To the memory of Jude Wanniski, may he Rest In Peace.

The Human Side

Katrina is really a human story, with lots of misery as good folks suffer huge damages to their homes, their businesses, and their lives. The cleanup is going to take a while, and its going to be hard going for those in Katrina’s path. The financial and business side to this story – whether it be insurance losses, the temporary breakdown in commodities and shipping, and of course, the problems with oil and gas – will take care of themselves and will have no lasting economic impact.

However, the oil and gas refining problems could be more difficult. Reports coming in from Royal Dutch Shell and other platforms suggest the threat of more damage. As we know, energy markets are very tight, so these supply disruptions are driving crude oil and natural gas and gasoline prices higher.

The Gulf area supplies about a quarter of domestic oil and natural gas. New Orleans-related energy production provides about 12% of domestic refining capacity, according to some estimates. So the impact of Katrina may be more difficult in the short term. James Hamilton of EconBrowser has a good piece on this.

Energy futures prices show that, on balance, prices will be much higher a year from now than they were a year ago. This is more than just Katrina, we are in a permanently higher price environment. For example, natural gas a year ago was $5 per million Btu but is priced at $10 a year from now. Similarly, crude oil is priced to move from its $42 per barrel year ago price to $70 a year from now while unleaded gasoline is priced to move from just over $1 to $2 per gallon.

The market will now do its job; the price and profit incentives will attract new capital investment, thereby increasing production. The market adjustment can be seen in the petroleum refinery shipments data. After declining at a 10 percent six-month rate in late-2003, shipments are now growing at a 34 percent clip. The price signal also points out the supply-demand imbalance in the energy sector, which means that producers will increase output while consumers consume less.

Red Hawaii

And from the always-brilliant Don Boudreaux, a dispatch on the People's Republic of Hawaii.

Worse Than Oil

Don't worry about oil or the housing bubble -- worry about the Fed. So I say in my latest NRO column. And apparently, someone at IBD agrees with me.

Tonight's Lineup

Tonight, on Kudlow and Company:

-- CNBC economic commentator Steve Liesman, on the Fed meeting in Jackson Hole

-- Washington to Wall Street, featruing Mike Holland, of Holland and Company, John Fund, of the Wall Street Journal, and Robert Millen, of Jensen Portfolio

-- Tracy Austin, on the US Open

Today's Poll, Redux

We have decided to go with this poll, instead:

Which will happen first: a woman being elected President, or a woman becoming chairwoman of the Federal Reserve?

But please feel free, readers, to vote on this blog for your favorite Fed chairman, as per our previous poll.

Today's Poll

Who is the best fed chairman of our lifetime?

Arthur Burns
Alan Greenspan
William McChesney Martin
G. William Miller
Paul Volcker

Other, 38%

As you know, the Fed and the IMF and their fellow travelers will gathered today at Jackson Hole, Wyoming. It's a scary thought. Like a tennis player grooving a bad backhand, a lot of mistaken monetary ideas may reappear in the beautiful Grand Tetons.

This apprehension about the current Fed leadership, and the general state of economic advice the federal government gets from other sources, maybe be the reason for the curious poll numbers, from our survey last night. When asked who they wanted to be the next Fed Chairman, 1103 viwers responded:

Lawrence Lindsey 15%
Glenn Hubbard 10%
Martin Feldstein 15%
Ben Bernanke 21%
Other 38%

Other being, as you can see, the clear winner. Can I offer one suggestion to restore some confidence? Instead of housing bubbles, or economic growth, or unemployment, why can't the Fed just focus on domestic price stability by carefully watching real time commodity and financial indicators? Look through the front view windshield, not the rearview mirror. As Friedrich Hayek taught us decades ago, markets are smarter than all of us and our models. And forward-looking market prices are signaling the Fed to take a breather from their tightening.

Repatriation

The front page of today's FT reports that the Treasury proposes to crack down on companies shifting profits to low tax jurisdictions. This is stupid. Of course companies will roam the globe for the lowest taxes and the highest returns. That's what investors want.

A much better idea is the Invest-In-USA act, which permits American firms to repatriate their foreign earnings back to America at a tax rate of 5.25%. Unfortunately, this is only a one-year bill. Then the rate goes back to 35%. But the results are startling, according to the American Shareholders Association.

ISI finds that 91 companies in the S&P 500 have repatriated more than $191 billion of foreign profits back to America for investment in the US so far this year. We are on track to get JP Morgan's forecast of $350 billion by year's end.

Tax something less and you get more of it. It's a basic supply-side incentive.

And with these new funds, Allen Sinai expects significantly more US growth, capital spending and job creation.

Instead of punishing US companies for acting rationally on behalf of shareholders, the US Treasury should get our corporate tax rate back in the direction of 20%, so we are competitive worldwide.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- Ken Safian, of Safian Investment Research, on recession-proof stocks

-- an international market segment, with Ray Mills, of T. Rowe Price, and George Greig, of William Blair

-- Christopher Byron, of the New York Post, on Carl Icahn's attacks on TimeWarner

-- Brian Wesbury, of Claymore Securities, on the next Fed chairman

Today's Poll

Who do you want to see as the next Fed Chairman?

Lawrence Lindsey
Glenn Hubbard
Martin Feldstein
Ben Bernanke
Other

Vote and see the results here.

More Poll Results

This one's a little worrying:

With threats from energy, fed and housing bubble, do you see a recession in the next year? 63% answered yes, and only 37% answered no. Hmmm...

74% to 26%

Well, the results are in for last night's poll, and the fair tax is a huge winner, 74% to 26%. This poll got readers and viewers quite excited, too: with close to 3000 votes, it represents an unprecedented turnout for a Kudlow & Company poll. So thanks for tuning in and thanks for voting.

Today's Poll

Many people agree that our income tax system is unfair and needs to be replaced. But what should replace it? "Flat taxers" want a 17% flat income tax for everyone. "Fair taxers" want a 23% sales tax. Which do you prefer? A flat tax? Or a fair tax? Vote and see the results here.

Jackson Hole

For all the yammering about rising oil and gasoline prices, one key commodity, namely lumber, has dropped 33 percent since winter. From a peak of $408 the front lumber contract has plunged to $274.

This suggests a definite cooling off of housing construction and home prices. Wall Street economist John Silvia believes that the condo markets are the front edge of this cooling. Condo inventories are rising, sale times are lengthening and prices are softening.

Private markets, city-by-city, are making their own adjustments based on affordability and the price of credit. There isn’t going to be a crash, but there will be a well-earned slowdown in the housing sector.

Other inflation-sensitive market price indicators continue to show broad-based domestic price stability. Gold prices have slipped back toward their $431 average range that has prevailed year to date. The 10-year Treasury continues to hover around its 4.25 percent range that has been in place since last October. The CRB spot commodity index has dropped slightly below its average 295 zone, in effect since last July.

In other words, outside of oil and energy, domestic prices in the aggregate look to be stabilizing in the wake of Federal Reserve money-tightening and rate-hiking moves dating back to June 30, 1994.

The yield curve is 75 basis points wide. If it would stay in this area then monetary policy would sufficiently accommodate continued economic growth albeit at a somewhat slower pace. If the Fed, however, engages in overkill by taking the Fed’s target rate to 4.25 percent, then the U.S. economy will keep slowing through next year and the year after. But the price rule indicators suggest no need for the Fed to take that kind of risk.

Domestic price stability and relatively low tax-rates are key policy indicators for continued non-inflationary prosperity. Add in the world economic boom, high domestic productivity and profits, a shrinking budget gap, and a new CAFTA free trade agreement, and you have a solidly bullish stock market and economic outlook for the next couple of years.

Fed bigwigs will be meeting in Jackson Hole, Wyoming this weekend. Will anybody be watching the price rule indicators? It would be great to see Fed chairman candidates like Glenn Hubbard, Larry Lindsey, or Martin Feldstein write an op-ed piece arguing in favor of real-time financial and commodity market prices as guides to central banking.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Noah Blackstein, of Dynamic Mutual Funds

-- H.U.D. Secretary Alphonso Jackson, on transparency in home-sale closing costs

-- David Malpass, of Bear Stearns, and Roger Kubarych, of HVB Group, debating Japan's economy

-- Steve Moore, of the WSJ editorial board, and Neal Boortz, author of The FairTax Book, a New York Times bestseller, on the flat tax vs. the fairtax

Hugo Chavez

Pat Robertson may be getting ahead of the narrative, but he is absolutely dead right to finger Hugo Chavez as a safe-harbor supporter of terrorists in Latin America, the new center of anti-Americanism south of the border, a protégé of Fidel Castro, and the ruler of a faux-democracy. He’s an all around bad guy: the question is what is the US State Department or the White House going to do about it. Robertson is putting Chavez on the front burner as a huge problem, and he has the story basically right.

Tectonic Shift

Permit me to take a contrarian view on the oil price shock. I say three cheers for higher energy prices. Why? Because I believe in markets. When the price of something goes up, demand falls off (call it conservation) and supply increases (call it new production). We're seeing a tectonic shift.

As Dan Yergin has advised us, energy supplies in the next few years will explode. Now the public is even favoring nuclear power. And the government is stepping out of the way by giving FERC the authority to override localities who oppose nuclear power, liquefied natural gas or other forms of energy.

Meanwhile the impact on the economy has been negligible, at least so far. And the Fed has prevented oil inflation from spreading to the rest of the economy. So much so that I think they should quit raising rates while they're ahead.

Meanwhile the spread of global capitalism to places like China, India, eastern Europe and elsewhere (which is a very good thing for world prosperity) is the main cause of the spike in energy.

So supply will rise exponentially in the years ahead, demand will slow a bit and we'll all live happily ever after. The moral of this story: markets work if you let them.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with David Goerz, of Highmark Capital, and John Sylvia, of Wachovia Securities

-- Jordan Rohan, of RBC Capital Markets, on Google

-- Professor Richard Epstein, of the University of Chicago, and plaintiff's attorney Mark Lanier, on the Vioxx verdict

-- Siemens senior vice president John Bergen, on the company's US operations

The Draft

Here it is: a first look at the current state of the Iraqi constitution. It looks, well, good, given all the negative press it has gotten in the past week. A (much-debated) highlight:

1. Islam is a main source for legislation.

-- a. No law may contradict Islamic standards.

-- b. No law may contradict democratic standards.

-- c. No law may contradict the essential rights and freedoms mentioned in this constitution.

2. This constitution guarantees the Islamic identity of the Iraqi people and guarantees all religious rights; all persons are free within their ideology and the practice of their ideological practices.
3. Iraq is part of the Islamic world, and the Arabs are part of the Arab nation.

Not quite as bad as everyone in the press seemed to worry...

It's a Wash

Stocks eked out some gains today but they are still fighting the threats of more energy spikes and more Fed tightening. Today's leading group was utilities. Aes Corp, Keyspan, People's Energy, and Entergy were all strong. UPS and Northrop Grumman had good gains in the industrial sector. Sprint, Nextel, and Verizon gained in telecoms. But consumer cyclicals continue to slump with eBay, Tiffany, Lowes and Dillard in the doghouse. So it's not just low-end stores that are bearing the brunt of the gasoline price threat. On the brighter side, Proctor & Gamble, Intel and Boeing registered good gains, along with Northwest

Here is an economic thought from all this: yes, gas prices are eating into consumer wallets to the tune of $500 to $600 according to some estimates. But as an offset, after tax/after inflation income is up $67 billion in the first half of this year, which comes to about $500 per worker. So in a sense, it's a wash between gas and rising incomes. If gas prices spike another ten to fifteen percent from here, we're going to have a bigger economic threat. But so far, the damage seems minimal.

Tonight's Lineup

Tonight, on Kudlow and Company:

-- a market segment, with Jeff Bagley of McCabe Capital Managers, and Robert Smith of T. Rowe Price

-- Micheline Maynard, of the New York Times, on Northwest Airlines

-- View from the Hill, with Senator Kay Bailey Hutchinson

-- Ronald Sorenson, of WH Reaves & Co. , on utility investments

Today's Poll

If Merck brought back Vioxx, would you fill a prescription for the painkiller or do you still think it's too big of a risk? Vote and see the results here.

Bad Medicine

From AEI's John Calfee and the University of Chicago's Richard Epstein: two scathing indictments of the Vioxx verdict -- judge, jury, and company included.

Flight Plan

An excellent article from the excellent Micheline Maynard, on the strikebreaking tactics of Northwest Airlines. Foresight and energy allowed the company to stay in flight even in the face of potentially paralyzing strikes. This is a real blow for the already-reeling world of unions -- first the AFL-CIO, now this.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a blowout Washington To Wall St. segment, featuring Rep. Harold Ford, Barry Ritholtz of the Maxim Group, Robert Zigunis of Jensen Investment Management, Craig Russell of Alaron Capital, and author Ben Stein

Tonight's Lineup

Tonight, on Kudlow & Company:

-- CNBC's Jim Goldman and Bear Stearns' Robert Peck, on Google and its new issuance of shares

-- a market segment, with Elaine Garzarelli, of Garzarelli Research, and Barbara Marcin, of Gabelli Asset Management

-- Greg Ehret, of State Street Global Advisors, on ETFs

-- Andrew Ross Sorkin, of the New York Times, on the Bancroft family and the possible sale of Dow Jones

Worried About Inflation?

Worried about inflation? Don’t be. At least not yet.

Commodity and gold prices, excluding the oil factor, have flattened out. The dollar is firming. And 10-year Treasuries continue to trade in a narrow 4.25 percent range.

Gold has been ranging between $400 and $450, more or less, since late last year. It has averaged $430 over this period. That is 12 percent above its 1994-1996 range of $385, which was consistent with about 2 percent basic inflation back then.

This 12 percent premium could signify a small liquidity excess. But lower marginal tax-rates on capital formation in this cycle have launched a supply-side economic response such that greater investment is soaking up any liquidity excess that may exist. In constant dollars, by the way, today’s $430 gold average would be equal to $460 in 1994-1996.

The chained CPI has been ranging around 2.6 percent or so for more than a year. The chained core CPI has been hovering around 1.8 percent. The PPI ex-energy is actually declining to 2.1 percent lately from 3.0 percent earlier this year.

These measures suggest that the Fed’s money tightening operation over the past year has contained inflation and it has prevented energy prices from spreading to the rest of the economy.

Should gold break out of its range and move, say to $450 to $500, that would suggest inflationary liquidity should be removed by additional Fed reserve-draining and rate-hiking actions. But as matters now stand, both in terms of forward market indicators and current inflation rates, it still looks like the Fed could stand pat. They could declare victory. No more tightening is really necessary.

Today's Poll

Google celebrates it's one year anniversary tomorrow. On this day last year the much anticipated IPO opened at $85 to then climb as high as $317.80 in mid-July. In celebratory fashion, Google told investors today it has filed with the Securities and Exchange Commission to sell 14.2 million shares of class A common stock. This offering is worth more than $4 billion at Wednesday's closing stock price of $285.10. Is this a move that will cause investors to buy or sell?

Randy Daniels

John Fund, in Political Diary, has this to say about potential gubernatorial candidate Randy Daniels:

The more this circus continues, the more the candidacy of Randy Daniels, New York's secretary of state, looks like a potential safe harbor. Mr. Daniels, a former CBS News reporter and deputy to New York's Democratic Mayor David Dinkins in the early 1990s, has moved steadily to the right and last year became a Republican. Smooth, sensible and a supporter of supply-side tax cuts, the African-American Mr. Daniels could potentially make inroads in minority neighborhoods. Given the awesome political machine that Democratic state Attorney General Eliot Spitzer has built up, the New York GOP is in need of some fresh, bold strategies.

I had dinner with Daniels about two months ago and was very impressed with his supply-side views on tax reform as a means of reviving economic opportunity in Harlem and other struggling parts of New York city in the Bronx, Brooklyn, and Queens, why the welfare-social services state offered over-abundantly in New York City has simply not worked, and why economic reform is necessary to change it. Daniels is a stickler for traditional virtues and values, and I agree with Fund: he would make an excellent candidate for governor.

More Good News

In the 'eventually getting to them' department: Saudi police killed the head the of the Saudi Arabian arm of al-Quaeda. Saleh Mohammed al-Aoofi was killed during the course of a series of anti-terror police raids today in Riyadh. Excellent.

A Father's Grief

Ronald R. Griffin, the father of slain Spc. Kyle Griffin, has a memorable op-ed in today's WSJ. He takes a position sympahtizing with but opposing Cindy Sheehan. Read it here.

New York Corporate Welfare

As I think you know, I'm a strong advocate of capitalism. But that's much different than corporatism, or corporate welfare, of the type now proposed by New York City and state to subsidize a new Goldman Sachs headquarters in lower Manhattan.

According to reports, New York will provide roughly $1.6 billion in special tax exempt bonds, a sales tax exemption on building materials, another break on energy costs, and still more tax breaks for retaining 8,000 or 9,000 jobs that were never in question of being lost.

The Daily News calls this a corporate shakedown. I agree.

It's corporate welfare. It's industrial targeting, It's central planning. But it is certainly not free market capitalism.

Goldman is a great global bank. It is also highly profitable and if it wants to build a new headquarters, than go right ahead and build it. But not by feeding at the public trough.

Why not give these tax breaks to small and medium businesses throughout the city? Or better yet, why not reduce exorbitantly burdensome tax rates for all New York taxpayers?

Creating permanent, after-tax rewards will grow our local economy.

Corporate welfare will not.

Tonight's Lineup

Market Guests:

Jeff Schappe, CIO of BB&T Asset Management
Gordon Johnson, President & CIO of Allegiant Investment

Morningstar analyst, Scott Burns, to talk about Deere earnings and other industrials.

Senator Norm Coleman wants to talk economy, the highway and energy bills, and the UN.

Charlie Gasparino with Newsweek and Scott Cohn from CNBC to give us an update on Dick Grasso's pay package deal.

4 In 10

According to an amazing new poll, conducted by the Pew Hispanic Center, 4 in 10 adult Mexican citizens would move to the US -- and this desire is equally present in the lower and upper economic classes. This is, also, the first poll of its kind ever conducted. Looks like we're doing something right...

Another Bombshell

Not only did the 9-11 Commission ignore and suppress the Able Danger reports, they ignored memos from Mary Jo White, the US attorney who helped convict, among others, Ramzi Yousef, that begged them to remove 'the wall' set up by the Clinton administration in 1995 between the intelligence services and prosecutors. Is it hard to see the hand of Jamie Gorelick at work in this? Read Deborah Orin's disturbing story here.

Unhappy Anniversary

President Bush recently celebrated the 70th anniversary of the social security system, which, in the early days, was a great help to ameliorate old age poverty. But as Investor's Business Daily points out, the demographic game has run out. Unless the system is reformed, through the ownership of personal savings accounts, which will permit stock and bond market investments to finance benefits rather than tax hikes, the system will continue to deteriorate.

Only through market wealth creation will old age pension benefits be fully financed over the long term. Government will break hearts and promises by raising taxes and cutting benefits time and again in the future just as it has in the past.

The system will never be fixed until Congress realizes that Bush is right: ownership of market asset wealth, which is also a huge policy incentive to maintain our capitalist free-market economic prosperity-creating machine, is the only solution.

Ronald Reagan once called it 'the magic of the marketplace.' And he was right. In the long run, markets will keep their promise, whereas governments will not.

Today's Poll

Are high gas prices keeping you out of stores? Vote and see the results here.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment, with Rob Morgan of Janey Montgomery Scott, Jeff Matthews, of Ram Partners, and Jim Glassman, of JP Morgan

-- a retail segment with analysts Bob Buchanan, of AG Edwards, and Bud Bagatch, of Raymond James

Surprise, Surprise

A short article, by Bloomberg, picked up by the New York Sun, mentions the CBO’s revised deficit estimate, in the face of the dramatic upsurge in tax revenues this past year. This article is entitled “Deficit Will Fall As Income Tax Revenue Rises.” The strange thing is that, despite its title, this article never once mentions that these revenues inflows are coming after the Bush cuts in marginal tax rates. I kept looking for reference to the Laffer curve, which says if you tax something less, you get more of it. Not one word. I looked even harder in the story for a reference to the idea that work and investment are highly responsive to lower tax rates. Again, nothing. I even looked for the simple notion that tax-rate changes affect economic behavior. Surprise, surprise: the Bloomberg story failed to mention any of these intellectual concepts which are, once again, being proven by real-world evidence.

So the CBO has lowered its FY05 deficit estimate to $333 billion, but assumes the same old dreary deficit outlook in the next 10 years. No mention of the CBO’s mistake in failing to account for the dynamic economic effects of supply-side incentives. I guess they’re being consistent – if you didn’t score it right in the past, you won’t score it right in the future. Bravo for CBO’s consistently wrongheaded estimating techniques.

Deadline

It would be easy to look at the missed constitutional deadline in Iraq as a disappointment, as a proof of the failure of our mission. But that would be completely innaccurate, as inaccurate as claiming that losing one battle indicates the loss of a war. Democratization, as Glenn Reynolds has said, rightly, again and again, is a process, not an event. This is a setback, and it will porbably only be a minor one, in the long term. It will ensure, at the very least, that secular, democratic elements shore up an even stronger position in the constitution.

And as for those who are already criticizing the Iraqi constituion because it denies women rights, or because it isn't secular enough, or for whatever potential imperfections it may have: remember that our own constitution, our own fabled Bill of Rights, only applied to white men for the first hundred years or so of its existence; that we permitted not just disenfranchisement but actual slavery; that American women were not granted suffrage until 1920. And look at us now -- it would be difficult to find a more secular, more open society. So give this process a chance, and give the Iraqis a chance to show their democratic colors.

Today's Poll

In light of rising oil prices, should the US build more nuclear plants? Vote and see the results here.

Blast From The Past

I don't know how they got a hold of it, but many many thanks to the New York Sun for reprinting my column about Dick Grasso. It's old, but as true as ever (in my impartial opinion.) Read it here.

Price Stability

Three important real-time market price indicators have moved into a zone of remarkable stability over the past year or more.

This, of course, is the year when the Fed tightened its monetary policy presumably in order to drain excess liquidity and prevent inflation and inflation expectations from flaring up. Gold, the CRB spot commodity index (which excludes energy and gold), and the 10-year Treasury rate are all pointing to domestic price stability.

The gold price has averaged $430, the CRB is holding around 295 and the Treasury bond is averaging 4.22 percent. Some supply-siders argue that the gold price is too high, but we have never agreed. This gold average is not far from the 1994-1996 pre-deflation average, which was consistent with about 2 percent inflation, about the same inflation rate as we have today.

A stable level of gold is probably more important than guesswork about the appropriate “right” price. This simple exercise again suggests that the Fed has done its job. More rate hikes and liquidity drains seem unnecessary in the light of these signals of domestic price stability.

Declare victory and then take at least the next six months off. That is our advice to the nation’s central bank.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Mike Churchill, president of Churchill Research, and Mike Holland, president of Holland and Company

-- a segment on oil and nuclear power, with Cambridge Energy head Dan Yergin

-- Senator Chuck Hagel, on US-China relations, the estate tax, and social security

-- Damon Darlin, of the New York Times, on the housing market

Pirro's Problems

This is an ugly story. It seems that Jeanine Pirro's husband has an illegitimate daughter. It's the sort of thing that usually comes out in hotly contested political races; if Pirro thought it would go away, he was wrong. Frederick Dicker writes that, in addition, Jeanine Pirro's own support of abortion rights and stem-cell resreach have alienated her from the more conservative side of her base, and that the GOP is taking another look at Ed Cox. This is a good idea: no disrespect meant to Pirro here, but Cox is conservative, and he has a huge knowledge base, on everything from tax and budget reform to international diplomacy and war. Cox would be a great choice; he isn't hampered either by personal or political problems. Maybe the GOP should take another look.

Abu Zubair

It seems that one of Zarqawi's top aides has been killed in Mosul. Good riddance. It's slow, but we are getting to these guys. The argument that it doesn't matter if we kill the insurgent leaders because someone else will just come along to take their places is a faulty one: if you kill a top terrorist lieutentant, all his technical and strategic knowledge die with him, as well as his ability to indoctrinate and lead others. So we shouldn't throw up our hands because bin Laden, Zarqawi, and Zawahiri have proven to be elusive, tough opponents. We will get to them, eventually.

Market Wrap

More worries about oil and money held down the stock market. Wall Street economists are thinking a 4.5% Fed funds rate next year compared to 3.5% today. I think this is insanity. But if you combine economic drag from high oil along with monetary restraint as the Fed drains liquidity, you're setting up an economic slowdown scenario. It's that simple.

That's why bonds have been rallying of late from 4.40% down to 4.25%. It's a non-inflationary slowdown signal.

Flat spot commodity prices excluding oil along with the flattening yield curve tell me the Fed should be finished. But they may take us in to uncharted waters. Today's stock market is telling us it can't happen that neatly.

Also a word on the trade gap. People are screaming as always but they are missing an important point. At 13.4%, US export sales abroad are actually growing faster than 11.1% import growth. If you exclude oil, import growth drops to 10% down from 20% last year. This country is a lot more competitive then its critics would have us believe.

In today's trading, utilities were the winner, led by PG&E and Entergy. Every other sector was either flat or down. The dog of the day was tech, with Dell tail-wagging the dog. At least Apple hit a 52 week high defying the weakness in techs.

Guru Stefan Abrams told us last night that tech was yesterday's story. Looks like he's got a point.

Witch's Brew

One of the interesting market developments in recent days is that alongside the jump in oil prices, 10-year bond rates have fallen significantly. Oil has gone from $61 to $67 and bond rates have gone from 4.42 percent to 4.25 percent. At the very same time stock prices have run into some fierce resistance.

But the resistance is not simply oil prices. It could well be that the stock market is beginning to discount an economic slowdown next year (or sooner) from the witch’s brew of a tighter Fed and higher oil, which would take a contractionary toll on the economy.

Oil prices have been rising for several years and so has the stock market, but what has clearly changed is the likelihood of a tighter Fed policy. You don’t see that with gold, which is trading in oil’s orbit. But you do see it in the flattening of the yield curve and the flattening of the spot commodity index, which excludes oil. So while rising commodity prices have been a proxy for world growth, which is good, now commodities in the aggregate have stopped rising, but oil continues upward.

Temporary supply disruptions in oil may be one cause of the recent spike. But the key point is that economists in this morning Wall Street Journal are now anticipating a 4.25 percent to 4.50 percent fed funds rate next year.

The drop in bond rates suggests a message that tight money and rising oil will slow the economy without any inflationary consequences. Normally one would expect higher bond rates and higher oil prices, but clearly something else is at work. A tighter Fed could be the answer.

In recent decades Fed moves to raise their target rate and flatten the yield curve have been a recession or near recession signal. Prolonged oil increases send the same message. While almost all the economic indicators currently look excellent, including a supply-side budget deficit reduction from huge revenue collections at lower tax-rates, to some extent all this good news is yesterday’s news. Tomorrow’s picture is not as good in the light of high oil and tighter money.

The idea of Dallas Fed president Richard Fisher’s ninth inning 3.75 percent fed funds rate peak has given way to worries about a 4.5 percent funds rate peak. That’s a big change. Unfortunately, spiking oil enhances the contractionary economic effects of this outlook for tighter money.

Today’s release of import prices excluding fuels shows a 1.8 percent July reading, down from 2.1 percent last month. A new core inflation price index for personal consumption expenditures created by the Dallas Fed shows a “trimmed mean PCE” of 2.1 percent for the 12 months to June, down from 2.4 percent last January.

As I have said before, the Fed has done its job removing excess liquidity, stabilizing spot commodities, flattening the yield curve, and bringing down actual inflation. The remainder of excess liquidity is being absorbed by a rising cap-ex investment trend that is now contributing almost 30 percent to the increase in GDP growth. Hence, additional aggressive Fed tightening appears to be a big mistake. The oil spike intensifies that mistake.

President Bush refuses to sell SPR oil reserves to stabilize the price so it’s hard to find a way out at least in the near term. Congressional talk of extended tax cuts or a repeal of the death tax might be helpful, but right now oil and monetary drag seems to be a stock market weight that could be foreshadowing much slower economic growth.

Today's Poll

Would you rather the government cut spending, cut taxes, or cut both? Vote (and see the results) here.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a three-segment Washington To Wall Street blowout, featuring the Wall Street Journal's John Fund, Don Luskin of TrendMacrolytics, Gene Henssler, of Henssler Financial Group, and Irwin Stelzer, of the Hudson Institute

-- pollsters John Zogby and Scott Rasmussen

Blair's Ten Points

Charles Krauthammer agrees with Blair. And it's a pleasure to read:

In 1977, when a bunch of neo-Nazis decided to march through Skokie, a suburb of Chicago heavily populated with Holocaust survivors, there was controversy as to whether they should be allowed. I thought they should. Why? Because neo-Nazis are utterly powerless.

Had they not been -- had they been a party on the rise, as in late-1920s Germany -- I would have been for not only banning the march, but for practically every measure of harassment and persecution from deportation to imprisonment. A tolerant society has an obligation to be tolerant. Except to those so intolerant that they themselves would abolish tolerance.

And that's just the beginning.

This is tough but necessary talk. Nobody wants to see civil liberties curtailed. Certainly not for whole segments of the population. And Krauthammer is not talking about putting Arab-Americans in prisons or camps en masse. He is talking about a very specific sort of person -- a person whose political speech is aimed at fomenting violence, and nothing else. First amendment protection doesn't extend to violence-facilitating non-political speech, so why should this be different? These people want to destroy us. And Krauthammer is unafraid to propose strong countermeasures.

The Right Balance

President Bush's recent statement on the war in Iraq strikes exactly the right balance. This is not Vietnam; we are not going to cut and run. But implicit in his resolve is the possiblity that, when certain political deadlines are met -- the August 15th deadline for having a draft of a constitution is the nearest one -- the possbility of troop withdrawal, the Gen. Casey plan, becomes an option.

Downside of a Boom

There's a great article in Investor's Business Daily about the one downside of the housing boom: rising property taxes. The rapid increase in the value of real estate is good for the economy; it increases wealth; it increases the investor class's political stake; it encourages growth; it allows the dilapidated parts of inner cities to be revitalized, from Harlem to LA to Baltimore. In short, it's almost an unmitigated good.

But the rise in property taxes that accompanies a rise in property values can slow down economic growth by taking more money out of the hands of taxpayers, particularly since they are getting no relief from local governments. As Paul Katzeff, the author, notes:

From December 2001 and December 2004, state and local personal income tax revenues fell by 1%, according to the National Taxpayers Union (NTU). But, in a stark contrast, property tax proceeds skyrocketed by 25%.

"Most taxes soften when the economy is down," said NTU President John Berthoud. "Not so with property taxes. So government ends up taking an increasing share of people's take-home pay. And that makes it harder to climb out of a recession."

Read it all here.

Market Wrap

Almost miraculously, stocks shrugged off $65 oil and mounted a decent rally across the board.

Pro-growth cyclical components such as industrials, energy and materials were the biggest gainers. Some good economic news helped. Retail sales were solid if not spectacular coming in at 10.3% over the past year, but, ex-autos, the growth drops to 4.8% annualized over the past 3 months. And so called core sales, which takes out cars, gasoline and building materials, and feeds into GDP, were up 3.4% at an annual rate over the past 3 months.

Greater strength came from business sales reported for the month of June. 8% for both 3 month and 12 month. With profit margins in the non-financial sector still positive, the rise in business sales bodes very well for rising profits.

Among the big gainers today: in the industrial sector, Deere, Rockwell and Boeing. In energy it was Valero, Amerada Hess and ExxonMobil. And in the commodity area with gold closing up almost nine dollars to a five-month high of nearly $451...we saw good gains in Newmont Mining, Freeport McMoran and aluminum maker Alcoa.

The doggy dog today was consumer staples including Tyson Foods and BJ's Wholesale. On the upside, telecom equipment maker Nortel was up a whopping 5.7%. We have been tracking these broadband expansion, fiber-to-the-home, deregulated-telecom-type stocks, and it looks like they are still paying off.

Mailbag

Yesterday, on Kudlow and Company, we asked if the Fed should continue to raise interest rates ?
Here are some of your responses:

Tom from Connecticut wrote...
"Never mind what makes sense. The Fed should keep raising rates out of respect for the tradition of always going too far. If they keep going long enough, they can kill the growth and bring the economy to its knees..."

Charles wrote...
"Yes, interest [rates] should continue to be increased. Have you considered the serious effect low rates have had on the retirement income of seniors?"

Jason from Mississippi said...
"you're wrong about the interest rates being bad for everyone. Hillary Clinton and the Democrats will greatly benefit in '08 because they will be able to blame a slowing economy on the majority GOP and President Bush."

Another Kudlow and Company viewer wrote...
"Yes, they [the Fed] need to raise rates to slow the high rates of inflation being seen in certain asset classes, such as housing and energy."

Lisa from Texas said...
"Given the price of oil, I wish the fed would stop raising rates. I'm drowning here..."

And finally, Bonnie said...
"No! Please, Mr. Greenspan, allow the market to grow. I and many of us seniors are trying to make up what you took from us in 2000. Let the market/economy grow..."
We thank you for your thoughtful comments. But we'd like to know more.

Please go to CNBC, scroll down to today's Kudlow and Company poll, and tell us:

Should the Fed keep raising interest rates ?
Yes. Or no. Results at the end of the show.

Tonight's Lineup

Tonight, on Kudlow & Company:

-- a market segment with Terry Jones, associate editor of IBD, and Eric Ross, of Think Equity Partners

-- Jerry Taylor, of the Cato Institute, on oil

-- Newsweek senior writer Charles Gasparino, on the Disney verdict

It Could Be Worse

That's the gist of a fascinating editorial on the energy bill in today's WSJ, from Peter Van Doren, of Regulation magazine, and Jerry Taylor, of the Cato Institute:

With Congress returning home for its summer recess, analysts are taking stock of the 1,724-page energy bill legislators passed last week on their way out the door. The press seems to be of the opinion that the bill did too little to address fundamental energy problems. That's an observation worth celebrating, not jeering. Past Congressional attempts to address "fundamental energy problems" resulted in an array of price controls, fuel-use restrictions, ambitious crash energy projects, and anti-profit regulation. The fact that Congress ignored such approaches this time around -- even in the face of higher energy prices -- is worth a few moments of grateful reflection.

And that's just the opening. Read the rest here.

Data Miners

Tuesday's startling NYT story that a secret military unit had identified two of the 9/11 hijackers as early as the summer of 2000 makes today's story, that the 9/11 Commission deliberately left this information out of its final report, all the more shocking and horrifying.

It's amazing that the Times is reporting this: it seems to add to the suspicion that Sandy Berger was doing something wrong rather than something merely stupid in stealing and destroying those documents. And it definitely suggests that Jamie Gorelick was looking out for her own skin more than the accuracy of the report. It also seems to put even more blame on the shoulders of the Clinton administration for at least some of our national security woes. This is just bad news, plain and simple. And it should be a wake-up call, too.