So writes our friend Larry Kudlow here:

The first priority, he says, is stabilizing the world’s banking system. That’s why Kudlow applauded Friday morning’s Fed intervention. 

Kudlow:

An extraordinary money-market development has occurred in recent days. The safest liquid credit instrument—the gilt-edged 91-day Treasury bill—has seen its yield plunge.

Here’s the story: Last Wednesday, Aug.  8, T-bills traded at 4.49 percent. On Monday they dropped to 4.74. On Tuesday, 4.63. And yesterday they fell to 4 percent. This morning they dropped another 50 basis points to 3.52 percent. What’s this mean? It means the entire banking system has turned completely risk averse and is fleeing into the safest haven possible.

It is fear. It is hording cash. It is a mountainous tremor that has seized financial markets.

Wait a minute. Isn’t Larry Kudlow a  free-market guy? (Yes.) Isn’t he a two-fisted optimist about durability of the American economy? (Yes.) Then why is he applauding the Fed’s intervention?

Kudlow:

All I’m saying is first things first. That means stabilizing the banking system and accommodating the huge cash demands that have arisen. Right now, the system is virtually frozen.

OK, but some of us are asking: Didn’t the Fed just sow more seeds of future inflation? Perhaps, allows Kudlow. But that’s a problem we handle later.

Gee, I dunno. I rarely disagree with Larry Kudlow. Today I do. Sort of. Maybe. OK, I’m, not sure.

Here is, or rather was, my case for no Fed intervention. One, the market was, on its own and before this morning’s Fed intervention, already rapidly repricing risk. After poking its nose into “correction” territory yesterday, the market quickly snapped back. Two, the U.S. and global economies are strong. Some readers will protest that paper and pixel panics can drag real economies underwater, but my take is that financial panics don’t usually begin inflicting such broader harm short of a 20% market drop. Argue this point if you want to. That’s what this blog is for.

Three, inflation is a problem—a small problem now—but the Fed just gave it oxygen, water and food today.

What do you think? Like Larry Kudlow, do you support Friday’s Fed intervention? Should the Fed do more? Or were markets already correcting just fine on their own? And will today’s Fed action only sow more inflation and reckless lending?

I’m truly confused. Help me out. Post your comments below.

If the Dow drops below 12,600 today, we will have an official correction. Feels more like a mugging. Could it happen today? Ask someone who knows. Honestly. My instincts about this summer’s plunge have not been helpful.

Still, I believe in historical analogy, and I think the right one for August 2007 is August 1998.

Read this transcript for a good perspective. It's from the Aug.  31, 1998, Online Newshour … the day after the Dow had dropped 512.61 points from 8,051.68.

The 1998 show’s participants expressed a lot of same fears we hear today:

Michael Metz: “The American consumer, in my judgment, has been spending his unrealized capital gains. I believe that we're going to have a disappointing growth in personal spending. We're going to have some slowdown in growth in capital spending and a rather difficult environment for exports. This is not consistent, in my opinion, with a strong economy.”

James Glassman: “We also have an inverted yield curve. In other words, interest rates are higher on the short-term than they are on the long-term. That's also a bad sign. So we could be headed for bad economic times.”

Metz: “I would say the world is more dangerous now than it was before.”

The lone bull on the panel was Joe Battipaglia. He said:

"We would have to have a recession in the United States or a significant credit crisis. And I don't see the conditions evolving for that. Indeed, if you go back over the history of this particular bull market, each and every correction, including the big one in '87, was sharp, deep and very short-lived, and we came out of the '87 crash, for example, saying that the real economy would be adversely affected. And, of course, it wasn't, and the market went on to sail to higher highs. … This short, deep correction is consistent with the ones we've experienced in '87, '89, even in '94, and even last year in October, when we had the first scare about Asia."

Battipaglia was right. During the next 16 and a half months, the Dow zoomed from 7,539 to 11,731 … a 55% pop.

So where are we in August 2007? The global economy is strong. Stocks are cheap. They are really cheap compared with  government bond yields. They are really, really cheap compared with prices on Aug. 31, 1998.

Hang in.

What do you think? Is August 1998 the right analogy for August 2007? Post your comments below.

ABC’s John Stossel is the country’s best-known libertarian pundit for a reason. He’s really good. Here Stossel rips the wasteful, insane, immoral and hypocritical U.S. farm bill.

From 1999 through 2005, the USDA "paid $1.1 billion in farm payments in the names of 172,801 deceased individuals ... 40 percent went to those who had been dead for three or more years, and 19 percent to those dead for seven or more years." One dead farmer got more than $400,000 during those years.

And they say you can't take it with you

Another Stossel gem:

Most crops are not subsidized. Yet we have no shortages of fruits, vegetables, livestock and poultry. America has plenty of peaches, plums, peas, green beans, etc., and farmers who grow those crops do fine. What makes wheat, cotton, corn, soybeans and rice different?

Last week, The New York Times reported that dairy farmers in New Zealand get along perfectly well without subsidies: "[E]ver since a liberal but free-market government swept to power in 1984 and essentially canceled handouts to farmers--something that just about every other government in an advanced industrial nation has considered both politically and economically impossible ... output has soared."

And finally, most urgently, this:

There's another reason to end farm subsidies. They show us to be hypocrites. How can we preach free trade in talks with developing nations when we subsidize farmers who then dump their crop surpluses in poor countries and wreck their domestic farms?

To Stossel’s fine piece, I would add that a converse is true. States that pull in a lot of farm subsidies, such as my native North Dakota, not only don’t thrive. They actually stagnate. North Dakota had a population in 1920 that is equal to today’s. The three largest cities--Fargo, Bismarck and Grand Forks--do well. The rest of the state, the part that is addicted to ag subsidies--in other words, the welfare state--struggles.

Yet here is North Dakota’s third-term U.S. senator, Byron Dorgan, defending the dysfunctional:

Dorgan added that such support would not only be bolstering the state's economic outlook but would also support a "way of life" that can only be learned on the family farm. He said it's crucial that family farms stay economically viable because they are valuable for teaching kids the values of hard work and the specific skills such as fixing a tractor or building a hut.

There you have it. In DorganWorld, it is dandy to suck more taxes out of New Yorkers in order to support tractor fixing and hut building … a “way of life” … in North Dakota.

What do you think? Per Stossel, would you end farm subsidies entirely? Or, per Dorgan, would you end them for rich farmers only but boost them for others? Given the peculiarity of the U.S. politics--North Dakota has two senators, just like California--is it even possible to end farm subsidies? Finally, do farm subsidies make the U.S. a hypocrite on trade and a plunderer of poor countries’ economies?

Post your thoughts below.
 

Wonderful column by James Altucher in today’s Financial Times.

Altucher puts the subprime meltdown in perspective:

But seriously, let me belt it out: U.S. household assets are $54 trillion. Liquid net worth (cash, mutual funds, bonds etc.) is $27.5 trillion. Household debt is $13 trillion. In other words, the U.S. household balance sheet is looking great: $54 trillion in assets ($27.5 trillion liquid) to cover $13 trillion in debt. Heck, we're under-leveraged as a country right now and should probably take on more debt.
And, by the way, liquid net worth has gone up year-over-year about $700 billion. So much for the myth that the savings rate is negative. If the savings rate was negative, then net worth would be going down. Hence the "net."

But what about the subprime mess? Isn't that going to bring the net worth of the U.S. to $0 or even negative? Right now the entire subprime market is about $800 billion, and let's give full credit to the traders and media and say 50% of that is at risk. So $400 billion. Will $400 billion worth of homes go into foreclosure? Of course not. Defaults are good for nobody. Things will and are getting restructured.

How did the subprime mess get started? Altucher writes:

It has to do with the "holy grail." The holy grail for hedge funds is to return 1% a month with no volatility. If you can do that you can raise infinite money. So they all did it for several years. Here's how. They borrowed at libor +75 basis points and bought subprime paper yielding libor +200. At first, subprime was libor +500, but so many people got into this trade that by 2006 the spread between the U.S. government and people who have never borrowed a nickel in their lives and had no jobs was only 125 basis points.

So how do you make 1% a month? You lever up 10 to one. And if subprime goes down 10% (it's down more than 50% now on the ABX), you get wiped out. The holy grail trade is over.

If the holy grail trade is over, what’s next? Altucher says we’re back to fundamentals--picking good stocks. He recommends two banks, Bank of America (BAC) and U.S. Bancorp (USB) and two techs, EMC and Apple (AAPL).

Good column. What do you think of Altucher's take on the subprime mess? Are we back to basics--picking good stocks? Do you like his picks?

Post your thoughts below.

The subprime crisis is worse than you think, writes Jim Cramer here.

The manic Cramer–admit it, he is fun to watch and read–thinks 7 million Americans will lose their homes. Though gorging on more mortgage than they could afford, these unlucky homeowners, writes Cramer, are innocent victims of Snidely Whiplash. Cramer blames bankers, Wall Street, Alan Greenspan … and, of course, the Bush Administration:

In other times, you might expect a president or a treasury secretary to get involved, perhaps to pressure Fannie Mae, the organization set up in the '30s to issue emergency loans to alleviate just the kind of home-owning credit squeeze that we have right now, to lend a hand. But this administration seems to be either totally clueless or totally heartless, or both, and doesn’t want to goad Fannie Mae into helping. Maybe they hate that quasi-governmental institution set up by bleeding-heart Democrats to help struggling home buyers of a different, more liberal and compassionate, era. Or maybe they just think that anything short of an FDR-era Agricultural Adjustment Act for homes, where we bulldoze whole housing projects instead of cornfields to get price stability, just won’t work.

What do you think of Cramer’s piece? For me, Jimbo’s hyperbole undermines his logic and basic point. No booyahs from me. I agree with The Washington Post’s clear-thinking Sebastian Mallaby, who compares the subprime crisis to the junk bond crisis of the 1980s. We worked our way through that one. We will work our way through this.

Is Cramer right? Will the subprime crisis get much bloodier before it gets better? Will it torpedo real estate, stocks and bonds? Or is the crisis being hyped by Cramer and others in the press? Post your thoughts below.

There's investment patience, of course.

Peter Lynch produced a whopping 29% average annual return when he ran Fidelity's Magellan Fund from 1977 to 1990. Yet the majority of Magellan investors lost money during this period, Lynch liked to say. The loser investors were too impatient.

(John Buckingham passed along this quote. John and I are not sure if the Lynch quote is apocryphal or true, but it sounds good. If anyone knows whether Lynch actually said this, post below.)

Then there's the patience that is absolutely required when flying our little Cirrus SR22. My wife and I are getting to practice gobs of patience today, as we wait out this storm. See North Dakota? That's where we are today, in Bismarck, smack in the middle of the thunderstorm. We were hoping to depart early and make Santa Fe, N.M., by early afternoon. Well, forget that. Damn it.

Are you good at patience? I'm not. Impatience has cost me relationships and money, and yet here I am, impatient as ever. Today I'm grinding my teeth, trying to will the thunder clouds away. Yep, fat good that will do.

Has impatience cost you? How do you practice this most difficult art? Post your thoughts below.

The stock market seems incredibly turbulent. Write "turbulent stock market" in your Google News search bar and count the hits. This summer, you don't have to go to Six Flags to ride a roller coaster.

It's all nonsense, of course. A market that slips 6% from a recent high, or pitches up or down 2% in a given day, is not a market that is roiled by turbulence. The raw numbers--Dow in the teens, daily gains or losses in the 200-plus range--only make the stock market seem turbulent. On a ratio basis, what we're seeing is mere light chop (to borrow a pilot term).

Put another way, what would happen if the Dow sank 3,000 points tomorrow? That would be a record drop, nominally. But on a percentage basis, a 3K plunge would be less than  the one-day drop on Oct. 19, 1987,  known as Black Monday.

From Wikipedia:

 Black Monday is the name given to Monday, Oct.  19,   1987, when the Dow Jones industrial average   fell dramatically, and on which similar enormous drops occurred across the world. By the end of October, stock markets in Hong Kong had fallen 45.8%, Australia 41.8%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%. (The terms Black Monday and Black Tuesday are also applied to Oct. 28 and 29, 1929, which occurred after Black Thursday on Oct.  24 , which started the stock market crash of 1929.)

The Black Monday decline was the second largest one-day percentage decline in stock market history. The largest one occurred on Saturday, Dec. 12 ,1914, when the DJIA fell 24.39%. However, in that case, the New York market had been closed since July due to the outbreak of the First World War. The greatest point loss in DJIA history was on Monday, Sept. 17, 2001, 684.81 points, six days after the Sept. 11, 2001, attacks and the first day after which the market was open.

You see, the turbulence of the summer 2007 is nothing.

Yet it feels like a lot. Which leads to this suggestion: Why not do a 10:1 reverse split of the Dow? Let's just call it 1,335. Then we'll all stop worrying when the market goes up or down 20 points in a day.

This may strike you as a silly suggestion. Of course. But humans are silly, or at least irrational. Many of us are chewing our nails in a market that is actually quite calm, simply because we are awed by the raw numbers. We are apparently incapable of minding the ratios instead of the numbers. So why not admit this irrationality, do the 10:1 split and take the rest of August off?

What do you think? Do you like the idea of a 10:1 reverse split of the Dow Jones industrial averages? Would this calm our irrational fears about market turbulence and volatility?

Post your thoughts below.

Five months ago I had Fake Steve Jobs bagged. Really, I did. Or thought so. Thanks to the brilliant suggestion of a reader named Phil Read, I nailed FSJ as the actor and comedy writer John Hodgman.

It just had to be Hodgman. He matched all the clues. As I wrote here:

This weekend, Phil Read e-mailed this delicious tip. What if Fake Steve Jobs is really John Hodgman, the actor who plays Bill Gates on TV in those Mac versus PC ads?

If so, this would have to be one of the all-time, brilliant comic stunts. Get the joke? Same guy who plays Gates on TV plays Jobs on a blog. Fun-eee! Here is the case for John Hodgman as Fake Steve Jobs:

1. Hodgman was on the February 2007 cover of Wired magazine. The same month, Wired signed on as a sponsor of the Fake Steve Jobs Web site.

2. Condé Nast, Wired's owner, is promoting FSJ T-shirts.

3. Hodgman is a talented enough satirist to write for Jon Stewart's The Daily Show. Fake Steve's prose style is similarly fast and chatty ... TV-ish.

4. Publisher's Weekly calls Hodgman's book, The Areas of My Expertise, "a treasure trove of absurdist miscellany." That's FSJ to a tee.

There was another tantalizing clue. Hodgman was born and raised in Brookline, Mass., and FSJ had been leaving all kinds of hints that pointed to a Boston-based writer.

Yep, Hodgman. But of course it wasn’t Hodgman.

In early April, on a Sunday, I got an e-mail from my colleague Dan Lyons, the Boston-based writer for Forbes. Dan wrote: “Call me. It’s kind of urgent.” Right then I had a premonition. Dan, a fearless reporter with a novelist’s deft touch, was Fake Steve. The nickel dropped as the phone rang. Dan answered. And I said, “Dude, you're him!”

The New York Times reporter who broke the story, Brad Stone, asked me if I was angry that a Forbes colleague had let me take ridiculous swings at FSJ’s identity.

Angry? Dan had pulled off one of the great spoofs in journalism. I had a ringside seat to the show. Dan and I laughed for days. I told NYT's Brad Stone: “I think [FSJ] is the most brilliant caricature of an important part of American culture that I’ve seen,” he said. “We’re really proud that [Dan]’s one of ours.”

Dan, brother, you did it.

And way to go, Brad Stone for your tireless sleuthing. In my Aug.  3, 2006, blog, the first to speculate about FSJ’s identity, I promised the most expensive iPod to anyone who guessed right. A year has passed, so let’s drop the iPod for a new, $599 iPhone. The New York Times likely will prohibit Brad Stone from accepting the prize, so how about this:

Let's put the iPhone on eBay and auction it off. The proceeds will go to Brad Stone’s favorite charity. Details to come.

Are you a fan of Fake Steve Jobs? Will you still read him now that you know FSJ's identity? Do you think the business world needs more spoofs, levity and laughs? Post your comments below.

This past Wednesday, I attended an Elevation Partners barbeque dinner at Marc Bodnick's house in California. Marc is a general partner at Elevation, the Silicon Valley private equity firm that took a minority share in Forbes last year.

One interesting contrast: Forbes will celebrate its 90th birthday next month. Elevation is a new, go-go firm.

Another, amusing contrast: Forbes's majority shareholders--that is, the Forbes brothers, Steve, Kip, Bob and Tim--are conservative in their politics and almost always vote Republican. Elevation's general partners, among them Roger McNamee and rock star Bono, are liberal in their politics. Roger also sings in a rock band, Moonalice, where he calls himself "Chubby Wombat Moonalice." (Hard to imagine Steve Forbes calling himself that.) Roger once managed money for the Grateful Dead.

Anyway … at the Elevation barbeque, my wife and I might possibly have been the only Republicans, out of a hundred guests. But consider this: I canvassed the crowd and could not find a single Democrat who thought the U.S. should slap tariffs on the Chinese and generally disengage from world trade.

Not one. Silicon Valley Democrats are free traders.

I'm happy they are. But they need to shout their support a bit louder. It is really time for Silicon Valley Democrats to stand up and rescue their party from its slide toward protectionism. The Republican party has its protectionists, too--knuckleheads like Lindsey Graham and Duncan Hunter. But they are in the minority. Democratic protectionists are taking over their party.

The U.S. economy and stock markets, I think, could survive a repeal of the Bush tax cuts, much as you and I can muddle through the day with a bad head cold. But Smoot Hawley-style protectionism would be a disaster, a cancer. Free-trade Democrats need to see this.

Silicon Valley Democrats especially need to wake up and rescue their party from protectionism.

What do you think? Are free-trade Democrats an endangered species? Will liberal Silicon Valley wake up? Post your comments below.

The New York Post’s John Crudel (“J-Crud”) is gloomier about the U.S. economy than the facts merit.

But he is correct about job growth. The Labor Department's number out tomorrow likely won’t meet Wall Street’s expectation of 135,000 new jobs. Look for a figure in the 90,000 to 120,000 range.

If I’m right, this prompts two questions:

1. Is the U.S. economy slowing, as J-Crud implies?

2. How will the stock market react to the jobs report? I can make a case that stocks will go up, because a weak jobs report will reduce any chance the Fed will hike.

What do you think? Will jobs growth disappoint? (Anyone think employers are sitting on their wallets due to the minimum-wage hike?) Does slow job growth point to a slowing economy? How will the stock market react?

Post your comments below.