Friday, January 28, 2011

Turtle Bay's Lilliputians

John Bolton is a good man. He did a great job and didn't deserve his fate. My friend, ace journalist Claudia Rosett sums up this latest U.N. saga rather nicely...

"John Bolton's resignation this week as ambassador to the United Nations was hardly the result of his being - as some have charged - ineffective, or a bully, or abrasive. The real problem is the shrunken character of the U.N.

Bolton was a Gulliver dispatched to Lilliput, a truth-teller in a den of diplomats. As a principled man in a dishonest institution, he was a threat to a whole raft of special interests that feed off the U.N. system.

If anything, Bolton was polite in a setting where bullying and abrading hardly count as sins. This is the U.N. where Secretary-General Kofi Annan, when queried last year about the Mercedes on which his son saved a bundle by making false use of U.N. perquisites, chose to bully the reporter - and avoid answering a good question. This is the U.N. whose deputy secretary-general, Mark Malloch Brown, set out this past spring, in violation of the U.N. charter, to meddle in U.S. politics - insulting a number of right-wing media outlets and sneering at their audience in the "heartland." This is the U.N. whose "excellencies" this past September applauded the histrionics of Venezuela's Hugo Chavez and Iran's Mahmoud Ahmadinejad - behavior that in civilized quarters might well be deemed abrasive.

This is the U.N. that in recent years has incubated such scandals as oil-for-food, procurement bribery, and peacekeeper rape. This is the U.N. whose "reforms," in answer to these scandals, have consisted largely of demands for more money, and a revamped so-called Human Rights Council that has devoted itself entirely to condemning Israel. This is the U.N. system that still does not provide coherent accounts of how it spends about $20 billion per year, about one-quarter of that supplied by U.S. taxpayers...."

Goldilocks Rules

Liberal New York Times columnist Paul Krugman took it on the chin today as the November jobs report was stronger than expected and increased by 132,000. The unemployment rate stayed at a historically low 4.5 percent.

The Goldilocks economy is producing large job gains in services—think retailers, healthcare, financial companies, business, professional and other areas.

Housing and manufacturing are still soft after two years of tight money from the Fed, and of course, higher energy prices have dampened things until recently. But the housing and manufacturing sectors are really just about 10 percent of our GDP. That means 90 percent is still hitting on all cylinders.

Even softer homes prices couldn’t hold back a new record gain in family net wealth. This hit another all-time high of over $54 trillion dollars on the strength of the roaring stock market.

Incidentally, that Goldilocks stock market is pointing to a solid growth rate in 2007.

And, let’s not forget, over the past 12 months, workers wages are up 4.1 percent. That development, along with lower gasoline prices and a negative CPI, suggest middle income families will have plenty of spending power this Christmas holiday season.

Oh by the way, did I mention lower tax rates on capital gains and dividends have helped drive stocks and the economy higher?

Mr. Krugman’s model doesn’t include supply-side tax cuts.

President George W. Bush will look with satisfaction at today’s employment numbers. He will realize once again the important connection between lower marginal tax rates and a strong economy.

A Bull v. Bear Debate

Here's an interesting little back-and-forth from last night's show...

KUDLOW: I want to go to my buddy Herb Greenberg. Herb, I would say, except for possibly Dougy Kass, you have been the most pessimistic person to come on our program, and, of course, the market has gone up, up and away. What is your current thought about this market rally, which seems to have legs, it seems to have muscles, it seems to have sinews, and it seems to say that things are going to be just fine in the American economy and American wealth creation?

HERB GREENBERG: Larry, there's an old saying, "Don't argue with a crazy person." I'll add to that, and I'll say don't argue with a crazy market, and this market is still, I believe, and I know Dougy believes, in a speculative blow-off phase and if you look even at Jeff Saut's recent commentary, where he said it's an unnatural market, an unnatural market because he said there just hasn't been any correction in this latest, you know, phase, where it's going straight up.

KUDLOW: Well, Noah, look, what do you hear? I'm listening to these adjectives: speculative, unnatural. This is, you know, a family show, and I'm glad you didn't go deeper than that. Noah, can you set him straight from up there in Canada?

NOAH BLACKSTEIN: You know, I don't understand how Herb gets the moniker realist. I mean, it assumes that all of us who are optimists are deluded, suffering from a mental disorder, and something is wrong with us. I don't see it. You know, a speculative blow-off, you know.

The P/E multiple on the S&P 500 is lower now than when we started this bull market. Profits have risen much quicker than this market has risen. And really, you could argue over the last year and a half the market's been capped by the Federal Reserve really sitting on the throat of liquidity over the last little while. With the Fed pulling back here, there's a lot of room for P/E multiples to expand.

The market is discounting too much inflation and too aggressive a Fed, and so I think there is more upside. I don't see anything that would indicate this is a rampant speculative market like the late 1990s. In fact, valuations are low.

Senator Backbone

Two of the most important qualities necessary for a run to the Oval Office are decisiveness and strength of character. In recent weeks, John McCain has proven that he has more stock in these traits than most any public official today.

As American fortunes in the battle of Iraq have deteriorated, the senator has forcefully elevated the policy debate by fearlessly offering unpopular advice on how to turn the tide toward victory. In fact, McCain is several steps ahead of nearly everyone on the subject of this war. At his recent news conference, President George W. Bush said the U.S. should expand the size of its armed forces, especially the Army and Marine Corps. McCain has been saying this for years. Bush and his high command are now mulling a possible troop-force surge in Iraq; McCain has been advocating this for quite some time.

Of course, each of these positions is out of favor. But that’s not silencing McCain: “I understand the polls show only 18 percent of the American people support my position. But I have to do what’s right, what I believe is right, and what my experience and knowledge and background tells me is the right thing to do in order to save this situation in Iraq . . . In war, my dear friends, there is no such compromise. You either win or you lose.”

In the midst of the latest doubt, pessimism, and quibbling over our direction in Iraq, here is John McCain digging his heels in the sand. He is fighting the defeatist tide, and though it might endanger his presidential bid, he is entirely comfortable with his posture. I believe this is called courage. Principle. Leadership. It’s what has long described this highly decorated former Navy fighter pilot and Vietnam prisoner of war.

More kudos go to McCain for blasting the defeatist recommendations of the Baker-Hamilton Iraq Study Group.

Speaking to the Senate Armed Services Committee, he said “There’s only one thing worse than an overstressed Army and Marine Corps, and that’s a defeated Army and Marine Corps. I believe this is a recipe that will lead to our defeat sooner than later in Iraq.”

McCain specifically ridiculed the Baker-Hamilton suggestion that American combat troops withdraw from Iraq while more advisors and trainers embed with Iraqi forces. He argued that this would “put at risk a large number of American advisors” who would be subject to hostage-taking and the attacks of rogue militias or terrorists.

McCain also mocked the commission’s idea of seeking peace talks with Iran and Syria, saying “I don’t believe that a peace conference with people who are dedicated to your extinction has much short-term gain.”

The recent McCain narrative is especially important. First, in the Oval Office, the Arizonan privately urged the president to add more troops and reject the Baker-Hamilton withdrawal approach. Then, in Baghdad, McCain pleaded the same case to American generals. Along the way, he has held several news conferences, deftly using the public square to influence the outcome of events.

No public figure today could do all this with as much influence and credibility as Sen. John McCain. If in fact President Bush goes forward with a troop surge -- one that is designed to protect the fledgling Iraqi democracy and repel our enemies in the Middle East -- McCain’s steadfastness and bravery will have sealed that outcome.

Interestingly, new defense secretary Robert Gates heard a McCain-like message from the troops when he traveled to Iraq after his swear-in ceremony. “More troops might hold [the enemy] off long enough to where we can get the Iraqi army trained up,” Private Spc. Jason Green of the 101st Military Intelligence Brigade told Gates. “More troops would help us integrate the Iraq army into patrols more,” said Pfc. Cassandra Wallace of the 10th Mountain Division.

Gates at least echoed McCain in saying that a premature withdrawal from Iraq would be “calamitous.” But there it is again -- the McCain narrative. It’s everywhere.

McCain clearly would rather do the right thing in our nation’s interest than the politically correct thing. He is about leadership and character and decisiveness. He seems to have the ability to assess American national-security needs, not just for the next few weeks, but the next few decades. And he is almost single-handedly lifting our war policy towards strength rather than weakness.

McCain is standing tall against the tides of wartime fatigue, the polls, and the conventional Beltway wisdom. Whatever the outcome of the Iraq debate, and even the 2008 presidential election, the senator is behaving in a remarkably brave and steadfast manner at a time when so many of our leaders are shrinking from those crucial public duties.

A rare bird. Senator Backbone. That’s John McCain.

"Goldilocks vs. Gold"

Is there a statute of limitations on predictions of higher inflation?

Jerry Bowyer answers this question in his latest on NRO:

Larry Kudlow has described this as the Goldilocks economy: decent growth, low inflation. But the gold bugs continue to warn that today’s high gold prices inevitably mean higher inflation.

BuzzCharts has written extensively on the ongoing debate among supply-siders on the usefulness of gold alone as an inflation bellwether. We’ve taken the position that the inclusion of other measures, such as interest rates, helps paint a more complete picture of future inflation.

Here’s some more data that should help settle the matter:

On December 15, the Bureau of Labor Statistics released its monthly consumer-price-index data, which showed that inflation was completely flat from October to November following a half-percent drop in each of the two prior months. This falloff in inflation has taken place despite the fact that gold prices have been rising. Measures like interest rates, however, are more predictive of inflation (or, in this case, the lack thereof). The 10-year Treasury note, for example, stands at 4.6 percent, virtually unchanged from a year ago.

Although the most recent producer price index showed a quick pop-up of inflation to 2 percent, readings for the previous months showed roughly 2 percent deflation. In addition, the implicit price deflator and the PCE price deflator — two other major inflation indicators — have shown very low and absolutely flat inflation, respectively.

Is there a statute of limitations on predictions of higher inflation? Or, to paraphrase Ronald Reagan, “shouldn’t they read the score to us once in awhile?”

Jerry Bowyer is an economic advisor to Blue Vase Capital Management and the author of The Bush Boom.

Wednesday Night's Lineup

In light of Gerald Ford's passing, we will spend the first portion of the show looking at his legacy and contributions to our great country.

On board:

*California Congressman David Dreier (R)
*Dr. John Rutledge, chairman of Rutledge Capital and presidential advisor
*Arthur Laffer, CEO of Laffer Associates and presidential advisor to Ronald Reagan

Following the Ford roundtable, we will discuss the state of the economy and outlook for the stock market.

Mr. Laffer and Dr. Rutledge will stick around and will be joined by:

*Russ Koesterich, senior portfolio manager at Barclays Global Investors
*Jim Huguet, president of the Great Companies fund management firm
*Barry Ritlholz, chief market strategist at Ritholtz Research & Analytics

The Ford Legacy

Gerald Ford was a good and gracious man.

He was a dedicated and honest public servant—well liked by all who knew him personally. And I think his controversial pardon of Richard Nixon was a good idea—good in the sense that it got it off the table so the country could move on.

However, President Ford was one of a long line of American executives who presided over the decline of the U.S. in both national security and economic terms. This began under LBJ and stretched out through Richard Nixon, Gerald Ford, and Jimmy Carter.

In national security terms, Mr. Ford was a d├ętentist who accommodated the Soviet Union in a number of ways, including unverifiable arms control deals that Ronald Reagan put an end to when the Gipper assumed the presidency in the 1980’s.

The U.S.’s Vietnam retreat from the rooftop of our embassy in Saigon was one of the low points in the history of American foreign policy—a disgraceful action. Reagan, of course, changed all this in the 1980’s with his many actions to overturn and defeat Soviet communism.

In economic policy, Mr. Ford was a traditional Republican budget balancer who had no pro-growth policies. Arthur Laffer tried to persuade Ford of the merits of supply side economics to reduce marginal tax rates and grow the American economy—but Ford, acting on advice of top economic advisor Alan Greenspan, rejected this.

June Wanniski called this root canal economics and Newt Gingrich described Ford’s futile obsession with the budget deficit as simply the tax collector for the welfare state.

The combination of high inflation interacting with high marginal tax rates led to stagflation and the continued decline of the American economy. And the infamous “whip inflation now” program was nothing more than price controls and state planning.

Again, it took Ronald Reagan to reverse all this by adopting the incentive-minded growth model which slashed tax rates and reignited the U.S. economy in the 1980's - an economy whose fire still burns brightly a quarter of a century later.

At the end of the day, Ford was defeated by Jimmy Carter, who was just as baffled about stagflation and Soviet hegemony as Ford was.

Mr. Ford attempted one last play on the national political stage at the 1980 Republican National Convention in Detroit. Reagan had soundly trounced Papa Bush in the primaries to capture the nomination. But the Papa Bush forces—led by James Baker—attempted a bizarre co-presidency that would have made Ford the vice president and divided up all the executive branch responsibilities.

Reagan himself squashed this, chose Papa Bush instead, crushed Carter in the election, and went on to become one of the greatest presidents in United States history.

Thank God for Ronald Reagan.