TCS Daily


Mustard Seeds of Hope

By Larry Kudlow - October 20, 2008 12:00 AM

Fear and volatility continue to dominate stock markets as the economy sinks into recession and profits estimates suffer from deeper downgrades. But how bearish should investors really be?

Warren Buffett writes in today's New York Times that now's the time to buy. He writes, "Be fearful when others are greedy, and be greedy when others are fearful." He advises investors to get out of cash and get into equities. He then argues, "Bad news is an investor's best friend. It lets you buy a slice of America's future at a marked-down price."

While Buffett is betting on America in the long-run, there even are two short-run positives amidst the credit crisis.

One is that the Fed is finally pouring new cash into the economy. Over the last five weeks it has jammed in nearly $900 billion of fresh liquidity, doubling the size of its balance sheet. So after being flat for more than 18 months, the Fed's reserve-bank credit is now growing at a 24 percent annual rate.

One economist who supports the central bank's money creation is Art Laffer. He argues that falling interest rates amidst the credit squeeze has created a huge appetite for cash. And he is pleased the Fed is supplying enough new money to accommodate that appetite.

Incidentally, while the Fed is cranking up the money supply, the dollar continues to rise and the bond-market inflation spread continues to fall.

The second positive is the collapse of oil prices and the end to the energy bubble. A lot of this is from the U.S. recession. But a lot of it is simply the bursting of a speculative bubble as hedge funds and others keep selling into a declining market. It was bound to happen.

But the really good news is that the energy plunge is a huge tax cut for consumers and businesses. In the past three months retail gas prices at the pump nationwide have dropped about 25 percent, to $3.04 from $4.11. The futures market suggests another 25 cent decline is on the way. All this while the world oil price in dollars has collapsed to near $70 a barrel from nearly $150.

Mark Perry of the Carpe Diem blog estimates annual consumer savings of $188 billion from the fall in gas prices over the past three months. But that's not all. There's also a pronounced drop in the price of home heating fuel, natural gas, and many distillates that will provide business and consumer savings. Additionally, corporate profits will improve as a result of the steep decline of energy costs. All of this dwarfs the big-spending stimulus plans being cooked up by the Democratic congressional majority.

I think of the Fed cash injections and the energy tax cut as planting mustard seeds that will bloom into a future bull-market recovery. The mustard seed, of course, is a New Testament reference. My friend Jerry Bowyer fleshes it out: "The kingdom of Heaven is like a grain of mustard seed, which a man took, and sowed in his field: Which indeed is the least of all seeds: but when it is grown, it is the greatest among herbs, and becomes a tree, so that the birds of the air come and lodge in the branches of it." That's from Matthew 13:31:32.

So there is hope for optimists like myself.

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30 Comments

Buffet advocate greed?
How can that be?

Is he not the sage of Omaha, adviser to 'the one'?

two points.
You should read about his history. He has followed this philosophy for quite some time.

I have heard people say he is NOT greedy....
because he lives modestly.

Other, more flamboyant (m)billionaires are labeled greedy because of their lifestyle or aggressive, but legal and ethical business practices that grow their wealth.

Presuming a CEO doesn't commit fraud, why is he greedy for trying to make as much money as he can?

I agree with his philosophy, buy low, sell high.

Welcome to the Promised Land
"While Buffett is betting on America in the long-run, there even are two short-run positives amidst the credit crisis.

"One is that the Fed is finally pouring new cash into the economy. Over the last five weeks it has jammed in nearly $900 billion of fresh liquidity, doubling the size of its balance sheet. So after being flat for more than 18 months, the Fed's reserve-bank credit is now growing at a 24 percent annual rate.

"One economist who supports the central bank's money creation is Art Laffer. He argues that falling interest rates amidst the credit squeeze has created a huge appetite for cash. And he is pleased the Fed is supplying enough new money to accommodate that appetite.

"Incidentally, while the Fed is cranking up the money supply, the dollar continues to rise and the bond-market inflation spread continues to fall."

Once again, the Keynesians have to rescue the Friedmanites from the consequences of their own folly. Imagine! Advocating an infusion of funds to jump-start the economy! As read in a TCS article!

Thank the lord they held their nose and drank the Keynes Koolaid. Now we're on the road to recovery, just like we were back in 1932.

I'm surprised none of the rest of you have pointed that out. :)

dictionary

a selfish and excessive desire for more of something (as money) than is needed

sounds like you are describing greed to me? Honestly don't you too?

What is the difference between 10, 100, 1000 million really? When you are living on this money?

What recovery?

Why do you think Friedman was wrong?
"Whom would Milton have blamed?

For the bubble itself? Probably nobody. From the tulip mania in Holland more than three-and-a-half centuries ago to the dot-com bubble here in the U.S. less than a decade ago, wildly irrational behavior sometimes develops in markets. "Friedman never argued that markets are perfect," says Jay, "only that over the long run they're a lot more efficient than any other method of allocating resources." Sometimes, Milton recognized, bubbles just happen.

Whatever the origin of the bubble, however, Milton would have blamed Congress for making it much, much worse. Congress, after all, created Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ), institutions that spent tens of billions of dollars on subprime instruments. "Congress told Fannie and Freddie to subsidize bad loans for the purposes of social engineering," says Jay. "It was terrible, just terrible.""

"Would Milton have seen the crisis as a setback for capitalism?

Only in the short term.

"If this election goes the way it looks as though it's going to go," says Tom, "then the political system is about to get a major overcorrection to the left. And that means the American people are about to get an extreme illustration of just how badly government intervention screws stuff up."

"If Milton were here," Tom says, "he'd tell us to remember what happened during the Clinton administration. After just two years, the Republicans ended up in control of both houses of Congress.""

http://www.forbes.com/opinions/2008/10/16/milton-friedman-meltdown-oped-cx_pr_1017robinson.html


Bad government policies caused this problem and more bad government policies will not fix it.

Democrats caused this preventable mess
"These are facts. This financial crisis was completely preventable. The party that blocked any attempt to prevent it was ... the Democratic Party. The party that tried to prevent it was ... the Republican Party.

Yet when Nancy Pelosi accused the Bush administration and Republican deregulation of causing the crisis, you in the press did not hold her to account for her lie. Instead, you criticized Republicans who took offense at this lie and refused to vote for the bailout! "

"And after Freddie Raines, the CEO of Fannie Mae who made $90 million while running it into the ground, was fired for his incompetence, one presidential candidate's campaign actually consulted him for advice on housing.

If that presidential candidate had been John McCain, you would have called it a major scandal and we would be getting stories in your paper every day about how incompetent and corrupt he was.

But instead, that candidate was Barack Obama, and so you have buried this story, and when the McCain campaign dared to call Raines an "adviser" to the Obama campaign — because that campaign had sought his advice — you actually let Obama's people get away with accusing McCain of lying, merely because Raines wasn't listed as an official adviser to the Obama campaign. "

http://www.ldsmag.com/ideas/081017light.html

This guy lives in NC. Maybe there are some intelligent people there.

And another: The Forgotten Man
http://www.amityshlaes.com/reviews.php

Since she blames socialism for extending the Depression Roy can't believe it.

An oldie but a goody:

http://www.tcsdaily.com/discussionForum.aspx?fldIdContentType=1&fldTheirID=060107E

we have met the enemy and he is us
deficits do matter.

What about THIS article by her which demolishes your pet fetish - House Ownership is productive
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5LoEiJ0IyAo

You missed the part...
where I said I don't support government subsidies favoring ANY industry, this includes HOUSING and it would include innovation as the article suggests.

People like the security of raising a family on property they own and have some measure of control.

If, as the article suggests, people should have the flexibility of moving around, why wouldn't this encourage employers to move around as well?

If you want to maximize the productivity of employees, then employers should do their best to support job security, among many other things.

I was a contract worker overseas and lived in a compound provided by the company. I thought it was great. They picked up the tab and I didn't have to do any maintenance.

There were many others from third world countries who were sending their money home to build a house. Most of these countries were so corrupt, real property is an better investment than any protected business.

But my bottom line is if the customer wants to own a house, why would any government enact polices to hinder him?

If owning a house makes the owner more productive, then the house has been a productive asset.

So, if a drug addict says his addiction makes him productive, then drug addiction is productive?
You are still simply ASSERTing, without providing any proof.

Ever been to a military base?


"Family housing is one of the most important quality of life
issues in the Air Force. Improving or replacing our aging
housing inventory is our top facility priority. Our military
members and their families expect and deserve homes which meet
current standards of livability. In the era of downsized forces,
we cannot risk losing highly-trained, experienced Air Force
members because of poor housing. Small investments in quality
family housing pay great dividends in retaining trained,
responsible, ready Air Force members. We cannot afford to let
our existing military family housing inventory deteriorate or
fail to modernize it to contemporary standards to achieve quality
of life incentives, so that we retain highly trained, motivated
members."

The military recognizes the importance of housing on moral and invests in housing for higher productivity.


It worked for Sherlock Holmes...
and for many real people throughout history.

Marjon promotes drug addiction as a way to improve productivity. Way to go Marjon
..

Do you even comprehend what you write? The military owns the homes, NOT those who reside in them
..

Don't you comprehend my point?
People value a nice place to live.

Why would they do that if housing has no impact on productivity?

Whatever works for you.

Drug addicts value a shot. Does that mean it has macro economic productivity value?
..

See my post titled "Drug addicts value a shot. Does that mean ........"
..

What ever works for you.

What post?
There is no content, which is typical.

Don't EVADE. Don't ASSERT. EXPLAIN how owning something contributes to macro-economic productivity
..

The subject line is the whiole post. See my post titled "Don't EVADE ......."
..

What post?
I don't see anything of substance in your 'posts'.

The subject line is the whiole post. Don't EVADE.
..

How do property rights contribute to productivity?
If you don't have the right to keep your productivity, why should you be productive?

I will produce less for others than I will for myself.

Doesn't answer how owning the unit one is living in, contributes to macro-ecinomic productivity
You need to establish causal link, not just ASSERT that it does.

You wrote

"I will produce less for others than I will for myself"

Be careful in voicing this in your job, if you ever have to work for others.

And as usual, this post also DOES NOT address the question of "how owning something (such as the unit one dwells in) contibutes to macr-economic productivity.

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