the dollar now. It’s a self-inflicted wound that will do great damage to American leadership and prestige globally, and to the economy here at home.
Last night distinguished South Dakota Sen. John Thune, chairman of the Senate Republican Policy Committee, joined me to discuss the $829 billion Baucus bill just passed by the Senate Finance Committee, as well as the need for a clear TARP exit strategy. He’s got the story right on both.
We know that gold is soaring. And we know the dollar is slumping. But, did you know that year-to-date, while the S&P 500 is up 18 percent — a great showing, no doubt — gold is up even more? The precious metal is up 21 percent. In other words, measured in true, gold-backed purchasing power, stocks have really done nothing this year. Zip. It is most disappointing.
I try to be optimistic about better earnings, a stock-market rally, and economic recovery. And I’m sticking to my guns. But what we’re seeing right now is pretty darn close to what we witnessed in the 1970s — the rise in gold and inflation really cuts into the stock market.
So what’s the way out?
Well for starters, we need a stable dollar to stop inflationary pressures. And we also need lower tax rates to spur the economy, help it grow, and reduce unemployment. I’ve been calling this the Mundell-Laffer supply-side solution, after Nobel Prize–winning economist Robert Mundell and my mentor, former Reagan advisor Arthur Laffer. It was put to work with great success nearly 30 years ago to stop stagflation. It also launched a 20-year bull-market recovery.
Put simply, the Mundell-Laffer model exercises monetary restraint to save the dollar — and low marginal tax rates for economic-growth incentives that benefit investors, risk takers, small businesses, and workers. Right now, for therapy, the Fed should begin moving excess cash from the economy, and they should raise their target rate. Take a page from the Reserve Bank of Australia’s playbook and move rates higher.
In addition, the Treasury ought to get out there and buy these unwanted dollars in the marketplace. Just go out there and bid for them. And they need to stop printing so much debt from Congress. All this massive spending and borrowing is killing us. We need to be slashing tax rates on large and small businesses. There’s just no better place to begin job creation. And leave the Bush tax cuts in place, for heaven’s sake.
This supply-side shock therapy would save the dollar. And it would put real long-term torque into the recovery.
We’re supposed to be in an era of post-partisanship. So in this spirit, I’d like to respectfully ask President Obama and his economic team to give this plan a try. It worked for JFK. It also worked for Bill Clinton and Ronald Reagan. It can work for you as well.
The time has come to save the greenback and grow the economy, sir.
Controlling Leviathan: The Battle for Limited Government [Larry Kudlow]
Here’s a terrific video from my friend Dan Mitchell explaining why the main fiscal threat we face is excessive government spending. Speaking at the Steamboat Institute conference, Dan makes an impassioned case for limited government and individual freedom. Definitely worth watching.
(Click here if you’d like to watch the Q&A session featuring commentary about the financial crisis, Keynesianism, stimulus, tax competition, and U.S. competitiveness.)
