This past Saturday night, Judy and I hosted our annual summer dinner party at our home in Connecticut. As always, we were graced with the company of some outstanding minds who had much to say about the current economic and political landscape.

Here are a few of the more prescient observations presented over dessert:

John Myers, Head of GE Asset Management and Hilton Hotels board member, observed that there are more hotel rooms in Orlando, Florida, than in all of India. If that little kernel of knowledge doesn’t demonstrate the huge untapped development potential abroad, I’m not sure what does’

Like my friend, retired U.S. Army Col. Ralph Peters, I am a bit worried about the efficiency and success of Israel’s war effort. Ralph’s recent article “Can Israel Win?” is an eye-opener and certainly deserves a read.

Here’s a brief excerpt:

“…This is ultimately about far more than a buffer zone in southern Lebanon. In the long run, it’s about Israel’s survival. And about preventing the rise of a nuclear Iran and the strengthening of the rogue regime in Syria. It’s also about the future of Lebanon – everybody’s victim.

The mess Israel has made of its opportunity to smack down Hezbollah should be a wake-up call to the country’s leadership. The IDF looks like a pathetic shadow of the bold military that Ariel Sharon led into Egypt three decades ago. The IDF’s intelligence, targeting and planning were all deficient. Technology failed to vanquish flesh and blood. The myth of the IDF’s invincibility just shattered.

If Israel can’t turn this situation around quickly, the failure will be a turning point in its history. And not for the better.”

(Incidentally, Ralph is a guest on “Kudlow & Company” tonight, where he and others will discuss the latest from the Middle East.)

Tech stocks have been getting killed as most folks know. There are a lot of reasons for this, but probably the most important reason is that tech prices continue to deflate big time. And if prices are falling, both because of intense competition and new technologies, it’s awfully hard to keep up profit margins.

Since 2000, chip prices are off 27 percent, and YTD 2006 versus 2005, chip prices are down another 5 percent. In the computer sector, since 2000, prices have dropped 58 percent, YTD they’re off 11 percent, compared to a year ago.

The consumer is of course, the big winner from these lower prices. But producers like Intel, AMD and Dell are naturally the losers. Compare this with industrial commodity prices that have been soaring in recent years. Of course, that is why industrial and commodities stocks have until very recently done extremely well.

This tech price deflation should slow down some of you inflation hawks out there. The chip stocks SOX index is off 30 percent or so, since early January.

Serious deflation.

According to the AP, the Democratic Leadership Council is planning to unveil its economic agenda called ‘The American Dream Initiative’ later today.

The plan is supposed to lay out the moderate Democratic strategy on education, health care, retirement and income. The article doesn’t say what the plan entails yet, so we’ll just have to wait until Sen. Hillary Clinton outlines its specific proposals sometime today.

The DLC is a centrist think tank which has some very good people in it. The DLC plan is their version of the GOP’s ‘Contract with America.’

But will it raise taxes on the rich? Will it increase government spending? Will it be like the Pelosi plan which rolls back investor tax cuts, allegedly in order to cut the budget deficit? (Remember, Pelosi wants to reinstate PayGo budget restraints which really could be a tax trap.)

Will there be any economic growth incentives? Or will it be anti-growth? Will it expand the economic pie, or will it redistribute the pie?

In California two years ago, Hillary Clinton appeared at a fundraiser and said:

“Many of you are well enough off that … the tax cuts may have helped you. We’re saying that for America to get back on track, we’re probably going to cut that short and not give it to you. We’re going to take things away from you on behalf of the common good.”

That kind of socialist thinking, along with HillaryCare, has me awaiting the plan’s specifics with great interest.

According to recent news reports, former President Bill Clinton is headed to Connecticut this Monday to lend his support to embattled Sen. Joe Lieberman’s senate re-election bid.

The race between Lieberman, a three-term incumbent and multimillionaire Greenwich businessman Ned Lamont, has attracted considerable national attention. Of course, much of the focus and controversy surrounds Lieberman’s support of our war in Iraq, which Lamont continues to attack. (Lamont actually writes on his campaign website, “I salute the patriotism and wisdom of Congressman Murtha…”)

The most recent Quinnipiac poll shows that Limousine Liberal Lamont has pulled ahead of Senator Lieberman by four points, just outside the poll’s 3.8 percent margin of error.

But, what’s interesting to note, is that in a three-way race with Republican candidate Alan Schlesinger, Lieberman would actually win big — 51 percent to Lamont’s 27 percent and Schlesinger’s 9 percent.

Joe Lieberman is a good, principled man. He is sharp, and he has done a great deal of good for our country. While we don’t see eye-to-eye on every single issue, he deserves to be reelected.

Even Bill Clinton seems to know this.

Bernanke was a lot tougher in yesterday’s House Financial Services hearing. He was much more hawkish. In response to a question posed to him, he replied that the core inflation pickup is broad based, and not a statistical illusion from the owners’ equivalent rent component of the CPI.

Gold prices fell almost $10 dollars, nearly erasing Wednesday’s gain (which in some sense was based on a dovish misreading of Bernanke.) If the Fed is data dependent, and if Bernanke believes that the core inflation pickup is broad based, then more fed rate hikes are in the cards.

Reuven Brenner’s article on National Review Online (’What’s Wrong with Fed Policy’) makes the important point that the Fed should be using a liquidity management model based on commodities including gold, the yield curve and the dollar exchange rate to guide policy, rather than an interest rate and unemployment rate management approach.

My reading of the Fed is that they’re essentially using both. They will continue to target the Fed funds rate with one eye on the TIPS bond market yield model, with perhaps a glance at commodities and the dollar, but their other eye is unfortunately still trained on the Phillips Curve tradeoff between inflation and unemployment, with various references to capacity utilization, output gaps and other economic growth speed limits. This stuff is what gets the Fed into trouble because inflation is a monetary phenomenon.

Think of it this way, over the past ten years, non-financial productivity has grown at a 3.5 percent annual rate with labor force growth at least 1 percent annually. That means the economy’s potential to grow is actually about 4.5 percent per year. With continued low tax rates on investment, plus a capital goods investment recovery cycle in hand, the idea of economic capacity constraints makes no sense at all.

The reason the dollar is weak is because there is still a modest excess dollar liquidity position in relation to demand. I still don’t think it’s a huge excess, but I’d like to see a stronger dollar and a narrower TIPS spread.

All that said, the Fed will get there in the months ahead.

(Michael Rubin, resident scholar at the American Enterprise Institute and editor of Middle East Quarterly, offers a spot-on take at what’s going on in the Middle East and what needs to be done. Here’s a portion of his column available at National Review Online.)

[Arafat], like other terrorists and rogue leaders, ran to diplomats and the United Nations when he feared retaliation, the playground equivalent of sucker-punching a classmate when the teacher’s back is turned, and then crying for intercession as the victim fights back’

“There are four ways in which you can spend money. You can spend your own money on yourself. When you do that, why then you really watch out what you’re doing, and you try to get the most for your money. Then you can spend your own money on somebody else. For example, I buy a birthday present for someone. Well, then I’m not so careful about the content of the present, but I’m very careful about the cost. Then, I can spend somebody else’s money on myself. And if I spend somebody else’s money on myself, then I’m sure going to have a good lunch! Finally, I can spend somebody else’s money on somebody else. And if I spend somebody else’s money on somebody else, I’m not concerned about how much it is, and I’m not concerned about what I get. And that’s government. And that’s close to 40% of our national income.”

-Milton Friedman, Fox News interview 2004

Some quick thoughts on Ben Bernanke’s testimony today:

The best thing I saw was his reference to a very healthy and sound business sector with high productivity, strong profits, plenty of cash, and a strong backlog of new durable goods orders, which suggests big capex spending in the future.

The testimony itself was fairly bland. It’s an economic forecast-driven Fed outlook, based on the Fed’s own models, that apparently show a sizable decline for economic growth in the second-half of this year, along with a moderating core inflation rate. Implicit in the forecast is about a 2.5 percent second-half growth rate that I think is too low. So, if Bernanke is operating policy through the economic growth rate, there will be one or two more tightenings this year. On inflation he could be right.

Bernanke’s testimony was definitely not a supply-side approach to economics. He did mention a TIP-based forward indicator of inflation, but there’s really no clear liquidity model that relies on sensitive market price indicators like gold, commodities, and the dollar. I do like the TIP model reference, which looks to me about 25 basis points too wide. I definitely favor a 5.5 percent fed funds rate target.

I was disappointed that Bernanke made no mention of the dollar. Nor did he mention lower tax rates on private investment as a spur to economic growth. Because of low tax rates, I continue to believe the economy will surprise on the upside in the month’s ahead. That is why I think the Fed will feel compelled to raise rates a bit more. That being said, an investment-led expansion is counter-inflationary, as supply drives demand and more goods are available to absorb the existing money stock. Low tax rates are similarly counter-inflationary.

But this is a data-driven approach to Fed policy. Looking through the rear-view mirror, I preferred Alan Greenspan’s seat of the pants approach, which left room for more scrutiny of market-based indicators of both inflation and growth.

All of this leaves me still nonplussed about our new chairman, who is very much a state of the art economic scientist. I just don’t think scientific models are nearly as accurate as market-based price watching.

The financial markets have taken their finger off the panic button. Israel’s actions in Lebanon and the Gaza Strip are inspiring confidence, at least compared with where sentiment was a week ago.

Investors recognize that Israel is doing the world a huge favor by defanging Hezbollah and Hamas. These terrorist groups have long held Middle East peace and prosperity hostage to their suicide bombings, missile attacks and their insane demands for the eradication of the Jewish state.

The dollar and stocks are up from where they were just days ago when geopolitical jitters got the better of many market participants. The Dow is up over 200 points today, with the S&P 500 and Nasdaq following suit. Even the Israeli shekel has firmed and the Tel Aviv stock market has turned up, as have Arab bourses, indicating that the fighting in Lebanon and Gaza is being put into a larger, more favorable perspective.

Of course, any widening of the theater of warfare, such as direct military action against Syria, would likely be received nervously. Even though many on Wall Street know that something must eventually be done to stop Syria and Iran from further destabilizing the region and using terror groups as proxies in their fight against Israel, stocks would likely head lower, at least in the short run. Similarly, were Tel Aviv to be struck by missiles, the financial markets would also respond poorly, despite the fact that such an attack would surely redouble Israeli efforts to take out all of Hezbollah’s offensive capabilities.

Domestically, the Fed’s got one more rate hike to go at its next policymaking meeting on Aug. 8. The increase in the Fed funds rate is needed to defend the dollar, quell inflation expectations and stop the small up-creep in inflation.

While the rate hike would complete Fed Chairman Ben Bernanke’s policymaking task for the rest of this year and into 2007, he and Treasury Secretary Henry Paulson still need to speak up in defense of the greenback, making clear their commitment to a strong and stable dollar. This is especially important in light of the international tensions in the Middle East, Persian Gulf, Korean Peninsula and Indian subcontinent that have added new geopolitical risk not just to the dollar, but also to commodities and a bunch of leading currencies.

(This seems particularly timely in light of Israel’s fight to defend herself.)

You and I have the courage to say to our enemies, “There is a price we will not pay.” There is a point beyond which they must not advance. This is the meaning in the phrase of Barry Goldwater’s “peace through strength.” Winston Churchill said that “the destiny of man is not measured by material computation. When great forces are on the move in the world, we learn we are spirits–not animals.” And he said, “There is something going on in time and space, and beyond time and space, which, whether we like it or not, spells duty.”

-Ronald Reagan’s Rendezvous with Destiny speech, October 27, 1964

While roughly half of Hezbollah’s military capability has been wiped out since the Israeli response, a number of reports suggest it will take Israel a few more weeks to destroy Hezbollah’s military capability.

I say go for it.

If this Israeli campaign takes another week or two, or three, then so be it. Hold back the diplomacy until the job is completed. No phony cease-fires. Get the job done. Clean out Hezbollah once and for all and put these evil thugs out of business. It needs to be done.

Then, once the mission is completed, some kind of ceasefire deal can be arranged.

Believe it or not, the Israeli stock market was up 2.1 percent today, and the Arabia Titans Index was up 0.6 percent today. The Dow Jones opened up 50 points higher on good earnings reports. The dollar remains firm. Gold is down $5-6 bucks after falling $16 bucks yesterday. Oil is up slightly.

The point of all these quotes is to suggest that world business is going about its business. Israel’s actions to clean out Hezbollah are being viewed as a big positive for world peace and economic stability.

It looks like ’all the news that’s fit to print’ is shrinking by at least 5 percent.

In a bid to cut costs, The New York Times (aka ’The Queen of Saboteurs’) has announced plans to reduce the size of its newspaper by 1

A few quick thoughts here on the political fallout from the war in Israel’

From my latest column at National Review Online, “Israel’s Moment, the Free World’s Gain”:

“All of us in the free world owe Israel an enormous thank-you for defending freedom, democracy, and security against the Iranian cat’s-paw wholly-owned terrorist subsidiaries Hezbollah and Hamas. Israel is doing the Lord’s work. They are defending their own homeland and very existence, but they are also defending America’s homeland as our frontline democratic ally in the Middle East. Commentary’s Norman Podhoretz was exactly right when he coined the term World War IV to describe the global terror conflict. Repeatedly hostile actions by the totalitarians in Iran, Syria, Hezbollah, Hamas, and North Korea are all connected. So are the recently foiled terrorist-cell-block plans in Canada, the U.S., London, and elsewhere around the globe. We are fortunate to have a staunch ally like Israel to assist us in this fight…”

(Click the link above to read my column in its entirety.)

Today’s industrial production report was incredibly strong’”twice what Wall Street expected. Business is booming. The front-page story in this weekend’s Wall Street Journal about a recession threat was just plain silly.

I have been thinking all day about the Israeli defense of freedom and democracy, and their attack on the terrorist groups Hamas and Hezbollah. I think Israel is doing the whole world a great service. To the extent that the Israeli defense forces can wipe out terrorist sanctuaries, training grounds, organizational headquarters and personnel, they are making the world a safer place.

Yes, of course, no one likes war or the collateral damage that accompanies war. But in their own defense, Israel is doing the kind of things to Hamas and Hezbollah that is being silently applauded throughout the Middle East.

Moderate Arab governments in places liker Egypt, Jordan and Saudi Arabia hate Hamas and Hezbollah almost as much as Americans and Israelis do. The Saudis have even criticized Hezbollah and implicitly, Syria, for having started this fight.

The usual pacifist hand wringing in places like France and socialist Spain and Italy is to be expected. No surprise there. Calls for Israeli restraint may sound great in the smoking rooms and coffee tables in Western Europe and throughout the halls of the United Nations, but there has been absolutely no restraint from the terrorist groups that started this fight.

Israel is doing what it has to do for their security and self-preservation. They have every right to defend themselves (as they did twenty-five years ago when the Israeli air force launched a preemptive strike that decimated Saddam’s nuclear reactor in Osirak). And, as a byproduct, they may very well help the Iraq war and the cause of peace throughout the Middle East. This is the unspoken word that I believe is reverberating in that part of the world.

And if Iran’”which is the primary source for terrorist financing and equipping’”wants to disrupt oil supplies with some silly action in the Strait of Hormuz, then so be it. The U.S. and Israeli forces will destroy the Iranian air force and navy in maybe 30-35 minutes.

Meanwhile, the handwringers here in the U.S. worrying about long-term damage to the economy and stock markets are just that’”Nervous Nellie handwringers. Oil prices will come back down as soon as this short war is completed.

Fundamentally, American business has never been healthier, or more profitable. Lower tax rates have spurred a tremendous boom in private investment that continues to spread throughout the economy. Job hiring will continue spurring family incomes. In the face of wartime uncertainty and the geopolitical risks that are temporarily driving up oil prices, stock markets have temporarily slumped.

But oil supplies are more than ample. Prices will soon drop when the Israeli defense forces eventually rest their case, and once the inevitable diplomacy takes over to clean up the hopefully decimated remains of these totalitarian terrorist groups. They will pay dearly for their manic hatred of democratic, freedom-loving nations.

When the dust clears, as it will before long, the world will thank Israel for its courage. Some nations like the United States will be more vocal, others will be quiet. But everyone will soon see that Israel’s furious response in the face of senseless terrorist attacks will make the world a better place.

Israel is doing exactly what is has to do. It’s messy, but it’s appropriate. Israel has every right to defend itself. Their freedom, democracy and independence depend on it. Their very existence is at stake.

Israel did not start this. It was Hamas who attacked in Gaza and kidnapped the Israeli soldier, setting the stage for this latest flare-up. And it was Hezbollah that further stoked the flames when they crossed the Lebanese border and kidnapped additional Israeli soldiers. It is Hezbollah raining missiles inside Israel. Israel must respond.

In the name of self-defense, Israel must do everything within its power to protect itself from Hezbollah and Hamas. Clean out their sanctuaries, their terrorist training camps, weapons caches and the terrorists themselves. They must do this; they are right to do this; and they’re going to do this. This is Israel’s deal and they have every right to protect themselves.

Much praise is due President Bush for his support of Israel. He deserves enormous credit for defending our democratic ally. Bush refuses to publicly ask the Israelis to pull back. This is the right policy. Israel, of course, is the only true democracy in the Middle East.

Bear in mind that much of what these terrorist groups are doing is at Iran’s behest. They are financed by Iran and they are armed by Iran. Perhaps Syria has a small piece in all of this, but the real dough comes from Iran and its crazy-ass mullahs. That’s the deal.

American hawks will argue that the U.S. should be taking out the terrorist harboring governments in Iran and Syria. These countries are run by ruthless dictators. They’re statists; they’re anti-capitalists; they’re anti-human rightists. These people have absolutely no morality. The model for these malcontents is anything but religious. It has zero to do with Mohammed or Jesus, or whoever. Their model is based upon evil, brutal, dictators like Stalin, Hitler and other totalitarian murderers.

However, the reality is that it is highly unlikely the United States will take military action against either Iran or Syria. We may be moving closer towards economic sanctions, to discourage Iran’s pursuit of nuclear weaponization, but the military option simply does not appear to be on the table. Perhaps economic sanctions will bring Iran to the negotiating table, but right now everything looks further and further away from that.

As for Syria, they seem to have fallen off the radar screen. I just don’t understand why Condi Rice has stopped the pressure on Baby Assad that she was applying a year ago during the Lebanese elections. There doesn’t seem to be any talk about Syria anymore. Despite the fact their country is a hotbed of terrorist activity and probably has weapons of mass destruction (either of their own, or weapons stored in Syria that were moved there with the help of Russians on the eve of the American regime change in early 2003). Even in the court of world opinion, the U.S seems to have taken the pressure off Syria. This is discouraging.

The U.S. is not going to come in with troops. The Israelis are not getting help from anyone. This is not news in the history of that great nation. It is their story.

The great reality here is that Israel must do what it has to do.

Bonds are saying inflation is manageable, but gold and commodities are saying inflation is going to be a very serious problem.

Check out Jerry Bowyer’s excellent article (’The Financial Paradox of Our Time?’) which attempts to get to the bottom of this important issue.

A snippet:

’My friend Rich Karlgaard, the omnivorous and ‘air-apatetic’ publisher of Forbes magazine has declared that the simultaneous existence of a flat (and, sometime, inverted) yield curve and high gold prices is “the financial question of our time.” I agree. Supply side economists who have lived in blissful peace with one another (at least as far as economic issues are concerned) are now split. They have fundamentally different views on the state of our economy, and what the Fed should be doing. Since the days of Ronald Reagan the supply-siders have been driving the policy debate and have, generally, forecast the pants off of the Keynesian establishment. But now they’re forecasting different things. Some of those think you should focus on the gold market and some put more emphasis on others markets; bonds, for instance.

In the past it hasn’t really mattered whether you are a gold watcher or a bond watcher, because these markets have been saying pretty much the same thing, but lately they haven’t’