Tuesday, September 30, 2008

This is bullish. King Dollar.

Monday, September 29, 2008

The End of the U.S. Financial System as We Know It?

A number of Republican House members and staff, along with others who are plugged in, are telling me that Nancy Pelosi and the Democrats will come back with a new bill that includes all the left-wing stuff that was scrubbed from the bill that was defeated today in the House.

As this scenario goes, the House Democrats need 218 votes, and they have to pick up a number of black and Hispanic House members who jumped ship because the Wall Street provisions, in their view, were too benign. So things like the bankruptcy judges setting mortgage terms and rates, the ACORN slush-fund spending, the union proxy for corporate boards, stricter limits on executive compensation, and much larger equity ownership of selling banks through warrants will all find itself back in the new bill. Of course, this scenario will lose more Republican votes. But insiders tell me President Bush will take Secretary Paulson’s advice and sign that kind of legislation.

Personally, if this scenario plays out, I would probably withdraw my support for the rescue mission and switch to plan B, which would center on the FDIC and its bank-recapitalization powers. The bank-ownership issue, in particular, could lead to heavy nationalization of America’s financial system with a three-house Democratic sweep in November.

I’m not forecasting, because I don’t know the next bill’s content. And while McCain’s polls are heading south, he could still win. But a three-house Dem sweep to implement some off the very onerous provisions being talked about could set up the end of the U.S. financial system as we know it.

I’m gonna wait and see. Obviously, the financial markets are in total collapse today. And the economic outlook is suffering.

Tough day. One of the worst I can remember.

Saturday, September 27, 2008

A Paulson-Cantor Plan Is a Win-Win

Actually, for taxpayers, the bank rescue plan is a win-win-win-win.

The single-biggest mistake in the Paulson bank-rescue-plan marketing effort has been the failure to explain clearly how taxpayers are going to recoup $700 billion used to buy toxic assets at auction in order to unfreeze the banking system. In other words, folks don’t understand how taxpayers will be paid back, and may actually make profits, which will enable the new government debt to be erased after the Treasury bank-rescue is completed.

Here’s the key point: Any loan package bought by the Treasury will be 100 percent taxpayer owned. Period.

Let’s walk through this hypothetical for a moment. Through a market-driven auction, the Treasury will purchase some dollar amount — say $100 billion — of loans that banks will sell. The Treasury will then buy those loans at the prices that fill the auction, starting with the lowest prices and working up. Now, the Treasury will hold those bonds either to maturity or for a sale in the open market if rising prices in the market make that sale attractive. In other words, suppose the Treasury buys a bond package at 20 cents on the dollar. They hold it for a while, and if market conditions improve, they sell it for 50 cents on the dollar to some buyer (e.g., an investment fund, a private-equity fund, a hedgie). The Treasury will make the sale at the higher price in order to gain a profit for taxpayers.

In the meantime, as the Treasury holds the loans, the government will get monthly cash-flows coming in on the mortgages, or on any other loans that it owns. So it is win-win for taxpayers. First, taxpayers get the cash flow generated by the assets. (Something like a 10 percent interest rate.) Second, if the loan is sold for profit, the taxpayers will own that profit. And the new law must of course stipulate that all the cash flows and/or profits go for debt-reduction to protect taxpayers.

I don’t think a lot of folks understand this win-win scenario. Let me repeat: The taxpayers own the bonds the Treasury buys; the taxpayers own the cash flows generated by the bonds; the taxpayers own the profits when the bonds are sold; and the taxpayers benefit when the profits and cash flows are used to pay-down government debt.

Actually, for taxpayers, it’s a win-win-win-win.

Think about this. The troubled assets purchased by the Treasury right now are likely to be very under-priced because of the chaotic and frozen market conditions. But over time, through monthly cash-flow payments or through loan sales, taxpayers will get all their money back and in great likelihood a handsome profit.

I have been in conversation with leading House Republicans all day. And they understand these key points. Unfortunately, this understanding did not materialize in their original meeting with Mr. Paulson a few days ago. But now the actual reality is sinking in.

Another point: Republican leader Eric Cantor has an excellent idea for a federal bond insurance guarantee for straight mortgage-backed paper, financed by private-sector insurance premiums. That will improve investor confidence in mortgage bonds and will make those bonds highly marketable. Importantly, senior Treasury officials have told me that Mr. Paulson will accept the insurance idea as an option in the final bill, alongside the ability of the Treasury to purchase distressed assets.

Sources also tell me that other conditions will be necessary to bring the House GOP along. First, the ACORN slush fund must be removed. Second, the so-called union proxy to run a slate of corporate directors is a big problem. Third, all profits from the Treasury rescue mission must be used to reduce the national debt — 100 percent. Fourth, Republican members are opposed to bankruptcy judges setting mortgage terms and interest rates (Sen. Obama also is opposed). Fifth, the so-called government equity ownership of banks is distasteful because it effectively creates a corporate tax increase on banks at a time when they are struggling. And last, the Treasury secretary’s request for $700 billion is regarded as way too high.

Essentially, House Republican leaders want a slimmer, cleaner Paulson plan supplemented by Mr. Cantor’s mortgage-bond insurance program. I think it’s a good package that would be great news for stock and bond markets that are now ailing badly. It would set the stage for a gradual return to normalcy on the part of bank lenders, including loans to small businesses, consumers, and homeowners. It would be a pro-growth package at a time when the economy desperately needs a prosperity tonic.

Friday, September 26, 2008

Burning Down The House: What Caused Our Economic Crisis?

This is amazing.

My Interview with Newsmax

Click below to listen to some of my latest thoughts on the government rescue plan.

Thursday, September 25, 2008

Bailout-Deal Warning: Update #1

My latest information on executive pay-caps and government ownership warrants — which are now being called “equity protection” — is that they would apply to bond sellers, not buyers. (My original warning is here.) I guess that makes it only half as bad. But I must say, it still is bad.

Why should a successful bank — whether large, medium, or small — give up ownership and allow pay-caps for executives?

Even the big guys like BofA and JPMorgan Chase are still solid banks. So is Goldman and Morgan Stanley. And Wells Fargo. And many others.

Why should they agree to this? It just makes the plan unworkable. Sources tell me the Treasury is opposed. Stay tuned for more.

Bailout-Deal Warning

If the bailout bill allows executive pay-caps and government ownership warrants for all buying or selling institutions, I must withdraw my support for the bill.

There is no clear information yet on this crucial topic. CNBC is reporting that Sen. Chuck Schumer is telling people that pay-caps and ownership warrants will be included for all banks and others (Fidelity-type investment managers, KKR-type private-equity firms, etc.) that either buy or sell the toxic paper.

The Treasury Department does not want this simply because it knows it would be unworkable. In other words, giving up pay-caps and warrants would probably mean that only the most dire, down-in-the-mouth banks will sell, and they’ll sell the very worst imaginable paper. Meanwhile, no reputable institution is gonna buy the paper if they have to give up ownership or compensation rules.

So it would be stupid for Congress to write this kind of thing into the bill. It would go beyond France into pure socialism. It would represent a huge first step into government interference everywhere. And it would sink New York way down the list of world financial centers. London and Hong Kong would pass us by in the blink of an eye.

I’m trying to get more information on this. But here’s a very key point: No House or Senate member in his or her right mind should vote for this bill without reading it. There’s no telling what’s in there.

The stock market is applauding the pre-announcement of a deal. The Dow’s up over 200 points. And credit-market risk spreads are narrowing a bit on the bailout hopes. But let me tell you, if the U.S. government is gonna start to own all of our financial institutions, all these markets will sink like stones.

Wednesday, September 24, 2008

The President Tonight

I thought he was pretty good. Kinda gave us some economic history about the mortgage credit collapse. Might have said a bit more on the taxpayers making good money as the mortgage loans are auctioned off and then worked out profitably. Some one's gonna buy the paper at 25 cents on the dollar, work it out, ride the economy and housing recovery up, then sell the paper for a handsome profit. Most of that profit will go to the government, aka the taxpayer. Ironically, this huge government action will be solved by free-market auctions and private sector loan workouts that will pay us back. I don't like it, but sometimes you just have to stop the financial fear. When I spoke to Alexander Hamilton last night about this, he told me it was the right thing to do. Like he did in the 1790s. Anyway, I think President Bush moved the ball forward tonight, and I expect a bi-partisan solution in the next day or two. Without pay limits for auction buyers and sellers, and without government ownership of buyers and sellers; no Soviet-style confiscation. All in all, looks like a good time to buy the depressed stock market. Spells more credit and better growth next year, that is, if we don't hike taxes and put up protectionist trade barriers.

Special Kudlow & Company Tonight

Please join us for another special edition of Kudlow & Company this evening at 7pm ET on CNBC. Our panel of Washington to Wall Street pros will discuss and debate all the latest news, issues, and developments affecting the markets and the economy as Congress debates a government rescue plan.

Special guests this evening include Senators Jon Kyl (R-AZ) and Evan Bayh (D-IN); Congressmen Mike Pence (R-IN) and Artur Davis (D-AL); as well as our stable of CNBC ace reporters and market all-stars who will provide fresh perspective on all the latest developments.

Kudlow & Company. 7pm ET. CNBC.

Give Paulson a Clean Bill

Keep France and Soviet-style policies out of the rescue plan.

Honestly. A clean bill as requested by Treasury man Henry Paulson, along with John McCain’s oversight board, can help fix the credit-crunch problem. It needn’t be this hard.

According to the Paulson plan, distressed assets will be sold by banks through a reverse auction (the low bid wins) to various investment funds, hedgies, private-equity boys, and other banks. And taxpayers will have a strong ownership position in these asset sales. When the assets are worked out over time — as they will be once housing and the economy recover — taxpayers will actually make money on the deal.

This is similar to the RTC story twenty years ago, when Bill Seidman presided over similar asset sales from bankrupt S&Ls and wound up making money for Uncle Sam and his taxpayers. A long prosperity wave followed.

In fact, industry insiders tell me the Federal Reserve and the SEC may be moving toward a five-to-seven year amortization plan for the scoring of bank losses from the sale of this distressed paper. This is very constructive. Fed head Ben Bernanke also is talking about getting rid of mark-to-market accounting and moving towards “hold to maturity.” This is good.

But the credit arteries are now clogged with a terrible virus that can be removed by the Paulson rescue plan. And as the problem is solved, credit and loans will be made more available to Main Street homeowners, small businesses, and consumers of every type. Credit markets will gradually unfreeze. It can be done. A deep recession can be avoided.

And maybe along the way we can get a strong King Dollar to fight inflation and attract international investment. And perhaps, just perhaps, we can get more drilling to reduce gas prices at the pump — a big recovery tonic. And, dare I hope, maybe we even can get corporate tax reform with lower tax rates, which along with energy deregulation will spur jobs and wage growth.

But after Tuesday’s Senate hearing I’m very concerned. The bells and whistles that would be attached to Paulson’s plan by our Democratic friends are anti-capitalist and anti-opportunity.

Capping compensation for both the selling and purchasing institutions? What? Salaries and bonuses are no business of the government. People go to work for profits. For opportunities. It’s at the heart of our free-market capitalist system.

Now, I can understand companies like AIG, Fannie, and Freddie, which effectively have been nationalized. That’s different. I don’t care if they all make $75,000 a year, just like the regulators. But to stretch this to the banks that are selling or buying the assets goes beyond the pale. It’s France. But it’s France heading toward the old Soviet Union, or at least Tsar Putin’s Russia.

And then there’s the ownership question. Some Democrats want Uncle Sam to take an ownership position in all the selling and purchasing banks. This is nuts. In America, this is nothing but property confiscation. It also will sharply curb buyers of the distressed assets.

You think Henry Kravis or Steve Schwarzman are gonna take a salary cap and lose an ownership share of the private-equity funds they themselves created and built? They shouldn’t and they won’t. And these funds are crucial to the new process. The only banks that will sell in this over-regulatory environment are the absolute, near-bankruptcy turkeys.

Meanwhile, Sen. McCain apparently has proposed that the buying and selling banks have comp-levels no higher than the top paycheck in the U.S. government, which I guess is the president’s at around $400,000 a year. Hey, I’ve got an idea. Let’s raise the chief executive’s pay to $50 million. He probably earns it anyway.

It’s these congressional bells and whistles that really trouble me. And they also trouble the stock market. Stocks absolutely roared last Thursday and Friday when they got wind of Paulson’s program. But Monday and Tuesday, as the new details leaked out and various Democratic senators put their ideas on the table, shares plunged big time. What does that tell you?

I can understand legitimate concerns about a big-government intervention and a giant $700 billion number. There’s a shock effect here. But once in a while the financial center of capitalism goes into panic mode and something has to be done.

Actually, it’s a marvel that we permit government to infrequently come to the rescue of our credit system. It doesn’t happen everyday. But it has been necessary going all the way back to Alexander Hamilton’s original rescue of our failing debt system in the 1790s.

Understanding this history, conservatives should not panic or walk away from the Paulson assistance plan. It would be great to avoid either a deep credit-driven recession or a global banking meltdown — or both. Paulson has always viewed his rescue plan as an economic-growth tool. I think he’s right.

Tuesday, September 23, 2008

Tuesday Night Special Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS RESPOND TO THE RESCUE PLAN...We'll get a live stock market update from CNBC aces Bob Pisani, Scott Wapner and Rick Santelli. CNBC chief Washington correspondent John Harwood will also deliver an update on today's hearings in Washington.

CAPITOL HILL PERSPECTIVE..Sen. Wayne Allard (R-CO) & Sen. Bernie Sanders (I-VT) will discuss and debate the bailout plan.

Also...CNBC senior economics reporter Steve Liesman will be aboard to offer his latest take.

ONE-ON-ONE WITH BILL ISAAC...Joining us to offer his perspective on the latest developments in the Treasury plan will be former FDIC chairman Bill Isaac.

MAKING SENSE OF THE MARKETS...Our all-star stock market panel will sort through all the latest news, trends and developments affecting investors.

On board:

*Mike Holland, money-manager, chairman of Holland & Company
*Vince Farrell, managing director, Scotsman Capital
*"Jimmy P" Pethokoukis, money and politics blogger for U.S. News & World Report

THE PAULSON PLAN: INFLATION THREAT?...On to discuss the inflationary implications of the Treasury plan will be former Dallas Fed president Bob McTeer.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Monday, September 22, 2008

Special Kudlow & Company Tonight

Please join us for another special edition of Kudlow & Company this evening at 7pm ET on CNBC. Our panel of experts will discuss and debate all the latest news, issues, and developments affecting the markets and the economy including the status of Treasury Secretary Paulson's rescue plan in front of Congress.

Special guests this evening include former Massachusetts Governor Mitt Romney, Sen. Bob Corker (R-TN), in addition to our CNBC stable of ace reporters and market all-stars who will provide perspective on all the latest Washington to Wall Street devlopments.

Kudlow & Company. 7pm ET. CNBC.

Friday, September 19, 2008

Good Stuff: Big Mac Talks Up a Strong Dollar

Almost unnoticed amidst the hoopla over Treasury man Paulson’s RTC-like rescue announcement to buy toxic assets from banks and unclog the credit system to promote economic recovery — a plan I support — Sen. John McCain gave a thoughtful speech today before a chamber-of-commerce group in Green Bay, Wisconsin.

The senator will undoubtedly support Paulson’s plan. But he hinted at some of his concerns about the proliferation of bailouts going on in Washington. McCain has his own idea for a mortgage and financial trust that would be part of the Treasury Department and help troubled institutions. But he jabbed at both the Fed and Treasury by calling for more consistent policies and actions. “We need to enhance regulatory clarity by holding the same financial activity to one regulatory standard,” said McCain.

But the most interesting part of Big Mac’s speech was his criticism of the Federal Reserve. And I’m gonna quote it in full: “The Federal Reserve should get back to its core business of responsibly managing our money supply and inflation. It needs to get out of the business of bailouts. The Fed needs to return to protecting the purchasing power of the dollar. A strong dollar will reduce energy and food prices. It will stimulate sustainable economic growth and get this economy moving again.”

This is very good stuff. The senator is saying a strong dollar will promote economic recovery through lower inflation and more consumer confidence. He is dead right. It’s the first time I can recall him being this explicit about money.

Elsewhere in the speech McCain repeated his call to keep taxes low and to slash the corporate tax rate. He also renewed his free-trade call and talked about drilling for more energy supplies across the board.

I can’t help but think that the more Mr. McCain talks about a strong dollar and low taxes as an economic-recovery tonic the closer he will move to a November victory.

Chris Cox’s Terrible Idea

The decision by SEC Chairman Chris Cox to ban short selling is a terrible idea. It is an encroachment on free-market principles. In extreme, the absence of short sellers would inflate stock market upturns, probably into bubbles. Short sellers keep the market honest. I know many in the short-selling community and most of them really do their homework. They are skeptical about puff pieces on companies and they are properly cynical about corporate press releases.

Why Cox is doing this is hard to fathom. He is supposed to be a free-market disciple of Milton Friedman and Art Laffer. It would have been much simpler and much more constructive if Cox restored the so called up-tick rule, where short sellers only can play after a share price has ticked higher. Some academic study apparently informed Cox that the up-tick rule was unnecessary. But virtually everyone who operates in the stock market disagrees.

I’m okay with banning naked shorts, where the seller doesn’t even have to take possession of the borrowed stock collateral before the sale. But a complete ban is just a terrible idea and sends all the wrong signals about government interference in the market.

As much as I agree with Paulson’s new RTC-type agency, which is what I call a smart regulatory move, I disagree with Cox’s action, which is an incredibly stupid regulatory move.


Treasury Secretary Henry Paulson delivered a game-changing proposal for a new RTC-type assistance package to solve the toxic loan problem plaguing the banks and the economy. Interestingly, Paulson frames this as a pro-growth measure. I agree. So does the soaring stock market.

Here's the release:

Statement by Secretary Henry M. Paulson, Jr. on Comprehensive Approach to Market Developments

Washington, DC--
Last night, Federal Reserve Chairman Ben Bernanke, SEC Chairman Chris Cox and I had a lengthy and productive working session with Congressional leaders. We began a substantive discussion on the need for a comprehensive approach to relieving the stresses on our financial institutions and markets.

We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. And this morning we've taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry.

Despite these steps, more is needed. We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses...
Click here for the full release.

Thursday, September 18, 2008

Never Sell America Short

We’ve been through worse, and we can fix what ails us now.

We can fix this. If nothing else, that’s the message I hope readers take away from this column. Of course, the “this” is the run on the world banking system. Stock markets have plunged globally, gold prices have shot up, and U.S. Treasury-bill rates have plummeted to 10 basis points, the lowest since the 1950s.

We’re witnessing a desperate flight to safety by investors. Folks are running away from financial assets and financial institutions simply because confidence has disappeared.

This week, Treasury secretary Hank Paulson said “no” to a government bailout of Lehman. Paulson and Ben Bernanke then took over AIG with an $85 billion bailout, with the Treasury issuing roughly $100 billion in new T-bills so the Fed has the cash to resuscitate AIG.

All this was necessary. A collapse of AIG would have been unfathomable — it is simply too interconnected globally. But it turns out this rescue mission only elevated investor fears. Shareholders are asking: “Who’s next?”

The bears are now raiding Morgan Stanley and Goldman Sachs, two national treasures. Meanwhile, the Reserve Fund — an original money-market fund launched by Bruce Bent, a hard-nosed friend of mine who for decades has supported conservative political causes — has seen its net asset value drop from $1 to $0.97. That’s a shocker. And the reason? The fund’s holdings of Lehman commercial paper were unsupported by letters of credit.

Money-market funds are supposed to be safe havens for mom and pop — for Mary and Joe in McKeesport, PA. But everybody now wants T-bills and gold.

Well, it’s time for some perspective. The world is not coming to an end. The stock market has tumbled, but it’s still over 10,000. In late 2002 it was 7,500 and in mid-1982 it was 750. Are things really that bad?

With home prices falling, foreclosures and defaults are at the root cause of the run against all manner of mortgage-related bonds held by the banks. But as investment guru Don Luskin points out, foreclosures today are less than 3 percent. During the 1930s they were 50 percent. Or how about the unemployment rate? Today it’s 6.1 percent. Back in 1982 it was near 11 percent and for most of the 1930s it was over 20 percent.

As the oil bubble pops the underlying inflation rate is somewhere between 2 and 3 percent — quite unlike the double-digit hyperinflation of the 1970s. Home prices themselves have fallen between 10 and 20 percent, but they’re still about 50 percent higher than at the start of the decade.

And there are constructive policy measures that can help fix the market’s problems.

Investor Zachary Karabell writes persuasively in the Wall Street Journal that “mark-to-market accounting in the aftermath of the Enron scandal makes no sense at all.” Many banks have taken huge losses on mortgage-backed securities and their derivatives because the SEC insists on mark-to-market. But Karabell asks: Why knock down these bond values, sometimes by as much as 100 percent, when the underlying home values embedded in the mortgages have only dropped 10 to 20 percent? And in the long run, the housing market will recover, as it always does.

Bad accounting rules like this are sinking the financial system. And why hasn’t the SEC restored the up-tick rule to stem cascading share-price declines triggered by manic short-sellers? Short-sellers are an important part of the stock market, and they add liquidity at crucial junctures. But until July 2007, they could only short a stock after the share price rose, not while it was continuing to decline. The SEC also should restore the net-capital rule, which limits banks to a 12-to-1 leverage ratio governing their debt. Over-borrowing by Wall Street is what got many firms into deep trouble.

A gathering consensus also seems to be forming around a new version of the Resolution Trust Corporation, which effectively disposed of bad savings-and-loan assets in the early 1990s. A new RTC could purchase underwater assets that proliferate through the financial system and are clogging the credit and loan arteries of our banks.

We clearly are in an emergency moment. But the government should opt for smart regulatory action rather than broad-based interference that could stifle the free economy. On Thursday afternoon, as rumors spread that Paulson was talking President Bush into a new RTC, the stock market soared 400 points. That’s what I call an endorsement.

The pessimists are now talking about the end of capitalism or a permanent decline of America. I don’t believe that for one moment. Specific regulatory reforms can get us out of this fix. And most of all, policymakers must maintain the low-tax, low-inflation, open-trade formula that has propelled this nation’s economy and produced so much prosperity for so long.

I say, never sell America short.

Special Kudlow & Company Tonight

Please join us for a special edition of Kudlow & Company this evening at 7pm ET on CNBC. Our panel of experts will discuss and debate all the latest news, issues, and developments affecting the markets and the economy during this challenging time.

Morning Joe Appearance

A blogger just emailed me the following post:

Watching MSNBC this morning, it was clear that the Morning Joe show has dropped the last pretenses of any balance in the presidential contest.

It sank this low: Larry Kudlow came on, not as a partisan (he does support McCain), but as a financial expert, to give his take on the ongoing financial crisis. He advised against panic and said that the markets will heal themselves. He advised against comprehensive new regulation and recommended “smart” regulation that would fix bad financial practices, most specifically over-leveraging (borrowing and lending money way beyond assets or reserves).

The team on Morning Joe, including the wisecracking Joe himself, who rarely does more than make it up as he goes along, did not like it that Kudlow wasn’t throwing, either subtly or excitedly, more amphetamine onto the hysteria...

Click here to continue reading.

Tuesday, September 16, 2008

Tuesday Night Special Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS, AIG, BANKS & MORE…Our stock market all-stars will discuss and debate all the latest news and developments affecting investors.

On board:

*Doug Kass, president, Seabreeze Partners Management
*Don Luskin, chief investment officer, Trend Macro
*Vince Farrell, managing director, Scotsman Capital
*Stefan Abrams, Bryden-Abrams Investment Management managing partner

Also…CNBC’S David Faber and Charlie Gasparino will be aboard with live updates as they unfold.

ONE-ON-ONE WITH TED FORSTMANN…Renowned financier Ted Forstmann will offer his thoughts and insights on the banking crisis and what he sees ahead.

A LOOK AT TODAY’S FED DECISION…Our Fed experts will weigh in with their perspective on today’s decision.

On board:

*Wayne Angell, former Federal Reserve Governor
*Bill Ford, former Atlanta Fed President
*Steve Liesman, CNBC senior economics reporter

Also on board:

*Robert Albertson, chief strategist at O'Neill & Partners
*Art Laffer, economist, president of Laffer Associates
*Andy Busch, global FX strategist at BMO Capital Markets

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Hard-Money Week

Hard money from the Treasury and hard money from the Fed seem to be the policy watchwords this week.

Treasury man Paulson refused to bail out Lehman Brothers and talked about the need to respect moral hazard. In other words, no more government goodies to reward bad corporate behavior. Of course, stocks got killed yesterday. But interestingly, today they are up about 100 points.

Meanwhile, despite pressures from Wall Street, the Ben Bernanke Fed elected not to ease money at their FOMC meeting today, and instead kept their fed funds target rate at 2 percent. They mentioned that “the downside risks to growth and the upsides risks to inflation are both of significant concern to the committee.” And I take them at their word that they are worried about stagflation.

Even though inflation indicators have been falling and today’s CPI dropped one-tenth of a percent, 12-month growth is still 5.4 percent for headline inflation and the core rate is 2.5 percent. The CPI less energy is up 3.1 percent, and non-energy prices in fact kicked up by three-tenths of 1 percent. So it would appear that the Fed wants to defend King Dollar and hold down prices. This is good.

Meanwhile, there are rumors that a $100 billion Fed loan to AIG will be completed tonight. Otherwise the global giant insurance company probably will be forced into bankruptcy tomorrow. Helping to turn the Fed around is a lot of pressure from New York’s Mayor Bloomberg and Governor Paterson.

Given AIG’s global connectedness in all the derivatives markets, a failure is almost unfathomable. The question is how the Fed might structure the loan in order to avoid taxpayer liabilities. They could conceivably provide funding through a conduit like JPMorgan Chase or some other high-quality dealer. Hence they would take high-quality collateral — a normal transaction. But it looks like some form of assistance is coming.

This may compromise Paulson’s no-bailout policy a bit. But Paulson is really saying that not every Tom, Dick, and Harry is gonna get bailed out. AIG may be an exception. Let’s wait and see.

Monday, September 15, 2008

Paulson’s Courageous Action

The Treasury man puts an end to bailout fever.

Treasury Secretary Henry Paulson is the man of the hour. This weekend he drew a clear line in the sand: no more federal bailouts. Not for Lehman Brothers. Not for global insurer AIG. Not for Merrill Lynch. Not for anyone, at least as of this writing.

It was a gutsy decision for the former Wall Street bigwig. Paulson came to Washington two years ago thinking he could reform Social Security and perhaps the tax system as well. In the process he hoped to clean up the federal budget books, maintain an open trading system, and persuade China to take on a more flexible currency and reform its own banking system. But history can be a cruel master, and Paulson’s agenda was completely altered by one of the worst financial crises in American history.

Last March, acting in conjunction with Fed head Ben Bernanke, Paulson safeguarded the banking system and the whole global financial structure by backstopping a JPMorgan-Chase deal to acquire the ailing Bear Stearns with $29 billion of loan guarantees. The action succeeded in stabilizing markets, but it put U.S. taxpayers on the hook big-time.

Then last week Paulson stepped into the breach again by backstopping mortgage lenders Fannie Mae and Freddie Mac. It was a necessary action. It stopped a global money meltdown. But it raised the stakes for taxpayers once more.

So this time around, as the Lehman stock headed for zero, Paulson said enough is enough.

Paulson’s view — supported by Bernanke and former Clinton Treasury official Timothy Geithner (now the president of the New York Fed) — is that the private sector has to take responsibility, including a consortium of private bank funds to assist the beleaguered AIG insurance company. We are now in for some Schumpeterian gales of creative destruction. But this is how it must be.

“Moral hazard,” said Paulson, “is something I don’t take lightly.” He’s saying bad financial behavior must be penalized, not rewarded. That’s the essence of the issue. The risk of failure is essential to an efficient economic system, and that includes financial risk.

In our capitalist system there are losers as well as winners. There are failures as well as successes. Harking back to the eminent economist Joseph Schumpeter, the old failures will be replaced by new enterprises.

The alternative, of course, is that the U.S. goes down the old European path of government domination of markets and the economy. But the moment the U.S. becomes bailout nation, that is the moment our economy and country heads irrevocably down the road of decline. However, Paulson set down a marker and said, “No we won’t.” As difficult as the next days may be, the primacy of economic freedom has been given a boost while the economic future of the U.S. looks brighter. Paulson’s decision was both momentous and transformative.

Obama is on the campaign trail predictably charging that a lack of regulations during the Bush era is responsible for the current mess. But he’s misreading history. As George Mason economist Tyler Cowen wrote in the New York Times, one of the problems with the U.S. financial system is not a lack of regulation, but a lack of smart and effective regulation.

During the Bush years, financial regulations increased exponentially, beginning with the misbegotten Sarbanes-Oxley act. That put accountants and lawyers in the driver’s seat rather than entrepreneurs. And it turns out that neither the Fed, the FDIC, the Comptroller of the Currency, nor the SEC properly supervised high-risk leveraged borrowings and the capital-adequacy ratios necessary to safeguard against losses. Accounting standards need reform, especially the notion of fair value. Economist David Malpass wants to throw out mark-to-market all together. He has a good point.

Then there’s Congress, led by Democrats in the last two years and Republicans before that, which mandated substandard lending to low-income groups. And as the high-risk loans mounted, this very same Congress — under the gun of political contributions — continued to promote the excesses of lenders, including Fannie Mae and Freddie Mac.

There are many more issues wound up in all this. But one thing’s for sure. Keeping tax rates low, holding back cheap-money inflation, strengthening the dollar, and building a more effective regulatory structure that does not stifle free enterprise is what will promote long-run economic prosperity. For optimists like myself, the plunge in oil and gas pump prices is already producing a sizable tax-cut effect, planting the seeds of recovery for mortgage-holding consumers and everyone else.

It’s easy to be overly pessimistic right now. But that negativism is not written in stone. Mr. Paulson talks about a housing and financial recovery in terms of months, not years. And I think he’s right. But his courageous action to put a stop to bailout fever will do as much as anything to move the nation toward recovery.

Gibson's Edited Interview

Here's the full transcript of Governor Sarah Palin's recent interview with Charlie Gibson. The bold, underlined portions were edited out of the interview.

A big hat tip to WABC producer Richard Sementa over at "The Mark Levin Show" for putting this together.

Friday, September 12, 2008

Friday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

AN EYE ON LEHMAN, WAMU, THE ECONOMY & MORE…Our stock market and economic all-stars will discuss and debate all the various news and developments currently facing investors.

On board:

*Vince Farrell, managing director, Scotsman Capital
*Andy Busch, global FX strategist, BMO Capital Markets
*Andrew Ross Sorkin, New York Times M&A reporter
*David Malpass, economist & president of Encima Global
*Steve Moore, senior economics writer, Wall Street Journal

Also…Energy and commodities expert Kevin Kerr, president of Kerrtrade.com & editor of MarketWatch's Global Resources, will join us with his perspective on the continuing drop in oil prices.

ONE-ON-ONE WITH MITT ROMNEY…Former presidential candidate and former Massachusetts governor Mitt Romney will be aboard with his take on a number of Washington to Wall Street issues including the banking crisis, economy, and his thoughts on the race for the White House.

PALIN IN THE SPOTLIGHT…Republican strategist Mary Matalin will join us with her insight and perspective on Governor Palin’s recent interview with Charlie Gibson.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Thursday, September 11, 2008

Intrade: McCain Surges Ahead

The Intrade pay-to-play prediction market — which as recently as July 19 had Obama ahead of McCain by 37 points — now has McCain leading Obama by 4 points.


Thursday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKETS & ECONOMY...Our stock market and economic all-stars will weigh in with their perspective on all the latest news and developments affecting investors.

On board:

*Joe LaVorgna, chief U.S. economist at Deutsche Bank
*Dave Maney, co-Founder & chairman of Headwaters MB
*Art Laffer, economist & chairman of Laffer Associates
*Jack Gage, Forbes magazine associate editor
*Andy Busch, global FX strategist, BMO Capital Markets

TACKLING TERRORISM...Steve Emerson, NBC terrorism analyst & author of "Jihad Incorporated: A Guide to Militant Islam in the US", will offer insight on the global war on terror.

WASHINGTON DRILLING DEBATE...Joining us to discuss the Democrats' energy plan and other energy and money politics issues will be Rep. Mike Pence (R-IN) and Rep. Artur Davis (D-AL).

THE LOW-TAX LEFT?...On to debate Obama, tax cuts, and more will be political consultant Dan Gerstein and CNBC's Dennis Kneale.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

God Bless . . .

God bless America for surviving 9/11.

God bless the men and women who died in that horrible attack.

God bless the police, firemen, and other emergency responders who died serving their country and their fellow Americans.

God bless all the families and friends who lost loved ones on that terrible day.

God bless the U.S armed services at home and abroad who have kept our country safe for seven years.

God bless all the law-enforcement agencies that have foiled various terrorist plots since 9/11 and have kept us safe.

God bless President George W. Bush for his leadership in keeping America safe these past seven years.

Let us never forget that there is, in fact, a global war being waged against us by terrorist extremists who wish to destroy this country and its values of freedom and democracy, a country that remains a beacon of shining light to the rest of the world. We must win this war.

And let us not ever forget 9/11. Let us be thankful for our safety and freedom since that day. And let us never lose our resolve to defend and maintain that freedom and safety.

The Sarah Surge in Black and White

The louder the Left screams the better the Alaska governor seems to do.

It’s so much fun reading the newspapers these days. The Sarah surge continues to dominate all the political news while the Palin-McCain — er, McCain-Palin — ticket is forging ahead in the polls.

But let’s be fair. Even though Sen. McCain is now riding Gov. Palin’s skirt tails, he was the one who made the brilliant decision to put her on the ticket. And the louder the Left screams the better Sarah seems to do. So much better that for the first time the Intrade pay-to-play prediction market — which long has had Obama winning by 20 to 25 points in November — now shows a McCain lead. Unbelievable.

And look at all these headlines. The Washington Post has “Palin Energizing Women from All Walks of Life.” In particular, white women with children at home give Palin a favorable rating of 80 percent.

Then there’s this lead story in the Wall Street Journal: “Palin Lifts McCain’s Support.” A WSJ/NBC poll now has the presidential race even, and it’s the Palin effect that explains the shift.
One-in-four Hillary Clinton voters now say the Palin pick makes them more likely to vote for McCain. And traditional Republican states like Georgia, Montana, North Carolina, and Alaska — which Obama thought he’d fight for — are now safely back in the McCain camp.

A Bloomberg news article is titled, “McCain Poll Surge, Fundraising Give Democrats Election Jitters.” It talks about how Democrats now worry they’ll lose the election. Rep. Artur Davis, the Alabama Democrat who was Obama’s Harvard Law classmate, says the GOP just had its best week in four years.

And Obama & Co. are completely flummoxed as to what to do about the Palin phenomenon. The normally unflappable Sen. Obama actually says, “You can put lipstick on a pig, but it’s still a pig.” Whew. That one will add several points to the McCain-Palin column. “Holy Sow!” reads the New York Post headline, hammering home the mistake.

Even Camille Paglia, a strong Obama supporter, is waxing rhapsodic over Sarah Palin. Paglia calls her “a new style of muscular American feminism”; a “brash ambassador from America’s pioneer past”; an “optimistic pragmatist like Ronald Reagan.” Following Palin’s GOP convention speech, I compared the governor to a Western pioneer version of Margaret Thatcher. I’m glad to see Ms. Paglia pick up on that.

A story by Sen. Jim DeMint (R., S.C.) in the Wall Street Journal is titled, “Yes, Palin Did Stop that Bridge.” The senator says Palin may once have supported the infamous Bridge to Nowhere, but she then killed it. And let’s not get into the flip-flop argument. Both Obama and McCain have flip-flopped this year. And anyway, who cares if you flip-flop if you land in the right place? Sen. DeMint notes that Palin cut nearly 10 percent of Alaska’s budget. And he should have reminded folks that Obama voted for the pork-barrel farm bill — chock full of earmarks and waste — and then voted again to overturn President Bush’s veto of the bill.

A USA Today headline says “Palin Did Not Ban Books in Wasilla as Mayor.” After interviewing a bunch of local folks, the author simply could not confirm the charge made by left-wing bloggers.

In “The Hunt for Sarah October,” the Wall Street Journal’s John Fund writes about a 30-lawyer S.W.A.T. team of Obama Democrats descending on Alaska in search of dirt related to “Palin’s troopergate.” They found nothing that hasn’t already aired about Palin’s alcoholic ex-brother-in-law who tasered his stepson.

Over in the Journal’s Political Diary, Steve Moore says GOP House members back from vacation are actually talking about picking up seats in November, with a recent USA Today poll putting GOP members up four points on the question: Who do you support, the Republican or the Democrat for Congress in your district?

Even the financial pages are looking better. Oil is about to drop under $100 a barrel. Gold is plunging. And the greenback continues to rally in true King Dollar fashion. Is there a Sarah Palin effect here, too?

On the campaign trail, Gov. Palin says, “We’re going to drill now to make this nation energy independent.” And she adds that she’s “ready to help John McCain bring tax relief to all Americans.” That’s the disciplined Sarah on message. She signaled this in St. Paul when she said the difference between a hockey mom and a pitbull is lipstick. Obama picked up on the dark side of that metaphor. But Palin’s really saying: Don’t tread on me. Don’t try to intimidate me. I am a strong, tough mom who is determined to succeed in politics.

That’s just what she’s doing.

Wednesday, September 10, 2008

Wednesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE STOCK MARKET & ECONOMY...Our stock market all-stars will discuss and debate all the latest news and developments affecting investors including the drop in oil and gold prices and what it all means for consumers.

On board:

*Mike Ozanian, Forbes magazine senior editor
*Joe Battipaglia, market strategist, Stifel Nicolaus
*Michael Pento, Delta Global Advisors, senior market strategist
*Vince Farrell, managing director, Scotsman Capital

PLUNGE IN OIL PRICE$...Oil expert Dan Yergin, chairman of Cambridge Energy Research, will be aboard with his perspective on oil prices and what may lie ahead.

SUBPRIME & HOUSING...William Erbey, chairman & CEO of Ocwen Financial, will lend his perspective on all the latest.

DEBATING SARAH...Joining us to debate all the news and controversy surrounding Governor Sarah Palin will be Republican political strategist Andrea Tantaros and former Planned Parenthood president Gloria Feldt.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Look Through the Windshield

As oil continues heading down towards $100 dollars, and gold plunges $35 bucks today to an 11-month low, and King Dollar continues its revival, my strategy of buying in consumer products, retailers, and banks is alive and well.

The commodity drop signals the death of inflation expectations. And of course, the oil plunge itself is a big tax cut for consumers. Not only will real wages start rising again, but folks will be able to service their mortgages. That’s good for banks. There’s a lot of volatility and cross currents in the stock market right now. But this consumer/banking theme should hold the test.

The trick here is to look through the front view of the windshield, rather than the rearview mirror of yesterday’s credit crunch like Lehman Brothers, Washington Mutual, and other cases.

The game changer is oil’s drop and the dollar’s rise. The collapse of gold adds more icing to the cake.

The recent surge of the McCain/Palin ticket can only help matters. Incidentally, for the first time, McCain and Obama are basically tied at 50-50 on Intrade’s pay-to-play prediction market. That’s an incredible turnaround.

I know that there’s no confidence in the stock market. But I do want to keep hammering away that falling commodities is a very good thing for consumers. You can make money on that in the stock market.

The Economic Case for Tax Havens

Top tax reform expert Dan Mitchell sent word this morning that his latest mini-documentary is up and running. Definitely worth a look.

Hard Money Congressman Legislates a Golden Dollar

Take a moment to read this very interesting column by Congressman Ted Poe:
On July 31, I introduced H.R. 6690, the “Sound Dollar and Economic Stimulus Act of 2008”. It is vital that this bill become law.

The U.S. dollar affects every American citizen and every American business. Our economy is totally dependent upon the dollar. To have a stable economy, we must have a stable dollar.

Unfortunately, for many years we have not had a stable dollar. Today, people are angry and afraid. The crumbling, gyrating dollar has created an economic crisis.

...My bill directs the Federal Reserve to bring the price of gold down to $500/oz and then to keep it there. The Fed would do this by announcing that its Open Market Desk was prepared to sell government bonds and contract the monetary base until the price of gold falls to $500/oz.

Continue reading.

Tuesday, September 09, 2008

Tuesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE MARKET & ECONOMY...Our panel of stock market pros will discuss and debate all the latest news and developments affecting investors including today's market sell-off and the continuing drop in oil prices.

On board:

*Don Luskin, chief investment officer, Trend Macro
*Jim Lacamp, portfolio manager at RBC Dain Rauscher
*Dennis Kneale, CNBC media & technology editor
*Dennis Gartman, economist & editor of the Gartman Letter

The market panel will stick around for the show's entirety.

FANNIE & FREDDIE MONEY POLITICS...We'll have two separate Washington to Wall Street interviews focusing on Fannie & Freddie. Joining us tonight will be Sen. Sherrod Brown (D-OH) and former Republican Rep. Richard Baker of Louisiana, who sought for years to strengthen oversight of the two GSEs.

FANNIE & FREDDIE, COVERED BONDS & MORTGAGE REFORM...Joining us for a one-on-one interview from Washington will be Rep. Scott Garrett (R-NJ) who has introduced legislation to provide statutory protections for covered-bond investors.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

"A Star Had Already Been Born"

Well-done column over at The New Republic:

When Senator John McCain selected Sarah Palin as his running mate two Fridays ago, the first-term governor and would-be vice president was a complete stranger to the vast majority of Americans. But, as we soon found out, she had already charmed not just her fellow Alaskans and a devoted University of Colorado at Colorado Springs undergraduate student--the one who launched "Draft Sarah Palin" early in 2007--but also some of the most influential members of D.C.'s conservative establishment. Who were her earliest boosters in the chattering class, and how did they fall so hard, so fast?

...Rising gas prices gave Palin the opportunity to impress another key Republican constituency: the pro-business, oil-friendly, anti-regulation wing of the party...[H]ere was an attractive, plainspoken Alaskan, with a blue-collar husband in the oil business, who seemed dying to drill in her backyard. Such credentials won Palin some highly influential admirers, most notably Larry Kudlow, the host of CNBC's "Kudlow & Company," and Rush Limbaugh.

...Kudlow, who describes his attitude on ANWR as "drill drill drill," says he hadn't heard of her until this spring. "Somebody tipped me off to Palin--I can't remember who. He just said, 'You ought to get her on your program. She'll defend [drilling in] ANWR, and nobody else will.' She came on the program, and we hit the bid pretty fast." Kudlow even managed to coax Palin into chiding McCain over his early anti-drilling stance. "I had interviewed everyone over the course of a year who was running for president or vice-president, and to tell you the truth, her knowledge and delivery on-air really impressed me. She has a better grasp of the energy story than anyone, and she has an attractive personality." Kudlow named Palin his favorite pick in late July.

Click here to read the whole article.

Monday, September 08, 2008

Monday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

FANNIE & FREDDIE, BAILOUT NATION, MARKETS & MORE...Our stock market and economic experts will discuss and debate all the latest news and developments affecting investors.

We'll lead things off this evening with long-time GSE critic and former Treasury official Peter Wallison of the American Enterprise Institute. Mr. Wallison will join us for a one-on-one look at all the latest Fannie & Freddie developments.

Our panel:

*Wayne Angell, former Federal Reserve Governor
*Doug Kass, president, Seabreeze Partners Management
*Gary Shilling, president, A. Gary Shilling & Co.
*Vince Farrell, managing director, Scotsman Capital
*Stefan Abrams, Bryden-Abrams Investment Management managing partner

SIT-DOWN WITH THE SENATORS...On to discuss the status of drill, drill, drill will be Sen. Jim Bunning (R-KY) and Sen. Jim DeMint (R-SC).

POLLSTER PERSPECTIVE...Joining us to discuss all the latest polling data in the race for the White House will be top pollsters Frank Newport from Gallup Poll and Scott Rasmussen of Rasmussen Reports.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

More Fan-Fred Questions than Answers

The talk of the town on Wall Street is the Treasury bailout of Fannie and Freddie. The most important development is that all the bonds are now totally covered by the U.S. government. So stocks soared this morning by over 300 points, though the gain is only 160 as of this writing.

Basically, the feds are taking Fannie and Freddie over in a conservatorship, which is less than a receivership and full nationalization, but does cut out private investors by dissing the common-stock and preferred-stock shareholders.

But this whole package raises more questions than it answers. It still leaves open the longer-term possibility that the flawed GSE model of private profits combined with taxpayer losses is a recipe for disaster and a ticket to France rather than American-style free-market capitalism.

Treasury man Paulson side-stepped any long-run decisions on the bad Fan-Fred business model. So Bailout Nation is alive and well, with the auto business waiting in the wings for its own federal money. Meanwhile, taxpayers could be on the Fan-Fred hook for $200 billion, or even more, if their internal portfolios implode. By the way, those inside hedge funds are set to expand in the next year before they contract. Very curious.

Opinions on all this are divided. Long-time GSE critic Peter Wallison, a former high Reagan official, thinks Paulson should have gone to a full receivership to clamp down on Fan-Fred and take out all the common stockholders. But former Fed governor Wayne Angell, also a Reagan appointee, prefers a larger role for private capital in order to reduce taxpayer exposure.

Meanwhile, it’s hard to connect the GSE bond bailout with distressed mortgage owners. The real issue is a pro-growth economic recovery plan. Drill, drill, drill and more energy supplies will bring down gas prices at the pump and help all mortgage owners, consumers, and the banks that own the paper. Additionally, lower marginal tax rates for businesses and individuals — especially middle-income folks — would give the whole economy a shot in the arm. In other words, grow the economy back into prosperity. That’s the key.

And it’s even harder to understand why Treasury is letting the GSE CEOs get $15 million severance payments as they are ushered out the door. And surely a Democratic Congress will defend the Fan-Fred business model till death do they part.

However, credit Treasury with a provision that eliminates all GSE political contributions and lobbying. I wonder — maybe Sarah Palin has the answer. Just put Fan and Fred on eBay and sell ’em.

Speaking of Ms. Palin and her sidekick John McCain, polls are showing a huge Big Mac surge. Even Intrade shows a virtual dead heat. Maybe that’s what drove stocks up today.

What a Difference 50 Days Makes...

Incredible Mac comeback. Veep choices do matter. Conventions do matter. Denver Dems a disaster. St. Paul Republicans an unbelievable success. Message matters. Convictions matter.

Friday, September 05, 2008

McCain’s Good Start in St. Paul

Did John McCain make the sale in St. Paul on a pro-growth economic-recovery plan? Did he connect with the working folks and blue-collar union types who will be so important come November? Did he make the case for tax cuts and energy drilling?

I think he did.

The day after the speech the InTrade pay-to-play prediction markets had McCain up four points to a 43 percent probability of winning. That’s his best score ever. Obama dropped four points to 56 percent. Over at Rasmussen, McCain recorded a bounce that closes Obama’s lead to 48-46. Pre-speech Obama was ahead 50-45.

So Big Mac may have done pretty well in St. Paul. Nonetheless, economic anxieties remain high in America, and the McCain-Palin team must still develop a comprehensive economic-recovery plan. It was reported on Friday that the U.S. jobless rate climbed to 6.1 percent while non-farm payrolls dropped 84,000. Even though the overall economy appears flat to slightly above water, we are surely in a mild jobs recession.

But McCain’s growth plan of energy drilling and lower taxes may well be what the doctor ordered for job anxieties. A careful reading of his acceptance speech shows very strong pro-growth content. I counted no fewer than six references to cutting taxes or keeping taxes low. And he took on Obama directly: “My tax cuts will create jobs. His tax increases will eliminate them.”

McCain also vowed that he “will keep taxes low” and “cut them where [he] can.” And he said his proposal to slash the corporate tax rate is a job creator. He also mentioned the child tax exemption and the pro-consumer refundable tax credit for health care.

He also embraced the drill, drill, drill theme. “We will produce more energy at home,” he said. “We will drill new wells offshore and we’ll drill them now.” And he made it clear that “Sen. Obama thinks we can achieve energy independence without more drilling and without more nuclear power. But Americans know better than that.”

In an important passage, he called energy reform and deregulation a “great national cause” that “will create millions of new jobs, many in industries that will be the engine of our future prosperity.” This is good stuff. He then linked his call for action on drilling to stopping Tsar Vladimir Putin’s efforts to reassemble the Russian empire.

He also hit the right notes on education. He said, “Education is the civil-rights issue of this century,” and he made a forceful case for school choice, competition, and empowering parents. Terrific. Obama “wants our schools to answer to unions and entrenched bureaucracies.” McCain wants “schools to answer to parents and students.”

McCain failed to mention King Dollar as a means of holding down inflation, and that’s a big miss in my book. But he did at least outline a conservative reform agenda on key economic issues including tax cuts, spending discipline, free trade, energy expansion, school choice, and pro-competition health care that puts consumers in the driver’s seat, not government.

Friday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE STOCK MARKET & ECONOMY...Our market all-stars will weigh in with its perspective on all the latest issues, trends and developments affecting investors.

On board:

*Don Luskin, chief investment officer, Trend Macro
*Jim Lacamp, portfolio manager, RBC Dain Rauscher
*Michael Pento, Delta Global Advisors, senior market strategist

TODAY'S JOBS NUMBER...On to debate the health of the economy and the jobs number will be Brian Wesbury, chief economist at First Trust Advisors and John Ryding, chief economist at RDQ Economics.

DRILL, DRILL, DRILL...Sen. Mary Landrieu (D-LA) will join us from Washington with her take on the latest developments in the oil and energy debate.

THE POLLS...Top pollster Scott Rasmussen from Rasmussen Reports will deliver the latest goods on the race for the White House.

DYNAMIC DUO DEBATE…Joining us to debate all the latest Washington to Wall Street developments will be Wall Street Journal senior economics writer Steve Moore and Robert Reich, author, public policy professor & former Clinton labor secretary.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Make No Mistake: Change is Coming to Washington

Thursday, September 04, 2008

Thursday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE REPUBLICAN CONVENTION...Joining us with a live update on all the latest developments from the GOP convention will be CNBC chief Washington correspondent John Harwood and U.S. News & World Report's Jimmy Pethokoukis.

POLITICAL DEBATE...On to debate Sarah Palin's impact and much more will be conservative columnist Ann Coulter and liberal columnist Bill Press.

THE MARKETS & ECONOMY...Our market all stars will discuss and debate all the latest news affecting investors including today's stock market sell-off and continued drop in oil prices.

On board:

*Quentin Hardy, Forbes Silicon Valley Bureau Chief
*Jerry Bowyer, chief economist at Benchmark Financial
*Stefan Abrams, Bryden-Abrams Investment Management managing partner

ENERGY, OIL & DRILLING...Joining me to discuss drill, drill, drill will be James Hackett president & CEO of Anadarko Petroleum.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

There’s Something Missing in St. Paul

Why isn’t anyone mentioning gas prices and the economy?

On CNBC last night Jack Welch, GE’s CEO from that firm’s salad days in the ’80s and ’90s, pointed out the dangers of a three-house Democratic sweep. He says it’s dangerous for both the stock market and the economy. And he wants to know why the St. Paul Republicans aren’t running against Harry Reid, Nancy Pelosi, and Barack Obama.

Welch made the point that the last time the Democrats had control of all three houses in Washington the Jimmy Carter administration was in charge. That was a time of economic and stock market malaise. However, when Washington was divided — as was the case when Ronald Reagan and Bill Clinton were in the White House — the economy and the stock market took off.

“With Pelosi and Reid pushing him,” said Welch, “there’s no limit to the taxes [Obama will] raise.” Mitch McConnell, who joined Welch on our show, was in full agreement: “You’ve got a prescription for turning America into France,” said the Senate minority leader, “which is exactly what the Democrats want to do if they get all three [houses.]”

I agree completely. A three-house Democratic sweep is a vital issue and McCain and Palin should be raising it. A three-house sweep is bad for the economy and the stock market. And will someone tell me exactly why the St. Paul Republican’s aren’t mentioning the economy?

As we head into the closing night in St. Paul, there has so far been no reference to the weak economy. There has been no economic-recovery message and no growth message. There has been no reference to the populist revolt against high gas prices at the pump, which is the main cause of the economic slump. There has been no reference to the 70 percent of Americans who are tired of high gas prices and want to drill for more oil as at least a short-run solution over the next 5 to 10 years. There is no one connecting with the economic woes of blue-collar type working folks who are getting creamed, who worry about falling jobs and rising unemployment, and who want someone to help with the oil shock. What’s going on here? What ever happened to the prosperity part of peace and prosperity?

I made many of these same points Wednesday night on The Corner on NRO. To reiterate, Sarah Palin delivered a brilliant speech. So many good lines. She showed us all that she’s a superb communicator — that she’s even Reagan-like. I personally loved her line about the difference between a hockey mom and a pit bull: lipstick. With a smile and a great quip, she signaled to her opponents that she is tough, serious, and purposeful — that she has strong convictions and she’s not going to be intimidated. I asked last night if we’re not witnessing the Western frontier version of Margaret Thatcher. Sarah Palin is just what the Republican party needs. She connected really well with middle-class working folks, both in cultural and social terms, which is no small feat: Values matter and the Democrats are in trouble here — big-time. The more they go after Palin culturally, as they have already, the more trouble they’ll fall into.

And Gov. Palin did mention oil and gas drilling, and she effectively connected her Alaskan natural-gas pipeline to Tsar Putin’s global aim of energy blackmail. She proved that she knows a bit more about high-table geopolitics than her critics think, and that Alaskans know a lot about Russian territorial ambitions, with Russia right across the pond.

But again, there were misses. Foremost, I do not think Palin connected with folks on the economic slump, nor did she present an economic-growth recovery plan. Rudy Giuliani made the first foray into that area in his speech when he talked about restoring economic growth through tax cuts and drilling. (Palin also fingered Obama as a tax-and-spend liberal. Good.) But he didn’t get to gas pump prices, or the oil-shock-driven consumer shortfall in real purchasing power, or the threat of more job losses and higher unemployment that are casting shadows over public confidence and the investor-class stock market.

That said, Palin did lay some important groundwork. In the weeks ahead, she can expand her oil-and-gas drill, drill, drill message to include gas prices and the economy. This is only a short stone’s throw away from her Wednesday-night speech. Wouldn’t it be great if she and McCain adopted a strong, pro-growth, tax-reform plan to reduce tax rates across-the-board, get rid of the corrupt loopholes and tax earmarks defended by the old order in Washington, and combine their ethical corruption cause with prosperity tax cuts as well as currency-reform to restore King Dollar?

At least Palin got us headed in the right direction last night with her America First energy-reform message. Watching her phenomenal communication skill, her disciplined yet positive style, I can’t help but be optimistic. I’m optimistic in part because Palin herself is clearly an optimist. I’m a sucker for optimism.

And tonight it’s McCain's turn. What St. Paul needs is a good dose of economic reality. A drill, drill, drill message tied to gas prices and the economy along with supply-side tax cuts and King Dollar. And like Jack Welch said, why not make the Reid-Pelosi-Obama three-house link? A return to the Jimmy Carter ’70s is the last thing we need.

You See This?

Peggy Noonan speaking out of both sides of her mouth on Palin. This is a credibility-killer. Here's the video.

NEW YORK Peggy Noonan had been defending the John McCain choice of Sarah Palin as his running mate for days, most recently just this morning in a widely-read Wall Street Journal online piece from the GOP convention. Palin was "powerful," she wrote, her story was strong, she might even be "transformative."But the savvy media veteran, and former Reagan speechwriter, then forgot the first rule of live TV -- beware of the live mike. After finishing up an interview with MSNBC's Chuck Todd today, as the scene was about to shift and guests were off camera, Noonan and former top GOP strategist Mike Murphy were caught still chatting with Todd on their microphones. "It's over," Noonan said, referring to the Republicans' chances. And, concerning Palin: "The most qualified? No! I think they went for this -- excuse me-- political bullshit about narratives.... Every time the Republicans do that, because that's not where they live and it's not what they're good at, they blow it."

Click here to continue reading.

Update: Noonan's response:

Sarah America Delivers

A brilliant speech, brilliantly delivered. So many good lines. Sarah Palin shows us all that she is a superb communicator, which of course is so essential to a successful politician. Obviously, I think of Reagan. Personally, I loved the difference between a hockey mom and a pit bull: lipstick. With a smile and a great quip, she signaled to her opponents that she is tough. Don't tread on me. I'm here now. I'm serious. I'm purposeful. I have strong convictions and you're not going to intimidate me. Nor will you push this lady around. A Western frontier version of Thatcher? Gosh, does the Republican Party need her.

Overall, I think she connected really well with middle class working folk in cultural and social terms. This is no small feat. Very important. Values matter. Dems are in trouble here, big-time. The more they go after her culturally, as they have already, the more trouble they'll fall into.

Gov. Palin did mention oil and gas drilling, and she effectively connected her Alaskan natural gas pipeline to Tsar Putin's global aim of energy blackmail. The lady knows a bit more about high table geopolitics than her critics think. Alaskans know a lot about Russian territorial ambitions, which are just across the pond from them.

But I do not think she connected with folks on the economic slump, nor did she present an economic growth recovery plan. Rudy Giuliani made the first foray into that area in his speech when he talked about restoring economic growth through tax cuts and drilling. But he did not get to gas pump prices and the oil shock-driven consumer shortfall in real purchasing power, or the threat of more job losses and higher unemployment which casts a shadow over public confidence and the investor class stock market.

Palin, however, can expand her oil and gas drill, drill drill to get to gas prices and the economy. She laid the groundwork tonight. It's only a short stone's throw from tonight's speech to an effectively fleshed out message. She did finger Obama as a tax and spend liberal. Good.

Wouldn't it be great if she and McCain adopted a strong pro-growth tax reform plan to reduce tax-rates across the board, get rid of the corrupt loopholes and tax earmarks defended by the old order in Washington, and combine their ethical corruption cause with prosperity tax cuts? Even a currency reform to restore King Dollar? Along with America First energy reform, where Palin made such a good start this evening?

Watching her phenomenal communication skill, and her disciplined yet positive style, I can't help but be optimistic. In part because she herself is clearly an optimist. I'm a sucker for optimism. Lord knows this country, and the GOP, needs it. Sarah America. I like it.

Wednesday, September 03, 2008

Whither Prosperity?

So far last night and tonight there is no reference to the weak economy. There is no economic recovery message. There is no growth message. There is no reference to populist revolt against high gas prices at pump, which is main cause of the slump. There is no reference to 70% who blame gas prices and want to drill for more oil as at least a short-run solution over next 5 to 10 years. There is no one connecting with economic woes of blue-collar type working folks who are getting creamed, worry about falling jobs and rising unemployment, and want some one to help with the oil shock. What is going on here? What ever happened to the prosperity part of peace and prosperity?

Wednesday Night Special Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE REPUBLICAN CONVENTION...Joining us with a live update on all the developments from the GOP convention will be CNBC chief Washington correspondent John Harwood and U.S. News & World Report's Jimmy Pethokoukis.

Also...Former GE CEO Jack Welch will share his thoughts in a one-on-one interview.

OBAMA VS. MCCAIN: ENERGY & TAXES...Our money politics panel of experts will weigh in with their perspective.

On board:

*Austan Goolsbee, Obama economic advisor & University of Chicago economist
*John Taylor, Stanford University economics professor & former Under Secretary of the Treasury for International Affairs
*Jack Welch, former GE CEO

THE STOCK MARKET & ECONOMY...Our market all-stars will discuss and debate all the latest news and developments affecting investors.

On board:

*Joe Battipaglia, market strategist, Stifel Nicolaus
*Jack Gage, Forbes magazine associate editor
*Jack Welch, former CEO of GE

INTERVIEW WITH SEN. MITCH MCCONNELL...The Republican Senate Leader from Kentucky will join us live from the Republican convention with his thoughts and perspective.

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Tuesday, September 02, 2008

Sarah Palin, Our Energy Answer

The number-one economic issue this election is gasoline prices at the pump. The tax-hike effect of surging oil on global markets that has translated to a huge spike at your local gas station has drained the economy of its vitality. It has damaged consumer purchasing power, made it tougher to pay mortgages on time, worsened the credit crunch, raised the inflation rate, undermined corporate profits, and thrown stocks into the first bear market in five years.

Of course, with all the political hoopla from the Denver Democrats, it’s easy to forget the populist revolt against high gas prices at the pump. Sen. Obama never mentioned skyrocketing pump prices or their devastating economic impact on ordinary working-class folks. But this is the energy election. It will determine our future peace and prosperity. And Alaska Gov. Sarah Palin has the energy answer: Our abundant country can produce more energy at lower cost if government gets out of the way.

Coming from the natural-resource rich state of Alaska, Palin is an experienced energy expert. She knows more about the economics of energy than senators McCain, Obama, or Biden. And in this year of the oil-shock economy, Palin’s role will be absolutely crucial.

"Obama is way off-base on all that. I think those politicians who don’t understand that we need more domestic supply of energy flowing into our hungry markets [are] living in la-la land. And we’re in a world of hurt if they’re agenda continues to be to lock up these safe, secure, domestic supplies of energy."

That’s what Palin told me in a CNBC interview in late June. I call it drill, drill, drill. But in fact it’s a full-throated America-first energy policy that will create millions of high-paying jobs with complete government deregulation and decontrol of the full menu of energy sources: oil, natural gas, nuclear, clean coal, shale, and the alternative fuels of wind, solar, and cellulosic.

Why aren’t all the candidates talking like Palin? How can this great country put its future growth and prosperity in the hands of enemies like Tsar Vladimir Putin, Ahmadinejad, and Hugo Chavez. Well, get ready for Sarah America to take on the fight against all comers.

The plain-talking governor is even tough on John McCain. The senator has said it’s too pristine to drill in ANWR. But Palin told me in June that "Sen. McCain is wrong on that issue. . . . We’re talking about a sliver of the coastal plain of Alaska being explored and drilled for oil. It’s about a footprint of a 2,000-acre plot of land. That’s smaller than the footprint of LAX."

Palin was pleased that McCain came around on the Outer Continental Shelf. But she intended to talk him into ANWR. Expect Mr. McCain to listen carefully. And she made this key point: The price of fuel will fall quickly in the expectation of more energy supplies, just as soon as Washington permits.

And when I interviewed her again in late July, she was justifiably furious that Congress was going on summer recess without a vote on rolling back its drilling moratorium. "Well," she said, "with all due respect to Congress, it’s pretty pathetic." Meanwhile, she was taking action: Palin had just gotten the Alaska legislature to agree to a new natural-gas pipeline that was 30 years in the works.

The U.S. Geological Survey estimates that there are nearly 100 billion barrels of oil in the Arctic, with roughly one-third under sovereign U.S. territory in Alaska. There are at least 10 billion (and perhaps close to 20 billion) barrels of oil in ANWR, while old estimates suggest between 800 billion and 2 trillion barrels of oil in the Rocky Mountain shale formations.

It’s also worth noting that 1.8 billion acres of the Outer Continental Shelf -- with roughly 100 billion barrels of recoverable oil and 400 trillion feet of natural gas -- are off-limits because of the congressional moratorium.

Palin grasps the strategic importance of all these domestic reserves. She’s also a governor who fully understands the energy- and foreign-policy designs of Mr. Putin, who sits right across the pond from her native Alaska.

Meanwhile, Obama railed against drilling in his Denver convention speech. He is opposed to ANWR. And shale. And nuclear power. He’s constantly bashing oil companies. And all he talks about is a windfall profits tax. That’s why he has no real economic recovery plan. He has no interest in reducing gasoline prices at the pump. He even sponsored legislation to prevent 3-D seismic technology and other research efforts to correctly measure our undersea oil deposits.

In other words, he just doesn’t get it.

That’s why the pro-life, tax-cutting, drill, drill, drill, family-centered, corruption reformer Sarah Palin will be a powerful weapon in this election. Don’t tell me she won’t make a difference this November.

Tuesday Night Lineup

On CNBC's Kudlow & Company at 7pm ET tonight:

THE REPUBLICAN CONVENTION...CNBC chief Washington correspondent John Harwood will deliver an update on all the latest news from Minnesota.

OBAMA VS. MCCAIN: DUELING ECONOMIC PLANS...Top Obama economic policy advisor Jason Furman will debate Steve Forbes, McCain economic adviser & editor-in-chief of Forbes magazine on taxes, oil and the economy.

OIL, THE STOCK MARKET & ECONOMY...Our market all-stars will discuss and debate all the latest news and developments affecting investors.

On board:

*Rich Karlgaard, publisher of Forbes magazine
*Gary Shilling, president, A. Gary Shilling & Co.
*Dennis Kneale, CNBC Media & Technology Editor
*"Jimmy P" Pethokoukis, money and politics blogger for U.S. News & World Report

CONVERSATIONS FROM THE CONVENTION...We'll have three separate one-on-one interviews with leading political figures to discuss all the latest in the run for the White House.

Joining us:

*Sen. Jon Kyl (R-Arizona), Senate Republican Whip
*Sen. Orrin Hatch (R-Utah), vice chairman of the National Republican Senatorial Committee
*Gov. Tom Vilsack, former governor of Iowa and a former presidential candidate

Please join us at 7pm ET on CNBC for another free market edition of Kudlow & Company.

Looking Through the Windshield

Apart from presidential politics, oil’s plunge toward $100 dollars deepens the tax cut effect and brightens the economic outlook across-the-board. There is so much gloom and doom and pessimism in investment circles that now’s a great time to take a contrary view.

Lower oil solves consumer purchasing power. And it will make it much easier for people to pay their mortgages on time. That in turn helps solve the credit crunch, because on-time payments enhance the value of all that mortgage-related bond market paper held in portfolios.

The oil tax cut will also help corporate profits as input price pressures recede, thus bringing costs into better alignment with prices. As you know, productivity remains strong trending around 3 percent. That’s a big growth factor.

Credit spreads are too wide, but don’t forget that interest rate levels everywhere are historically low. The level of bank loans is stable. Meanwhile, commercial paper issuance has been rising lately. Economist Art Laffer points out that 10 percent M1 growth over the last 3 months is a harbinger of stronger money demand -- a good sign for economic growth.

Because U.S. growth looks poised to do better, the real exchange rate of the dollar is enjoying a strong rally. Robert Mundell always taught me to watch the real exchange rate as a leading indicator of economic growth.

Headline inflation will abate with falling oil prices, even though core inflation is creeping up toward 3 percent. The Fed’s next move will be a higher target rate. That will confirm the growth rebound. It will also defend the dollar and help to restrain future inflation.

Despite controversy, Sarah Palin will strengthen the McCain presidential case. That spells lower taxes and more drilling. She is a champion of drilling in ANWR and is one tough cookie to boot.

Undoubtedly, more credit problems will surface among the banks. But that’s looking through the rearview mirror. For those of us who prefer to look ahead, through the windshield, the outlook for stocks is getting better and better. I would even suggest that lower oil prices moving toward $80 dollars a barrel leads to retailers, consumer cyclicals, consumer household products, as well as financials.

The global industrial infrastructure play continues.