Exclusive Interview: Art Laffer Says Oil Will Fall Below $35

by Dr. Mark Skousen

Last week, I had the opportunity of a rare interview with one of the world’s most ingenious financial economists, Arthur B. Laffer, at his new office in Nashville.

A former professor at the famed University of Chicago, Art Laffer is the inventor of the “Laffer Curve,” found in all economics textbooks; it demonstrates that cutting taxes can stimulate productivity so that government revenues can actually increase. The Laffer Curve has been proven right, especially when it comes to cutting capital gains taxes…

Every year after a capital gains tax cut, such as 1978, 1986, 1997, and 2001, revenues from capital gains have increased substantially.

Laffer is a sought-after expert. His offices are crowded with letters and photos of famous people – Alan Greenspan, Ronald Reagan, Jane Fonda, et al. While I was in his office, he got a phone call from former governor Mitt Romney, who is running for president, and Steve Moore from The Wall Street Journal.

But he’s also known as a brilliant money manager and economic forecaster, and since 2000, his Macro 100 stock portfolio is 48 percentage points ahead of the S&P 500 Index. Below is our interview, where we’ll take a look at his unique top-down approach to investing.


Is the Laffer Curve a Free Lunch in Economics?

Mark Skousen: I see your Laffer Curve is still in all the textbooks. How does it feel to be famous?

Art Laffer: I love it. It’s great. I was blessed with a name that is very entertaining [laughter].

MS: Is the Laffer Curve alive and well?

AL: I brought it back in the 1980s under Reagan, but it’s been around for time immemorial in economics. And it’s true. How can you ever be worse off if you lower tax rates and you get more money?

MS: So there is a free lunch in economics?

AL: Of course, there’s a free lunch!

MS: Is there a free lunch in finance? Do investors get a free lunch taking advantage of Warren Buffett’s expertise in Berkshire Hathaway?

AL: Sure. When Buffett acquires a very large asset and gets it at a discount, because he sees things we don’t get to see as retail investors, it’s hard not to win. It’s a huge advantage over other investors.

MS: Do you manage money?

AL: We have two firms: Laffer Associates is our research firm and boutique broker/dealer. We have close to 350 institutional clients. And we have a money management firm, co-owned by General Electric, again for institutional investors. We advise the Huntington Funds on the Macro 100 stocks, so individual investors can take advantage of our services through the Huntington funds. We’ve been in business for six years.

Laffer’s Top-Down Investing Style

MS: Do you have a unique strategy?

AL: Our angle is unique. We look at the world from macroeconomics. For example, if oil goes from $10 to $70, you will do well no matter what oil companies you buy. So the key is to invest in sectors that are benefiting from changing macroeconomic policies. We look at trade, income and fiscal policies.

MS: What’s your favorite sector right now?

AL: Growth stocks, both small- and large-cap. We think we’re in a “neutral interest rate” environment – we don’t think they are going up or down by much right now. We also invest in companies in individual states that are lowering taxes, and avoiding companies in states that are raising taxes.

MS: Are there states that are lowering taxes?

AL: Oh, my, yes, over 40 right now. State governments are cutting taxes like mad, and adopting pro-growth strategies. It’s very exciting. This is one of the most overlooked pluses in the economy right now.

MS: But aren’t most companies national or global these days?

AL: That’s true for McDonald’s and IBM, but many companies are concentrated in just one state, such as auto suppliers. We also do our stock analysis country by country.

MS: Are you still bullish on China and India like most analysts?

AL: Yes, but not as much as I used to be. I was bullish on Japan a year ago, but not so much now. We look at every country’s monetary policy, tax policy, etc.

MS: You’re not investing in Venezuela?

AL: No. I’d be out of Venezuela for a lot of reasons. Oil is going to come way down in price.

MS: Oh, really? You sound like Steve Forbes, who predicted $35 a year ago in one of my IU interviews.

AL: Oh, yes, and easily lower than that, over the next two years.

MS: Many of my gold bug friends, including Jim Rogers, see a 20-year bull market in commodities. What do you think?

AL: They are wrong, wrong, wrong! Oil, copper, gold… they’re all coming down and will continue to fall in price. We’ve seen a huge bull market in commodities, and at the same time, we are now seeing the dollar at its lowest level in terms of its trading partners.

MS: Do you envision the dollar crashing?

AL: No! It’s going to rise. When oil prices decline, the trade deficit – what I call the capital surplus – is going to come way down. These are all cases of a reversal to the mean.

Positive Outlook for U.S. Stocks

MS: What about the U.S. stock market?

AL: I’ve never seen the U.S. stock market so well positioned as it is now. They’re really cheap right now. According to my own method of valuing stocks – taking into account profits in relation to interest rates and tax rates, which I call “capitalized economic profits,” the stock market has never been lower in relative terms. I don’t see a recession coming, I don’t see interest rates going up. Tell me, what tax increases do you see coming down the road?

MS: Well, the Democrats are now in charge of Congress, and they could raise taxes.

AL: I was more worried about the Republicans raising taxes! I love gridlock on Capitol Hill. I don’t see a big tax increase right now. Have you noticed that the Federal deficit has fallen dramatically? The Laffer Curve works!

MS: What’s your opinion of the new Fed chairman?

AL: Ben Bernanke, an orthodox Jew from South Carolina, is terrific. He may be boring, but he’s sound. The Fed has been leaning against inflation, and the monetary base is hardly growing at all, just what you want. The price of gold is going to come down, and the dollar is going to strengthen in 2007. This isn’t the 1970s. Compared to those days, today we have wonderful fiscal policy, and wonderful monetary policy. Who would have thought that since the 1970s, the highest Federal income tax rate and capital gains rate have fallen from 70%, to 35%? We don’t have 21% interest rates, we have 4% rates today.

MS: Aren’t you worried by the regulatory stranglehold of Sarbanes Oxley?

AL: I think Sarbanes Oxley is great! Yeah, it’s added a layer of regulation that has hurt small business, but I’m on a lot of company boards, and a lot of companies have found Sarbox to be highly beneficial because they’ve learned a lot more about their companies, the good and the bad.

MS: Isn’t it true that you are always optimistic about the stock market and the economy?

AL: No, not at all. In the 1960s and 1970s, I was a big pessimist.

MS: Did you anticipate the Nasdaq collapse in the early 2000s?

AL: Yes, sir! I warned investors to “take warning” in late 1999, and in 2000, when inflation and interest rates were rising sharply, I told investors to go to the basement and hide and wait until its over. [Laffer showed me copies of papers he had written confirming his bearish views in the early 2000s.]

The War on Terror

MS: Are you concerned at all about worldwide terrorism and the war in the Middle East?

AL: I really don’t see much of a problem. I think the Middle East is terrible, but it’s always been terrible. Iran and Iraq need the oil money badly, but when the oil price drops sharply, as it will, it will be the best foreign policy we ever had, and we’ll get rid of those tyrants in Iran and Venezuela. Sure, terrorism is a problem, but I lived through an era in the 1950s and 1960s under the fear of Soviet attack, and that was much more scary.

www.investmentu.com

AL: I really don’t see much of a problem. I think the Middle East is terrible, but it’s always been terrible. Iran and Iraq need the oil money badly, but when the oil price drops sharply, as it will, it will be the best foreign policy we ever had, and we’ll get rid of those tyrants in Iran and Venezuela. Sure, terrorism is a problem, but I lived through an era in the 1950s and 1960s under the fear of Soviet attack, and that was much more scary.

They are wrong, wrong, wrong! Oil, copper, gold… they’re all coming down and will continue to fall in price. We’ve seen a huge bull market in commodities, and at the same time, we are now seeing the dollar at its lowest level in terms of its trading partners

US-centered folks see the potential for more oil demand declines in america.

but if you lived in china, you would find it hard to imagine that the oil demand steamroller
could go into reverse.

your view depends on your vantage point, i suppose

Laffer was popular under Reagan. What more need one say? Like any fool, he just sees what he wants to see.

Very easy to be popular when you tell governments they can increase their tax take by lowering taxes. Not necessarily disagreeing (I'm all for lower taxes) just pointing out how easy it is to be popular in political circles if you are telling them exactly what they want to hear.

Close to, or just past the peak, totally irrational behaviour takes over and we meet ‘The Church of
the Super Cycle’. Its apostles, whose message is forever ‘this time it’s different’ always have a
slightly different excuse why the coffee, zinc or uranium cycle will run forever, even though they
know it has never happened before. It is particularly odd: for these people, outside their highly paid
hobby of investing other people’s money, are normally pleasant and rational human beings.
The fourth quarter of 2005 was an interesting example of this phenomenon for several
commodities. We will focus solely on oil. Within weeks of the devastating hurricanes Rita and
Katrina causing an oil price surge to nearly $80 per barrel, there was overwhelming evidence that
world supply exceeded demand by between half a million and two million barrels per day (on a
daily production rate of around 85 million barrels). This has remained the case for the last fifteen
months and whilst every world oil storage facility is brimming over, tankers are steaming as slowly
as possible to their destinations, because there is no storage capacity left. Industrial nations,
including China, have become slightly less oil inefficient; 2006 was one year of only four since
1945 when world oil consumption actually fell. Changing economic activity also kicked in: China
switched much power production to coal and macho American SUVs were left unsold as more fuel
efficient and lighter Asian automobiles were snapped up. Such information was available in free
newspapers.

Institutional investors however, having avoided significant exposure to oil companies at $25 or $45
per barrel in the three years to 2005, then decided in 2006 as the price peaked that oil was the sure
fire, no-risk, and super-cycle safe investment. As a consequence, the sector last year witnessed not
only the largest number of new issues worldwide (many now trading below their offer prices), but
the highest level of net new investment of any major sector. Despite this inflow, oil shares
generally performed poorly.

We have not held a single oil, gas or coal share since the end of the first quarter in 2006. Although
we have no idea where the price is going (but our guess is down, down, then down), so utterly
clear was the data showing supply thumping demand that this was hardly a genius call. We even
tried modelling supply and demand on the assumption that the two key countries behind higher
consumption - China and America - grow at record rates: still the oil market had a problem. So it
remains very puzzling why so many rational people persist with such dramatic denial, as
demonstrated in their investment portfolios.

http://www.greenenergyinvestors.com/index....amp;#entry15716

Oil down to near $61. Still a long way from $35 though.

I think we'll probably see $35-$40 at some point this year or next. OECD oil demand fell last year for the first time in 20 years, so higher prices do have an effect.

If it fell to $35 it would represent a great long term buying opportunity.

I dont see it.

US Oil inventories are sliding, and we are coming into the summer driving season.
Meantime, demand continues to grow in countries like China and India

Falling prices seem like an oil bear's dram, not reality

Perhaps this bogus economist should changed his name to Laugher- he was joking, right?

'
Although I like Art, man was he 180 degrees off on those predictions. The tough part is, he was contrary to the fundamentals. I mean, math is math and there's no getting around it.

Well, the gap between $35 and approximately £100 is a long way. Wonder what Art is predicting today?

Absolutely Laffer-Bull (...groan)

Another prominent economist, Arthur Laffer, who became well known for his supply-side theories that influenced President Ronald Reagan, says money "is and has been exceedingly tight."

Laffer believes the Fed should cut another 50 to 75 basis points. He says the dollar is being driven down by investors pulling capital out of the U.S. "We're not a capital magnet anymore because of very bad fiscal and regulatory policy," Laffer says. "This isn't a monetary problem, it's a fiscal and trade problem. And it is correctly a weak dollar because there is no political will to do what's right."

Laffer says if today's higher commodity prices were due to inflation, interest rates would also be higher and the monetary base would be growing faster. By his measure, growth of the monetary base has slowed since mid-2001, and he believes this could lead to stagflation — high prices with slow economic growth — if the financial markets don't recover.

http://www.smartmoney.com/theeconomy/index...0080430-the-fed

IT HAS been widely noted that the Republican presidential nominee, Senator John McCain, is not a man who is personally comfortable with the ins and outs of economics. Mr McCain has admitted as much, but has insisted that this is not a problem, because he has surrounded himself with expert economic advisors. Just how expert, you ask? The New York Times is on the case:

“What really happens is that the economy grows more vigorously when you lower tax rates,” said Kevin Hassett, an adviser to the presumptive Republican nominee, John McCain, and the director for economic policy studies at the conservative American Enterprise Institute. “It is beyond the reach of economic science to explain precisely why that happens, but it does.”

Dani Rodrik has dubbed this faith-based economics, which strikes me as far too kind a characterisation. Of course, one might not fret too much about such a statement from a presidential advisor if the candidate himself had the analytical ability to separate economic fact from economic fiction, but that is obviously not the case here.

Balancing out Mr McCain's economic team is Arthur Laffer himself, who notes that the Senator is "on the right track." The track being that which leads to astounding deficits, one assumes, given that Mr McCain's highly touted war on earmarks will do nothing to counteract spending increases on entitlements and defence.

http://www.economist.com/blogs/freeexchange/2008/03/

Absolutely with you on that. Even at $45 or $50

U.S. fuel demand averaged about 18.6 million barrels a day during the past four weeks, the lowest since June 1999, according to the report. The U.S. consumes 24 percent of the world's oil.

``When the U.S. catches a cold, the impact is felt elsewhere,'' said Steve Maloney, a risk-management consultant for Stamford, Connecticut-based Towers Perrin. ``Demand is already down here because of the economic slowdown and should drop elsewhere. Even the countries that recently had dramatic, double- digit growth are seeing their economies slow.''

The Organization of Petroleum Exporting Countries, the producer of 40 percent of the world's oil, reduced its forecast for average oil demand next year by 450,000 barrels a day, or 0.5 percent, to 87.21 million barrels a day, in a report yesterday.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Oil being slaughtered today, now around $70.

OPEC is getting edgy.

Daily Brent Crude (Jan) $57.20


whats $20 between friends?

Exclusive Interview: Art Laffer Says Oil Will Fall Below $35

Laffer is that idiot ...

Traders Bet Against OPEC, Buy $30 February Oil Put Options

Nov. 13 (Bloomberg) -- Oil traders made their biggest bet yet that the Organization of Petroleum Exporting Countries will fail to prevent crude prices from plunging below $30 a barrel.

Trades in crude-oil options contracts that would allow the holder to sell oil for February delivery at $30 a barrel reached 1,406 on the New York Mercantile Exchange today, making the contract day's second-most active, exchange data show.

http://www.bloomberg.com/apps/news?pid=206...&refer=home

Dec. 2 (Bloomberg) -- Crude oil tumbled, capping a decline of more than $100 from July’s record, on speculation the U.S., the world’s largest energy consumer, may be in the longest slump since World War II.

Oil prices have tumbled 68 percent in New York since reaching an all-time high of $147.27 a barrel on July 11. Fuel demand dropped as the U.S., European and Japanese economies slowed. The U.S. first entered a recession in December 2007, the panel of economists that dates American business cycles said yesterday.

“It’s all about demand, demand, demand,” said Kyle Cooper, an analyst at IAF Advisors in Houston. “Until we see signs of better economic times, the market is going to move lower.”

Crude oil for January delivery fell $2.32, or 4.7 percent, to $46.96 a barrel at 2:41 p.m. on the New York Mercantile Exchange, the lowest settlement since May 20, 2005.

http://www.bloomberg.com/apps/news?pid=206...id=aZfNYqvr61iU

Hmm from $150 down to $47 - thats pretty damn close so far !

$41 and change. Art must be

Jan. 15 (Bloomberg) -- Crude oil fell to the lowest in almost four weeks after OPEC said demand will drop this year and U.S. supplies rose as the recession cut fuel use.

Consumption of OPEC supplies will shrink 4.2 percent to 29.5 million barrels a day, according to a monthly report released today. The discount of oil in New York to the Brent grade in London widened to as much as $10.79 a barrel today, a record, because of rising supplies at Cushing, Oklahoma, the delivery point for barrels traded on the U.S. exchange.

“The overriding factor impacting the market is the fact that we are in the midst of a global recession, which is buffeting the U.S., even China,” said Rachel Ziemba, an analyst at RGE Monitor, an economic research company in New York. “That’s going to be a negative for oil demand.”

Crude oil for February delivery fell $1.83, or 5 percent, to $35.40 a barrel at the 2:30 p.m. close of floor trading on the New York Mercantile Exchange. Futures touched $33.20, the lowest since Dec. 19. Prices are down 62 percent from a year ago.

http://www.bloomberg.com/apps/news?pid=new...id=aQlNzf77fBXs

Oil Could Plunge Below $20

Before Hitting Bottom …



If oil closes below $33, I think it could go to $25. And if oil gets to $25, sheer momentum could carry it to $20. And if it gets to $20, then it could even test its long-term support — just above $17 — before finding a bottom.

So is the oil bubble over? Maybe, but you better brace yourself for Oil Bubble II.

Why We’ll See Oil Prices Surge Again

The fall in crude oil prices is wreaking havoc in oil services and oil drilling. Now, projects and new rigs are being canceled. And that means the flow from new wells won’t be there when we need it later.

The number of rigs actively exploring for oil and natural gas in the United States dropped by 21 last week to 1,568. A year ago, the rig count stood at 1,732.

http://www.moneyandmarkets.com/how-low-can-oil-go-3-29361

Economy woes push oil below $34

Oil prices have fallen by almost $2 a barrel to below $34 as doubts grow that a US stimulus package will reinvigorate America's economy.

Claims for new unemployment benefit remaining close to record highs added to fears of the depth of recession.

Even an unexpected rise in retail sales was dismissed as a blip - attributed mainly to higher petrol prices.

US light, sweet crude tumbled $1.96, more than 5%, to settle at $33.98 but London Brent added 19 cents to $44.47.

http://news.bbc.co.uk/1/hi/business/7887239.stm

I saw what people in the City paid 100 times what I get did not see.