From New Jersey to Beijing and Back Again

Thursday, 24 Jun 2010 10:13 AM

By Larry Kudlow

Share:
  Comment  |
   Contact Us  |
  Print  
|  A   A  
  Copy Shortlink
Here are some thoughts on a few recent and important money-politics headlines.

Garden State Millionaire Tax Defeated. Some late-breaking news was delivered in New Jersey Monday afternoon on the tax front. Democrats there failed in their efforts to override Gov. Chris Christie's veto of the millionaire tax. Make no mistake: This is a big win for GOP maverick Chris Christie, and a big win for limited, tea-party-inspired government. This story has national election implications.

The Democrats needed two-thirds of the assembly, but without Republicans they couldn't do it. This ill-conceived tax on income over a million bucks would have hit roughly 16,000 households at an anti-growth 10.75 percent rate.

I call it the "Move to Florida" tax. It would have destroyed New Jersey job creation. One study after another demonstrates what a bad idea it is for states to go down this road. It's a fiscal dead end. After all, capital goes where it's treated best. Apparently, this lesson was lost on the New Jersey Democrats, who fortunately lost their tax-hike bid.

And get this: The millionaire tax would have represented the 116th tax increase in the last eight years in the Garden State. Unbelievable.

That begs an obvious question: If the first 115 tax increases failed to balance the state budget, why on earth did they think the 116th would? New Jersey is a mess. My hat goes off to Chris Christie.

The BP Mess. Two important headlines on the Gulf oil catastrophe:

First, the Senate may finally be moving to overturn the Jones Act. That act, of course, is preventing foreign-flagged ships from helping in the Gulf clean-up effort. What in the world has taken them so long?

Second, in what could become a major story, a federal judge in Louisiana overturned Obama's job-killing drilling moratorium.

So at least there's some better news out there. Lord knows we need it.

Yuan Appreciation. So China announced a more flexible exchange rate for its yuan. I call it an upward managed, crawling peg against the dollar. It's ultimately a slow delinking, one that will take years, but it could liberate China from Fed head Ben Bernanke.

Near-term, it's much ado about very little. There will be no big yuan shift. But at least the China move might stave off a Smoot-Hawley protectionist trade war. That's the last thing we need right now. So it's likely good news on the trade front.

And while China's move represents a tax cut for Chinese consumers and workers (better purchasing power), it's ultimately a tax hike on American consumers, since imported goods will cost more at the cash register.

A message to all those people blaming China for our slow, jobless recovery: Shame on you.

Stick to your own knitting.

Washington is the problem, folks. Our government's massive overspending, overtaxing and over-regulating has caused corporations and banks to hoard $2.5 trillion in cash and credit. If all that money was unleashed, it could ignite the economy. But the problem is everyone is absolutely scared to death of Washington's anti-business, anti-profit, anti-investment policies.

The Market: Sell Into Rallies. The yuan-based stock market rally completely fizzled on Monday as triple-digit gains were wiped out by the end of trading. The biggest market mover was gold, which dropped about $25, while the greenback held firm.

Let me raise a few key questions: Did the yuan crush gold? Is the strong dollar deflating stocks and the recovery? Is gold overvalued right now?

Stocks are still off about 8 percent from their late-April peak. From my perch, I think it's going to be difficult to return to that peak, or to surpass it, for some time. Not impossible, but difficult.

I also happen to agree, at least partly, with Nobel Prize-winning economist Robert Mundell's recent take on the dollar. He believes that the 20 percent overshoot of King Dollar, relative to the euro, possesses some deflationary consequences that could slow the recovery rate. And the euro decline will speed up the German and (northern) Euroland recovery rate.

Here's a little economic reality check: Despite Monday's gains, copper is still off around 20 percent. Jobless claims are moving up, not down. U.S. retail sales and housing starts have both recently surprised to the downside.

These are not good signs.

While manufacturing production remains the single strongest part of the economy, I'm wondering whether it also might slow with the decline of industrial commodity prices, due to an overly strong dollar. Now, you know me. I'm all for a strong, stable and reliable dollar. But huge swings in the greenback always produce lagged consequences in our economy. This worries me.

Let me state for the record that I'm not a double-dipper. I'm just in the slowdown camp. And tepid growth could very well slow down the stream of corporate profits.

In other words, a slowing economy, a big 2011 Washington tax-hike wall, an overly strong dollar, ongoing debt concerns in Europe, and bad economic news from the BP catastrophe in the gulf all leave me feeling realistically cautious on the stock market. For now.

Let me conclude with the following thought. I've mentioned this a bunch in recent weeks, and I'm sticking to my guns here: Why not consider taking some profits off the table, before the tax man arrives next year? Taxes on capital gains and dividends are heading higher folks. Why not book some gains before the IRS grabs them?

I'm not suggesting that investors sell everything they own. But investors may want to seriously consider lightening their portfolios a bit. Take some profits on these mini-market rallies.

No, I am not going all doom and gloom. I'm just saying this is a good time to be cautious. That's all.

To find out more about Lawrence Kudlow and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com.

© Creators Syndicate Inc.

Share:
  Comment  |
   Contact Us  |
  Print  
  Copy Shortlink
Around the Web
Join the Newsmax Community
>> Register to share your comments with the community.
>> Login if you are already a member.
blog comments powered by Disqus
 
Email:
Retype Email:
Country
Zip Code:
 
You May Also Like
Around the Web

Newsmax, Moneynews, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, NewsmaxWorld, NewsmaxHealth, are trademarks of Newsmax Media, Inc.

MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved