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With Noteworthy People
1o Questions
Larry Kudlow on Advice for
Janet Yellen, Tax Reform, and
Being Bullish
by Carly Schulaka
L
Who:
Larry Kudlow
What:
Economist, TV and radio host,
journalist
What’s on his mind:
“I think the economy is
underperforming. I think there are a lot of
issues about taxes and regulations that
need to be improved. I don’t think we are
pursuing pro-growth policies right now.”
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arry Kudlow is many things,
the least of which is recognizable. You may recognize
him from his popular CNBC show
The Kudlow Report—which ended its
five-year run just last month—or his
nationally syndicated talk radio show,
or perhaps from his time working for
President Reagan. Kudlow, former
chief economist at Bear Stearns and
American Skandia, refers to himself
as “an old Fed guy,” “a Reagan Republican,” and an “open book.”
When it comes to investing, he’s
buy-and-hold. “I’m not a guy who
wants an actively managed portfolio,”
he says. “I love indexes. I think they
are cheap and they are efficient. I
think money managers, on the whole,
charge way too much. So I like to buy
and hold, unless you are smart enough
to see the catastrophe coming.”
The Journal spoke to Kudlow in
late January, just as Ben Bernanke
was preparing to hand over the Fed
reins to Janet Yellen. He shared his
thoughts on what Yellen and the Fed
need to do now, why he’s bullish on
the economy, and whether or not we
Journal of Financial Planning | April 2014
should expect another government
shutdown.
1. You’ve been critical of Ben Bernanke
and the Fed’s monetary policies. As
Bernanke hands the reins to Janet Yellen,
what advice would you offer her?
On and off [I’ve been critical of
Bernanke]. We are doing this thing
on CNBC about the most important
people in the last 25 years, and I listed
Bernanke as one of them. So I just want
to clear that up.
Bernanke, in the period from
September 2008 when the absolute
heart of the crisis hit and the banking
system literally froze, at least through
early 2009 when he instituted QE1,
was brilliant. He started pouring liquidity in through the emergency discount
window and buying various bond and
other assets, and it was the exact right
thing to do.
Now, I was critical of Bernanke, of
QE2, and basically critical of QE3. I
don’t think it worked. I acknowledged,
by the way, in a mea culpa that ran
rampant in the Twitter universe, that
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Bernanke was right—no inflation has
occurred in his pump priming. And I
give him that credit. So, I am mixed
on Bernanke.
On handing over the reins to Janet
Yellen, here are some thoughts:
Unwind QE3. In fact, unwind all
the QEs; unwind the Fed’s balance
sheet. It’s too big; $4 trillion is way
too big. They were involved in too
many markets. Not just the Treasury
market, but at different moments, they
were involved in the mortgage-backed
market and the automobile loan
market. That’s credit allocation, not
monetary policy, and I object to that
strenuously. I think it compromised the
independence of the Fed. So get out,
unwind the QE.
Bernanke has started this, so I
reckon they’ll be out of the game by
the middle or back-end of this year.
That’s good.
There’s too much discretion and
fine-tuning by the Fed, and it creates
tremendous uncertainty in finance,
business, and for consumers—they
don’t know what the hell the Fed’s
going to do. And that’s not good.
Rules, give me rules. What kind of
rules? I like the commodity price rule.
The Fed should always have a sharp
eye on broad commodity indexes
including gold and Treasury bond
spreads and the exchange value of
the dollar and the growth of nominal
GDP. That will tell them whether they
are too loose or too tight. What is the
market telling them? I fear right now,
they are glued to their econometric
models and they are not looking at the
market. I think that’s a mistake.
2. How should financial advisers
counsel their clients to counterbalance
today’s Fed policy?
I think in some respect you are asking
me if I’m a bull or a bear. I’m basically
still playing it from the bull side.
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I think the economy is underperforming. I think there are a lot of issues
about taxes and regulations that need to
be improved. I don’t think we are pursuing pro-growth policies right now.
On the other hand, we have had
some pretty good spending restraint.
I thought the sequester was basically
good; not perfect, but good. I thought
the budget caps were good. Look, I’m
a limited government guy, as you probably know. So if the government share
of GDP is low, that’s good. Where we
get into trouble is when it’s high and
rising.
I don’t want the government to
run the economy; I’m a free market
capitalist. We’ve made progress on
that, but we need tremendous reform
of taxes; this whole Obamacare thing
is crazy; the EPA attack on energy,
especially coal and other things, is
all wrong. Having said that, I expect
profits to rise.
It’s funny, a lot of people say the Fed
has caused the market to go up and
it’s a bubble. I don’t agree. I think the
Fed has aided the market by injecting
liquidity. But if you go back and look
at your numbers, the rise of profits
from the bottom in ’08 and the rise
of stocks from the bottom in early ’09
is pretty close; not identical, but very
close.
I think profits will continue to rise
by something of an order of magnitude
of, say, 10 percent in 2014 and probably
2015. So, I’m a bull, but I’m somewhat
more cautious, and that would be my
advice for financial planners.
The Fed is embarking on what I
think is going to be a four- or five-year
tightening cycle. The next five years
will probably be tougher to make
money than the last five years in the
market, but that doesn’t mean I’d be
dumping my stocks left and right.
3. As an economist, what’s your
economic outlook for 2014?
In number terms, I’m in the 2.5 to
3 percent growth zone. And as I
said, profits should go up close to
10 percent. I don’t see any inflation
problems on the horizon, and that, by
the way, is good.
4. Treasury Secretary Jack Lew warned
recently that the Treasury will run out
of wiggle room and need additional borrowing authority by the end of February.
Should anyone be worried?
I’d say there is no appetite whatsoever
for a shutdown or a debt default. You
saw the Ryan-Murray deal on the
budget. We’re going to play small ball;
not big ball, small ball. And there may
be some bells and whistles on this debt
ceiling, but I don’t see any chance of a
shutdown; not before the election.
5. How do you feel about estate taxes?
Hate them. All that is, is a double and
triple tax on the savings and investment, and that goes to the heart of
my tax reform. I want to really reform
the whole tax system, particularly
the corporate tax system, but also the
personal tax system.
We should be taxing consumption.
We should have flat tax rates. We
should broaden the base and get rid of
the loopholes.
All right, you want to create a job,
you need a healthy business. You want
to create a healthy business, somebody’s got to put some investment in
that business. If we’re double and triple
taxing that investment, you’re not
going to get it.
Capital is the key to productivity,
which is the heart of the economy.
The more capital you have, the
greater chance of innovations and
breakthroughs and entrepreneurship
that will create new products, new
machinery, more efficient labor-saving
devices. And that ultimately creates
April 2014 | Journal of Financial Planning
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10 Questions
With Noteworthy People
a lot of jobs, and it ultimately creates
higher real wages, which is a problem
for the economy right now.
I think each dollar should be taxed
once and only once. That’s my motto.
And that’s the essence of a flat tax. So
I hate the estate tax. I think it is just a
clumsy way of class warfare to get at
rich people.
6. You Tweeted recently that Sandinista
Dems will not give large and small
businesses the growth [the U.S. economy]
needs. What will?
Smaller government. And we’ve
made progress on that. Deregulation,
wherever possible. I want business to
breath and have freedom.
We should regulate lightly. I’m not
against all regulations. I am predominately against economic regulations, so
deregulate and be as light as you can.
I do not favor Dodd-Frank; I think it’s
a cumbersome bill that’s holding back
banking recovery.
Second point is, we come back to
tax reform. We desperately need tax
reform. Besides the complexity of the
code, which is a deterrent, the one part
that really bugs me is the corporate
tax. I’ve always been for lowering the
corporate tax, getting it down to 20
or 25 percent, but I’m actually getting
persuaded again by the idea of abolishing the corporate tax all together.
The trigger for this thought was
Lawrence Kotlikoff, who is a distinguished economist at Boston University. He is not a Reagan supply side guy;
he is just a smart economist. He has
come to believe through his work that
we should totally abolish the entire
corporate tax system, and of course,
all the loopholes, because the workers’
wages get hurt the most.
And if you think about it intuitively,
it’s a pass through. Fred Smith of
FedEx has said to me for years that
corporations don’t pay taxes, they
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collect taxes. And what he means by
that is [corporations] pay lower wages
to cover the tax. They have to raise
prices to consumers to cover the tax.
Well, that’s a lousy system.
We have the highest corporate taxes
in the world. Our biggest companies,
our best companies, our newest
companies—look at Apple, look at
Google—they are putting their profits
and their cash overseas. That means
they are not investing the cash here to
build a new plant and equipment and
create jobs.
I’m for abolishing the entire corporate tax; I think it would be a great
boon to economic growth and jobs. In
terms of a couple of economic policies,
that’s where I would go.
7. Is there any downside to abolishing
the corporate tax? What about small
business income taxes?
No, I don’t see [a downside to abolishing the corporate tax].
Now, you asked about small business. If I could wave a magic wand, I
would include that in the corporate tax
reform. I think the point I am trying to
make is individuals should pay taxes at
a low, flat rate.
See, our income tax now with
Obamacare and all the rest is over 40
percent. It shouldn’t be a dime over
20, and probably should be close to 15.
And then get rid of all the loopholes.
So where you put the small business
in there, I’m not sure. I’ve got to work
that through.
8.
You recently had Jeff Kleintop from
LPL on your show, saying that from a
yield perspective, there’s no reason to be
in bonds. Do you agree?
I do. Kleintop’s one of the top strategists in the whole country.
As I said earlier, the Fed is embarking on what I think is going to be
Journal of Financial Planning | April 2014
about a five-year tightening cycle, and
because of the Fed’s QE2 and QE3,
bond rates are too low and they are
going to go up. The faster the Fed
gets out of the QE business, the more
the market can price risk and set the
interest rate. Right now, the market
is having trouble pricing risk, and it’s
having trouble setting the interest rate
right, because the Fed is involved. Now,
the Fed doesn’t control rates, but they
influence them.
The 10-year Treasury is about 2.85
[percent] today; it got as high as 3
[percent], and a year and a half ago it
was about 1.5 [percent]. I would guess
that’s going to 5, maybe 6 percent in
the next five years. So you can see a
lot of downside, right? Rates go up,
prices go down, and I think that’s what
Kleintop is talking about, and I agree.
Stay the hell out of bonds. But look,
you always have to balance as you get
older; I get that. Right now, I’m 100
to zero for stocks. I do have a pretty
good cash position, but I don’t own any
bonds. As I get older, I’m going to want
to balance that out a little bit. But I
don’t want to do it now, because in the
next couple of years we’re looking at
some big rate increases in bonds.
9. What’s the best financial book you’ve
read in the last year?
I’m going to give you one that might be
more obvious and one that’s not.
The obvious one is something that
I’m rereading—Applied Economics by
Tom Sowell. He’s a classical free market
economist and a good friend of mine.
He wrote this book 10 years ago, and it
got re-issued a couple of years ago.
The other book is Amity Shlaes’s
biography of Calvin Coolidge called
Coolidge. Coolidge is one of my favorite
presidents, particularly regarding his
economic policy. He cut spending,
slashed tax rates, and lowered the debt
in the 1920s. He did all this simultaneFPAJournal.org
10 Questions
ously and spurred one of the great
booms in American history. And then
came a whole bunch of mistakes in ’29,
’30, and ’31 that created a bust.
In this book, Amity goes through
what Coolidge did with his Treasury
secretary Andrew Mellon, who is one of
the giant figures in American finance.
She goes through what they did to the
budget and what they did to taxes and
why they did it. It makes a fascinating
read, because they had just come out of
a very deep depression after World War
I. And you know what, they came back
fast. Instead of increasing government
spending, like we just did, they cut
government spending. And instead of
worrying about taxes on the rich, they
lowered marginal tax rates for everybody across the board. The economy
grew so much without inflation that
they were able to pay down large
quantities of the World War I debt.
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10. You’ve been hosting The Kudlow
Report, and prior to that Kudlow &
Company, for 10 years now. Who has
been your favorite guest?
I think the most compelling interview I ever had was with President
George W. Bush. I interviewed him
twice during his presidency; once in
2006 and a second time near the end
[of his presidency] in 2008.
In ’06, the economy was doing
very well, but the war in Iraq was
going downhill fast. He acknowledged that he was getting no credit
on the economic boom because of
the war in Iraq. He said, here’s what’s
good on the economy, and here’s
my agenda for the second term, but
Iraq is blocking everything. It’s why
my approval ratings are down and I
understand that, he said. He didn’t
throw any temper tantrums; he
didn’t blame anybody. He just saw
it as a problem to be tackled, and I
thought that took remarkable inner
strength.
In a second interview with Bush in
early autumn of 2008, he acknowledged that there were severe stresses
and problems in the financial system
and the economy, and he was going
to have to do something about it
and do it fast. Instead of waving his
arms or blaming or whatever, he just
very calmly lays out the problem and
then starts talking about the options
to solve the problem. And I think
these are things the public at large
didn’t really know about this man,
how calm he was in the maelstrom
around him and how he would be
analytic and problem-solving.
Carly Schulaka is editor of the Journal. Contact her
[email protected].
April 2014 | Journal of Financial Planning
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