October 28, 2003
Larry may be back on the bottle, but it is Snow that needs to go to rehab
By Brady Willett & Todd Alway

As economists scramble to raise their GDP forecasts, Larry Kudlow closes his eyes and fashions himself as a specialist:

“In the early 1980s almost no one expected a real prosperity wave. Still, we got one. It was the same case in the early 1990s. Right now, pessimism abounds, but the naysayers will be wrong again.”  Hot Commodity

“Pessimism abounds?” Is Larry back on the bottle?

To begin with, unless 1999 is the only year out of the last 100 that you care to study, it is obvious that stock market pessimism does not ‘abound’. On the contrary, stock market pessimism cannot be found!  To be sure, margin debt has skyrocketed, Joe mutual fund chaser is rotating out of every financial instrument conceivable except stocks, and relative valuations are near their pre-bubble all-time highs. For these and a truckload of other reasons – namely the fantastic Oct 02-Oct 03 rally, investor confidence readings, the VIX, etc. - to compare today’s stock market to the early 1980s market is ridiculous. What percentage of the population owned stocks in 1982 Larry? What was the average P/E multiple on the Dow in 1982?  How many years decades did it take before the markets finally found a bottom in August 1982?

As for the economy, it is Larry’s warped interpretation of the terms ‘pessimism’ and ‘naysayer’ that needs to be challenged. For example, chief economist of Goldman Sachs, Bill Dudley, is more ‘pessimistic’ than most in that he is calling for a slowdown in economic activity early next year.  However, Mr. Dudley is still calling for 3%-4% GDP growth in 2004. Is Dudley, in Kudlow’s mind, a naysayer? As for the consensus, the more than 50 economists polled by the Blue Chip Economic Indicators newsletter expect 2004 GDP to come in at 3.9%. Yes, 3.9% may seem low compared to the high end 2004 GDP estimate (4.75%) offered by the Fed in July.  Nevertheless, can a 4% GDP growth estimate really be considered pessimistic given that stronger growth will surely put upward pressure on interest rates, which would (already is) quash the magical consumer spending propellant that is refi?

“The next several quarters will produce 5, 6, or 7 percent economic growth”  Kudlow

So, Larry is a little bit more bullish than most. Nevertheless, remember the sentence “Right now, pessimism abounds, but the naysayers will be wrong again.” Besides politically driven thinkers (i.e. Krugman), and the market bears (largely being regarded, once again, as ‘crackpots’), the near term outlook for the U.S. economy and stock market is nearly all roses.

Failing To Stay Relevant

Following his much talked about interview with The Times (2), U.S. Treasury Secretary John Snow should check himself into a 12-step program – “12-steps to becoming a successful U.S. Treasury” (written by Rubin.)  Remember that O’Neill’s comments cost him both his job and - in the case of O’Neill’s backtracking on Brazilian loans - his character. Quite frankly, if Snow isn’t careful he could be lining up a series of verbal missteps that end up making anything he says a meaningless contradiction.  

Beyond Snow’s interest rate comments – which were quickly rebuked by the White House as being Snow’s opinion not U.S. policy – Mr. Snow also commented on the dollar:
            
“The U.S. had never intended to talk the dollar down against other currencies”. 

You can forgive Snow for acting foolishly once – specifically his March 2003 statement in which he said that he was ‘not particularly concerned’ about the dollar’s slide. However, twice?  Think about it: can Snow with any degree of character state that at the G7 the U.S. was pressuring China, Japan and others to allow their currencies to float freely because the dollar was too low?  No, of course not. So why does the man want to insult everyone’s intelligence by claiming that the U.S. was not talking down the dollar? 

Granted, there is the possibility that Snow wanted to give a signal to the markets that the dollar’s slide is overdone. Nevertheless, with more than a month to think about it that the best he could come up with was a bold lie and insult to traders is disturbing.

Rubin’s number one lesson was just this: crystallize doctrine into easily repeatable and non abrasive mantras.  Rubin was a master of his craft; partially because he did not face the same type of uncertainty as Snow, but largely because traders trusted him to deal with problems in a circumspect and professional manner. To be sure, every word that comes out of Snow’s mouth – just like Jim Baker’s before the Crash in 1987 – is crucial; every syllable, nuance, pause, and breath is the difference between financial market stability and volatility.  That Snow didn’t learn this earlier this year either means that he is unworthy of the job, or truly conflicted about the direction of the dollar and interest rates. 

In short, unless Snow is absolutely certain that he wants to try and stop the dollar’s slide, he should not have said what he did.  Moreover, unless he is absolutely certain that higher interest rates are in the best interest of the U.S. economy, he should not have said what he did. Does Snow’s flip-flopping on the dollar help explain why the money supply has now stopped expanding for two weeks in a row? (h.6)  Time will tell.