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Kudlow’s Money Politics

Larry Kudlow’s daily web log of matters political and financial.

Cruz: Government Shutdown Is on the Table



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Last week on The Kudlow Report, I asked Republican Senator Ted Cruz if he’d go with a government shutdown if it came to it on the debt-ceiling debate. His answer: “I think we have to be prepared to go so far as to shut the government down — if we don’t get some serious policies to stop the out-of-control spending, to tackle the debt, and to get economic growth.”

It was a bold statement. Watch the full video here:

One Cheer for the Cliff Deal



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One cheer out of a potential three is all anyone can logically give the fiscal-cliff deal. On the day after the bargain was clinched, the stock market gave a 300-point cheer. So be it.

In the short run, extending tax cuts up to $450,000 probably saved us from a recession. If all the tax cuts had expired, we’d have a $500 billion tax hike, plus marginal rate increases, and that would have sunk the economy. So I’m going to bet that the big stock rally was a sign of relief that the final deal wasn’t worse. 

Read my full column here

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Don’t Blame Boehner



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When you lose an election you get frustrated. When you’re sitting in a subpar 2 percent economy, and are faced with tax hikes rather than marginal rate reductions, you get even more frustrated. And when you’re staring at $47 trillion in spending over the next ten years, and $8.6 trillion in deficits, your frustration levels climb even higher.

These are among the frustrations that led a number of House Republicans to pull back from Speaker John Boehner’s so-called Plan B. Nobody looked good on the Republican side when Thursday night’s vote fell through. But you have to understand their frustrations. Losing an election is no fun.

I don’t blame John Boehner. His idea is the best compromise currently available. Or put another way, it’s the least-bad option out there. It was even backed by Paul Ryan and Grover Norquist.

Read my full column here

No Cliff Calamity: That’s What Stocks Are Correctly Predicting



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Despite all the media hullabaloo about the fiscal cliff and a potential recession if none of the Bush tax cuts are extended, stock markets have behaved calmly throughout this whole period. In fact, as of this writing today, the Dow is up 100 points.

I’m gonna guess that stocks, in their wisdom, are correctly sniffing that there will be no calamitous falling off the cliff. By that I mean there will be no $500 billion tax hike, which would be an economy killer.

Instead, after speaking with prominent Republican House and Senate members, I have come to believe the following: The GOP knows that Obama has the upper hand in this post-election battle. Therefore, they are preparing a strategic retreat.

Republicans don’t want to be the party of rich people and let Obama maintain his hold on the middle class. Republicans also don’t want to be the party of recession. So if no comprehensive deal is reached by President Obama and Speaker John Boehner, Republicans will not block an extension of the so-called middle-class tax cuts, which are roughly three quarters of the total.

It’s hard to know how this story will work itself out. There may be deals on upper-end tax rates, say 37 percent instead of 39.6 percent. And maybe even some lower tax penalties on capital gains and dividends.

Ideally, the GOP can get solid promises on spending cuts and entitlement reforms in return for a tax package. That tax package may include a dollar limit for tax deductions along with the rise in upper-end tax rates. Entitlement reform is also on the table. And so is a roughly $60 billion 2013 spending cut, which carries over from the across-the-board sequester. That is still possible.

But what is not possible is that House Republicans give up their constitutional prerogative to set the debt ceiling. That is their biggest point of leverage. And that leverage will carry over into 2013 as lawmakers once again attempt an across-the-board effort for pro-growth tax reform (flatter rates, broadening the base), serious structural entitlement reform, and more discretionary spending cuts. This will be the battle royale of next year.

As I said, no one knows how all this is going to play out in the next two weeks. But from the standpoint of the economy and the stock market, a worst-case tax-hike scenario that would sink GDP is not likely to happen.

There will be a deal to extend most of the tax cuts. And while higher tax rates on successful earners, small-business owners, and investors are most definitely not pro-growth, at least the across-the-board tax-hike calamity will be avoided. 

GOP Strategic Retreat?



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Republicans are divided. President Obama won’t budge. And more and more, it looks like the fiscal-cliff deadline of December 31 will be missed.

It’s now clear that Team Obama wants higher tax rates and revenue-raising tax-deduction caps to meet their $1.6 trillion revenue target. Spending cuts and entitlement reforms are vague to non-existent. In fact, it could be that Obama not only rejects the across-the-board budget sequester, but that he actively seeks to raise spending, not cut it.

I guess it stands to reason that if you puff up his $800 billion revenue increase from last year, and double it to $1.6 trillion this year, the money will be spent. The government will grow larger.

All this should be unacceptable to the GOP.

Read my full column here

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Herbert Hoover Obama?



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Once again, President Obama dodged the key fiscal-cliff issues at a campaign rally/press conference Wednesday morning. Campaign-style, he argued that the middle-class tax cuts (below $250,000) must be renewed in order to prevent a $2,200 average tax hike from hitting middle-class folks. He added that a middle-class tax hike would cost consumers $200 billion in spending power.

Okay, fine. But no one wants to raise middle-class taxes. That’s not the issue. And even if those numbers are right, they dodge one of the key points in the dialogue between President Obama and House Speaker John Boehner. Namely, what to do about top income-tax rates, which include capital gains, dividends, and inheritance taxes?

The president once again avoided the term “tax rate” in his latest round of fiscal-cliff comments. He basically said, Let’s get this done before Christmas in a fair and balanced way. But what is balance?

Read my full column here

Obama Wants Higher Revenues and Rates



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Right after the election, it was all peaches and cream and conciliatory common-ground language when President Obama met with congressional leaders to discuss the fiscal cliff. Of course, the president campaigned on tax hikes for the rich, by which he meant raising top income-tax rates and extending the Bush tax cuts for incomes below $200,000. And the president’s first meeting post-election was with his union and liberal-interest-group supporters, all of whom want to raise the top rates and then some. But instead, the newly reelected president spoke about “new ideas,” as long as they provided a balance of spending cuts and tax increases on the most successful upper-end earners.

Now, however, stalemate may be just as likely as solution. Why? Well, it was former Bush advisor Keith Hennessey who discovered a big obstacle in all this. Team Obama wants a gargantuan $1.6 trillion tax hike over the next ten years to finance larger government. And Hennessey surmised — and I agree — that the reason the president couched his language in terms of higher tax “revenues” rather than tax “rates” is that he essentially wants both. Raise the top rates and cap or eliminate a number of tax deductions for more revenues. This is going to be a big problem. It could well be a deal-breaker.

Read my full column here.

Richard Fisher: Fed Won’t Catch Markets if U.S. Falls Off ‘Cliff’



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In the event the U.S. goes off the fiscal cliff, don’t expect the Fed to shield markets from the worst. In an interview on The Kudlow Report last night, hawkish Dallas Fed president Richard Fisher told me he’d resist that kind of intervention.

“I do not see us as that kind of safety net,” he said. “There’s got to be a limit. In committee we’d have to decide what kind of limit, but there’s got to be a limit.”

That means if Congress plays partisan politics and a big tax hike kicks in, the first quarter turns negative, and lawmakers continue to scurry around Washington unable to reach a deal, don’t expect a massive bond-buying program.

It’s not coming.

Fisher went on to say that lawmakers have to step up, and if need be he thinks the Fed should force their hand.

“Fiscal authorities must get their act together,” he said. “We can’t just rely on monetary policy — we can’t have a monetary policy of infinity and beyond.”

Fisher added, “The Fed has been carrying the ball. But we can’t carry the ball all by ourselves.”

In short, Fisher is tired of the indecision in Washington. “The more we do at the Fed,” he said, “the more excuses politicians have to do nothing.”

It’s worth noting that Fisher emphasized that these are strictly his opinions and not those of Ben Bernanke.

Watch the full interview here:

Don’t Go Wobbly, GOP



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In the fierce headline debate over the so-called fiscal cliff, our newly reelected president argues that “a majority of Americans agree with [his] approach.” That approach, according to the president, is “to combine spending cuts with revenue — and that means asking the wealthiest Americans to pay a little more in taxes.”

Well, that’s not exactly what the exit polls said.

Read my full column here

Romney’s Optimism Will Win



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Putting aside all the voter models, there’s one overlooked point worth making with Election Day at hand. Most times in American politics, optimists win, and pessimists lose. I know that’s not always the case. And sometimes it’s hard to distinguish between the two. But in this election, I believe Mitt Romney is the optimist, and Barack Obama is the pessimist. It’s Romney’s election to win.

Read my full column here

Once Bullish, Leon Cooperman Grows Wary of Stock Valuation



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For years, famed investor Leon Cooperman has talked up stocks. But on last night’s Kudlow Report, he sounded the alarm. Cooperman, who is a widely followed investor and chairman of the hedge fund Omega, has made headlines for quite some time calling stocks “the best house in the financial-asset neighborhood.” Back in 2011, Cooperman outlined his pro-stock market thesis at length on CNBC.

But last night, Cooperman made a surprising statement that presumably reflected a shift in his outlook. He told me, “I think the stock market presently is fairly valued. I believe the profit cycle is peaking.” Cooperman went on to say that the market multiple may be too high. After noting that the market multiple is around 15, he said the growth rate over the past 50 years or so has been much more robust. So if we’re moving into a period of slower growth, Cooperman reasons that the premium investors are willing to pay for stocks will probably decline.  That’s not to say Cooperman is a seller — he’s not. “I’m not aggressively bullish or bearish,” he explained, “I’m simply saying I think the market is now fairly valued.”

And he reiterated something he’s said many times before: “If you must put money to work, I still don’t think there’s a better alternative than common stocks. The Fed has made all the alternatives very unappealing.”

Nonetheless, his commentary suggests his outlook is shifting. Cooperman also told me that he thought all the concerns about the fiscal cliff or the confluence of tax hikes and spending cuts that could go into effect as soon as January 1 are overblown. “They’ll kick the can down the road,” he said. “There’s no way a politician will allow the cliff to hit.”

Watch the video here:

Does the Fed Have Grave Concerns about the Economy?



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On Tuesday, the Federal Reserve reaffirmed its commitment to using unconventional efforts to stimulate the economy. In the latest Fed statement, the central bank said it would keep buying $40 billion in mortgage-backed debt per month to push interest rates lower. The Fed also repeated its vow to keep interest rates near zero until mid-2015. That may seem like the Fed is sending a signal to markets that it is intent on driving the economy no matter what the cost. But that may not be the case. According to former Fed governor Kevin Warsh, the move isn’t a show of strength — it’s something far more ominous.

“I think the Fed revealed in their actions just how grave they think the economy is,” he said on The Kudlow Report. The statement shows “just how concerned they are about the economy’s prospects; just how concerned they are about the ‘fiscal cliff’ and Europe.” Warsh served as a member of the Board of Governors of the Federal Reserve System from 2006 to 2011. From 2002 to 2006, he was special assistant to the president for economic policy, and executive secretary of the National Economic Council. His take on the Fed — as someone who was once on the inside — is that the central bank feels it’s the only institution standing between the nation and a terrible downturn.

He said, “The central bankers feel they’re doing it all by themselves; that they’re not getting help from Congress or the administration.” It seems Wall Street may share the skepticism expressed by Warsh. Again both the Dow and S&P closed lower.

Obama’s Little Plan



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Under pressure from Mitt Romney, President Obama has finally released his own policy vision for a second term. And yes, it’s the same old, same old. Some are calling it a second first term.

There isn’t a single true economic-growth incentive in this scant plan. There’s no serious spending, deficit, and debt reduction, and no attempt to solve the Social Security and health-entitlement problems, which are moving us toward bankruptcy.

Nothing. Nada.

But before getting into the details of this little plan, my basic conclusion is this: Mr. Obama wants to slash defense spending, raise all other spending, and hike taxes to finance the largest government size he can possibly get.

Read my full column here.

Is Obama Buying the Election with His Welfare Explosion?



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With the unprecedented budget explosion of means-tested, welfare-related entitlements, does Team Obama think it can buy the election?

It’s a cynical question. But I wouldn’t put it past that cynical bunch.

Read my full column here

Ryan’s Benghazi Surprise



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The irony of ironies: The Biden-Ryan debate was more about foreign policy than the economy and jobs. And yet another irony: Paul Ryan, an expert on all things fiscal, revealed a much better knowledge base of foreign policy than anyone thought existed. Shows how smart and well-rounded he really is.

In fact, Ryan’s Benghazi slam, right out of the chute, won him the debate. This terrorist attack is going to be a huge presidential-race issue. Americans are furious at the Obama-Biden-Clinton stupidity and mismanagement surrounding the tragic Benghazi deaths. They are enraged at the Benghazi cover-up. Ryan accused Biden of malfeasance in every aspect of this tragedy. It was a tremendous body slam right from the start.

Read my full column here

Sell-Off Presents Market Opportunities



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The S&P fell for the fourth day in a row on Wednesday as investors fearing a rough market ahead ran for the exits. But if you’re among those sellers running for the sidelines, you may be making a big mistake.

For the first time, I feel comfortable enough tell you that Mitt Romney is going to win big. And I firmly believe Mitt Romney is about to usher in a new era — a Reagan-like, economic-growth revolution.

His tax-reform plan alone will drive the economy into tremendous prosperity. For example, a married couple earning $143,000 whose tax rate under Romney drops from 25 to 20 percent will keep roughly $7,100 more in take-home pay.

I see opportunities galore in the market. Right here and right now.

Why wouldn’t you be out there buying energy? Romney is pro energy. He supports coal and fracking. I’d also buy industrials. Romney is going to lower tax rates. I’d also buy health care. Romney will end government-run health care.

If you expect the nation to be led by a President Romney next year, all these sectors are very attractive right now. There’s just tremendous potential. I think the stock market is missing this.

Go on Offense, Mitt



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Free advice is, well, free advice. But I would say this to Governor Romney: In your gentlemanly fashion, get on the offense quickly tonight, and put President Obama on the defense.

Play the leadership card: “No leadership on the anemic economy. No leadership on the grand-bargain talks with Speaker Boehner, where a great opportunity was blown with your last-minute $400 billion tax hike. No leadership on Simpson-Bowles. No leadership on the credit downgrade.

“And no leadership on the Benghazi catastrophe, where our ambassador was killed and dragged through the streets. Security broke down. If you had read your intel briefing, you would have seen the threat ahead of time. And then you went off to a Las Vegas fundraiser. And then came the cover-up, led by Susan Rice’s five-Sunday-talk-show lying fiasco.”

And push your tax-cut plan, Governor Romney. Across-the-board rate reductions. Don’t be afraid to sell it. Talk to the middle class, who will get a huge increase in take-home pay as a result of your tax plan, during a period when incomes are falling (as Joe Biden correctly stated) . And say that there will be no tax hikes for the middle class.

And talk growth. Growth, growth, growth.

Red line the middle-class tax deductions and explain that the tax-rate cuts for the upper end, which will spur economic and investment incentives for growth, will be balanced with a significant loss of this group’s unnecessary tax deductions.

And back all that up with a strong sell on spending cuts that along with faster 4 percent economic growth and 12 million new jobs will bring the deficit and debt GDP ratios way down.

Growth, growth, growth.

And by the way, don’t forget the corporate tax cut to 25 percent from 35 percent. And put in some sound money, too, to stop the Fed’s assault against the dollar.

Be a free-market, free-enterprise visionary. Emphasize opportunity over class warfare. Emphasize employment rather than government dependency.

Emphasize American exceptionalism, at home and abroad.

Mitt’s Tax-Cut Mulligan?



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For some unknown reason, Mitt Romney dialed back his tax-cut plan yesterday, the same day new reports showed incomes are dropping.

Last month, median household income fell by about $500, and since Obama became president, income is down over $4,500. But under Mitt Romney’s 20 percent tax-cut plan, if he truly believes it and follows through with it, a married couple making $70,000 a year would save over $2,000. And take-home pay for a middle-class married couple earning about $140,000 — with their tax rate dropping to 20 percent from 25 percent — would increase by over $7,100. Obama has no such middle-class tax cuts.

So why would Governor Romney tell an Ohio crowd on Wednesday that they shouldn’t “be expecting a huge cut in taxes, ’cause I’m also going to lower deductions and exemptions.”

What is that all about? What kind of message is he sending? Is it pro-growth take-home pay? Or is he pulling back and hedging his bet?

I wrote in my last column about the potential benefits of the Romney plan. And I suggested that Romney should give specific examples of higher take-home pay from his tax cuts. And then I suggested that he draw a red line for middle-income taxpayers, and say “you will not lose you’re your deductions.” In other words, send a true growth message. And make it clear, not muddied.

This afternoon, one of the most senior people in the Romney-Ryan camp called me to say that Mitt misspoke, and that I should give him a mulligan. This person told me there’s no pull-back on the pro-growth tax-cut message, no new overemphasis on debt, and no departure from the Reagan-Kemp tradition.

Okay, even though I’m a tennis player, I’m willing to give Mr. Romney a mulligan. But I’ll say this: The growth message has to be crystal clear for the debate next Wednesday night. Mitt is slipping in the polls. People are confused about his message. He must clarify it.

Lower marginal tax rates. Higher middle-class take-home pay to offset lost income under Obama. More family financial resources. More growth and more jobs.

This doesn’t have to be so hard. 

Mitt’s Take-Home-Pay Message



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One of the reasons Mitt Romney and the GOP failed to get a convention bounce was their inability to talk tax cuts, economic growth, and jobs. In his 45-minute convention speech, Romney spent 200 words on the economy, with no mention of tax cuts. It was the same for his running mate Paul Ryan: no mention of tax cuts at the convention.

In fact, Romney and Ryan didn’t talk tax cuts leading up to the convention, and they didn’t in the weeks that followed. This has hurt them in the polls. They haven’t connected the dots between Obama’s anemic economy and the Romney-Ryan solution to improve it.

But, all of a sudden, there may have been an “aha” moment. In a 60 Minutes interview this past Sunday, Romney did mention tax cuts, and take-home pay, too. Whoa.

Read my full column here

Obamanomics Has Failed Dismally



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About thirty years ago, Paul Volcker launched a monumental monetary effort to bring down inflation. As Fed chairman, he sold bonds, removed cash from the economy, and cared not one wit about rising interest rates. And it worked. Gold plunged, King Dollar soared, and the drop-off in bank reserves and money extinguished high inflation — and actually launched a multi-decade period of very low inflation.

This week, current Fed chairman Ben Bernanke embarked on an absolute reversal of Volcker’s policy. He is launching a monumental effort to buy bonds and inject new money into the economy in order to reignite economic growth and job creation. It’s like history is repeating itself, but in reverse. Gold is soaring, the dollar is falling. Something’s wrong with this picture. 

Read my full column here

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