Desperately Seeking Larry (Kudlow)

About midday yesterday we got to wondering just how desperate bubblevision is for fake good news to peddle because apparently even the talking heads can't figure out why the market keeps levitating higher.

These ruminations arose after we had turned down a request to appear on the CNBC Halftime Report to comment on the network's "breaking news" that Larry Kudlow was about to be named Trump's top economic advisor. Next thing we knew, however, the show's host, Scott Wapner, broke into the producer's follow-up call, insisting we reconsider.

The apparent goal was to elicit some praise for Larry's solid free trade position. And, obviously, Trump's increasingly unhinged trade-war-in-the-making could indeed upset the Wall Street applecart.

Well, it could if any of the remaining carbon units in the casino should perchance notice---between banging chart points on the coattails of the robo-machines---the import of the Donald's rejection of Broadcom's takeover bid for Qualcomm.

That was done on "national security" grounds, which is curious because back in the day Broadcom's original ancestor was an American tech star when it was embedded in Hewlett-Packard; and it became even more red-blooded in 1998 when it was spun off as a high flying dotcom IPO---only to become positively red-white-and-blue in 2005 when Silver Lake and KKR conferred upon it the blessed state of LBOdom.

Thereafter came another patriotic dousing in the New York IPO market in 2009, when it was valued at $3.5 billion, but that was just a way station in its all-American upbringing. Subsequently it acquired US based Javelin Semiconductors (Austin TX), PLX Technology Inc (Sunnyvale CA), LSI Corp (San Jose CA) and Emulex Corp ( Costa Mesa CA), and then another storied 1990s California-based start-up, Broadcom Corp, in 2015 for $37 billion.

After taking the latter's name, the merged company then bought still another iconic chip-maker, Brocade Communications of San Jose CA.

Alas, at that p0int the company's pesky financial planners got ahold of this California based serial roll-up and dropped the tax equivalent of a neutron bomb on it. That is, its vast California and other US based operations and 7,800 US employees were left standing, while its headquarters and mailbox were incinerated and replaced by new ones in (then) lower-tax Singapore.

Still, notwithstanding all of this M&A activity, headquarters shuffling, name changing and mailbox relocation, Broadcom was still the same old US roll-up of "fabless" chip-set designers, assemblers and marketers.

That is, this $18 billion sales/$107 billion market cap semi-conductor conglomerate mainly buys it wafers in east Asia; manufactures its advanced chip-sets largely in the US to protect its knowhow; and then exports them to gadget assemblers, such as Foxconn's China factories, which send them back to California as i-Phones, thereby enabling America's Facebook zombies to get their 5 hours of daily social media fix.

So what we really have is an American-on-American M&A attack, where the target (Qualcomm) has nearly the same sales ($22 billion), market cap ($88 billion), business model (fabless chip-set  designer and maker), and main customer (Apple) as the purported "furinner" stalking it.

The difference, apparently, was that Qualcomm had not yet moved its mailbox to Singapore, and was therefore not in danger of having it canned and seized by the latter's 72,000 man army.

So exactly how all that threatens "national security", the Donald didn't say. But the fast money boyz are suddenly getting nervous about the Donald's trade blunderbuss. Even they are scratching their heads about why the Donald thinks Brazil, South Korea, Turkey, Japan, Germany, Netherlands, Italy, Spain, the UK and Sweden are national security threats on steel.

Yet these countries account for 17 million tons of US steel imports, and most are members of NATO or otherwise historic allies.

Moreover, when you add in the 9 million tons from NAFTA neighbors, Mexico and Canada---which even Trump exempted from the tariffs---you get a total of 26 million tons of steel imports from the putative "friendlies".

Since that's nearly 75% of all US steel imports, you are left to wonder: How can the balance-- 10 million tons of steel imports from the likes of Russia (3.3 million tons), China (784,000 tons) and Thailand (417,000 tons)---imperil the nation's safety and security?

After all, the entire supply in 2017 from these presumably "not friendlies" accounted for less than 10% of US annual steel consumption of 107 million tons, and its annual value was only about $8 billion. For the record, the latter amounts to around three hours of annual US GDP.

The world market, in fact, is drowning in excess steel owing to China's elephantine 1.2 billion ton industry and its desperate need to export steel to generate cash flow for debt service. And this globally standardized commodity is also about as fungible as it comes among suppliers.

So the US military could blacken the oceans with aircraft carries and cover the Pentagon's 8,000-car parking lot ten times over with M-1 battle tanks and it would still have no trouble getting the steel it needs at a bargain price.

In any event, the punters were desperately seeking Larry to calm their trade-jangled nerves and we reluctantly relented to CNBC. But it was reluctant indeed, and that's why we mention it.

Truth be told, your editor goes all the way back to December 1980 with Larry Kudlow. So we hadn't wished to spoil his moment of glory by having to point out that his free trade virtues to the contrary notwithstanding, Larry Kudlow has been off the very (deep) deep-end for years on the more important matters of deficits, tax cut magic, Fed money-printing, wild-eyed economic growth rates, and, above all else, incorrigible cheerleading for Wall Street's serial financial bubbles.

To be sure, that is undoubtedly an occupational injury from all the years Larry spent at CNBC, and we do make a point of bringing our own bottled war to its studios.

And we also did make a point of singing Larry's praises as a consistent free market economist and experienced policy-hand. Indeed, given that the Donald's economic education and trade policy views are stuck in some kind of 17th century mercantilist time warp, it's just possible that Kudlow could occasionally shed some light unto the darkness beneath the Orange Combover.

However, we were not about to let the Halftime Report's fantasy peddlers off the hook so easily. That's because after a 40-year public record of advocating flat-out protectionism, not Adam Smith himself could convince Donald Trump otherwise.

The Donald is not getting off his current mercantilist bandwagon until they usher him out of the Imperial City on the Dick Nixon Memorial Helicopter.

In the interim, unfortunately, we are quite sure that the Donald would love Kudlow's later life views on how the only cure for deficits is super-growth and that the route to super-growth is an easy money Fed that keeps the Wall Street party going at all hazards.

And that's what bugs us to no end about the Kudlow who emerged after many years in the CNBC re-education camps as a raving perma-bull.

As we explain in the clip below, it was a very different view of the world that we discovered in December 1980 when we journeyed to Wall Street on a goodwill tour for the newly appointed economics team of President-Elect, Ronald Reagan.

Back then a decidedly more honest Wall Street, which had not yet been house-broken by 30 years of Greenspan's Bubble Finance, was worried stiff about the promised giant Reagan tax cuts and defense build-up and the prospect of runaway deficits.

We did out best to reassure them that the fiscal circle could be squared after all because the Reagan Revolution intended to slash spending, eliminate corporate subsidies, close special interest tax loopholes and shrink Welfare State entitlements, too. It would all add up---which it did on paper!

In the fullness of time, it can be admitted that not many of the hardened Wall Street types we met during that sojourn were much persuaded. They cautioned that Paul Volcker had just turned-off Jimmy Carter's money spigot and that the prospective giant Reagan deficits would lead to a thundering clash in the bond pits and a subsequent nasty recession.

As it happened, they were right. Interest rates soared to nearly 16% on the 10-year UST and more than 20% on the prime rate---just as the Reagan tax cuts and defense build-up were kicking-in. Needless to say, in the context of an economy sliding south rapidly and visibly, there was at first only tepid enthusiasm for cutting domestic spending on Capitol Hill; and then, as the unemployment rate soared toward 10%, none at all.

Nevertheless, there had been one convert during your editor's trip to Wall Street. The then economist at Bear Stearns had given a stirring presentation about how the incipient Reagan economic plan needed to be rebalanced on a sturdy four-legged stool of: free markets, sound money, low taxes and balanced budgets.

Actually, it was we who got converted to the virtues of a brilliant presenter who could bring it all together in a compelling package. So we offered Kudlow the job as OMB economist, and the rest became history.

Except, except. At length, your editor had to fall on the sword and tell the Gipper that the fiscal math had been blown sky high and that the nation faced unheard of 6% of GDP deficits as far as the eye could see.

That's because the defense build-up ended up twice the originally intended size; a tax bidding war got so out of hand on Capitol Hill during the summer of 1981 that it cost 6.2% of GDP when full effective rather than the original Kemp-Roth plan that had cost only 3.5% of GDP (a $500 billion annual increase to the deficit in today's economic scale); the original domestic spending cuts had fallen drastically short, and the appetite for a second round among shell-shocked Congressional Republicans had evaporated entirely; and the deep 1982 recession had further knocked the whole fiscal equation into a cocked hat.

In those conditions there was nothing left to do but recapture some of the original tax cut. Upwards of 40% of it, in fact, via tax increases in 1982, 1983 and 1984.

But here's the thing. We ended up making the sale to the Gipper without our house economist, but our house economist in due course returned to the Wall Street of Bubbles Alan Greenspan, where he lost all memory of how close Ronald Reagan had come to fiscal armeggedon; and that what amounted to a half-trillion per year "tax grab" (i.e. increase) had saved the day.

Needless to say, this all comes to mind because in the year FY 2019, the Trump White House is heading into 1981 redux but much worse. The Fed is taking away the punch bowl in the form of a staggering $600 billion per year sell-down of its balance sheet at a time---far, far later in the business cycle----that the deficit is again soaring past 6.0% of GDP ( $1.2 trillion); and at a time when the national debt is already 106% of GDP, not 30% as it was in 1980.

In short, we have seen this movie before. The shame of it is so has Larry Kudlow.

But, alas, Larry spent too many years on Bubblevision's version of the Truman Show. Rather than save Wall Street, he'd encourage the Donald to sleep walk right into the fiscal disaster that the Gipper escaped by a hair.

 

David Stockman's Contra Corner is the only place where mainstream delusions and cant about the Warfare State, the Bailout State, Bubble Finance and Beltway Banditry are ripped, refuted and rebuked. Subscribe now to receive David Stockman’s latest posts by email each day as well as his model portfolio, Lee Adler’s Daily Data Dive and David’s personally curated insights and analysis from leading contrarian thinkers.