The white house and congressional members are locked in a game of chicken. With 17 days possible, is a deal possible before the time runs out . All that and more coming up on the kudlow report. Good evening. Im larry kudlow. This is the the kudlow report. First up, economists have been telling us for months that a second half economic rebound is coming. And for months, i have completely disagreed. So i think todays tepid retail sales report and a big drop in Consumer Confidence suggests i may have gotten this slowdown forecast right. One time in a row. Lets talk. Here now is steve forbes. Media chairman and editorinchief. The chief u. S. Economist for Deutsche Bank and providing perspective on the numbers and anything else she wants to talk about is mary efner. 0. 2 . The worst in four months. Core retail sales looked lousy. Whats going on here . Two things. At the high level in luxury that continues to be robust. Those are not impacted by it. In fact, they can raise retails on the product and the customer is tistill buying. At the other end, we see discounters being very strong. The discounter has to trade down and theyre profiting from this. In the middle is where its challenged. If its not newness, the customer is not buying and they proved that in august. Thats because people are risk averse . Is that because people are worried about their jobs and their incomes . Its a little bit of that, but we do see that they are sper spending, but its a pair of jeans, a plain tshirt, theyre not buying it. And many people who had fulltime jobs are going to parttime jobs. So in doing so theyre going to discounters. Theyre not going to some of the bigger ones where you can buy a pack of 18 for 5. Theyre just buying what they need. What they need is corresponding to the cut in pay that they have gotten from lower hours. Marys right. Isnt she . Parttime jobs, you know, its funny. Look at the charts. I know the white house has done the best they can to rebut this but starting in march or april it shows up on the graph. Part time jobs rising, fulltime jobs not. Youre not making as much if you have parttime or two parttime jobs. And therefore the economy is not surging in the second half. I say its early before we throw our hands up and say the Third Quarter is done. Q2 might get revised up to 3 . An economist thought it could be close to 0 . The quarter is not over. It could be revised up to 1 it can be. I think it can be close to 3 , but we have strong vehicle sales. Gdp is a measure of output, inventory is cap ex. It could be i think manufacturing looks very sloppy. No. Ism is one of the highest ones we have had in the cycle. I know, but im suspicious of that. But the real number is actually it fell last month and edits sloppy. Look at what ford is doing. I know, the car business is booming. Im not giving um yet. Do you think well get 3 of growth . Not in the Third Quarter, maybe in the fourth quarter. We have to put this in perspective. Our expectations have been lowered well break the champagne for 3 or a light beer. Well get 3 , but thats like a baseball player hitting. 250 when he should be hitting. 350. Whats holding back this economy . I would say the Federal Reserve has hurt the access of credit to Small Businesses over the job creators. Uncertain uncertain tikrited by obama over everything. Look at jpmorgan spending all the time on compliance. Governments at war with jpmorgan. There are troops surrounding the jpmorgan theyre punishing them. Rifles and drones flying over. Theyre punishing dimon for going beyond the script they had for him. Whats labor going to cost you . You dont know. Mary, what about something parttime jobs, a lot of talk about obama care, businesses cutting back. But let me ask you, are individuals suffering from the big increase in insurance premiums that we have had this year . Massive increase which is really like a tax hike. Yes, absolutely. Theyre particularly if one is going from a fulltime job to parttime job they have to quickly figure out how theyre going to cover the cobra payments if they get them. Or to take other actions and wait the lag time in order to get covered from another policy. So were seeing that a lot particularly at the lower levels where we see discounters performing well. How much is the Interest Rate impacted in . Its been it has been very impactful. Particularly, you know, with home sales and home businesses. There is a direct relationship there and that plays a big part in it. Is there going to be a down turn in housing . No. Home builder stocks did very well this week. Mortgage rates, applications for mortgages have all gone done. A problem there . Larry, heres the thing. We have had the best run in Builder Sentiment since 91. Rates have hurt applications and refis, no question. Thats the initial reaction. The thing with housing though s is, household formations and scrap together suggest starts should be at 1. 5 million per annum. We are at 750 to 800. So affordability while its come down dramatically is still higher any point prior to 08. Even though prices have to level back off . They probably will at some point. The other issue is banks are easing a little bit on real estate loans. Are banks lending in general . I know the biggest corporations which take advantage of quantitative easing, q. E. But what about ordinary main street loans, are banks giving credit . Loans to businesses are starting to pick up. And nonbank lending to businesses is starting to pick up. One of the Amazing Things about this economy if one area is clogged because of politics or something else, new sources start to rise up. So the business sector, special Small Businesses, little better than it was six months, 12 months ago. Regulators being pro cyclical are easing up where they were hammering them a few months back. We talk about obama care, the insurance premiums have skyrocketed. I dont know when thats going to stop. People are trying to beat the price controls. Is obama care in general an issue or is too much made of that . No. I think as people find out more about it, especially young people theyll try to shoe horn them in this whole thing on being selfinsurance thats under attack now as people try to take advantage of it to get out from the constraints of obama care. That massive uncertainty is holding us back. You know, its funny. In washington, i dont think they understand that its businesses that create jobs. I dont think they understand that. So therefore businesses didnt create it. Thats right. They havent made the investments or creating the jobs. When you talk about the 30hour workweek and the 51st worker and then you have to go into obama care, i think a lot of the jobs are being held back by the job creators. I think thats an issue. I do not think that the president and his cronies understand that. Perhaps thats true. The other thing in retail thats kind of interesting is retailers feel that they dont have a great loss by moving somebody from fulltime hours to parttime hours because its a clerk on the floor. The only one who really understands the only brands that really understand Great Service does make a difference and you need those fulltimers and you need to support them, you know, are places like nordstrom and ones that are known for their service. But you think okay, so this whole obama care business and the parttime business, this affects the customer traffic. This affects the ambience of the store. Absolutely. Yes. Absolutely. I hadnt thought of that. Thats a great take. You talk about luxury brands. Thats all service. Does that mean they go online or they dont shop . They probably wont shop or, you know, because its too much of hassle to go into a store if they dont have the help that they need. So theyll go elsewhere and its just as easy to order something online, try it on at home. If they dont like it, theyll send it back. Its funny you say that. I shop at Specialty Stores but only shop at the ones i know. That includes the salespeople i know. They just help me. If they dont if its not there, and the salespeople arent there, i dont go back. I look for other places. So joe, i dont want to be overly pessimistic. Its a 2 economy, really all year, really for the last four years plus. A lot of people including the Federal Reserve expected it to become a 3 economy. 3. 5 even. The fed going to slow down the bond push clarchases. It will slow down the bond purchases by a small amount. At the same time, that the economy is showing disappointment and their own forecasts that the fed are coming down. If their forecasts are coming down, and if the economy is disappointing, why do you think they should slow down their stimulus . A couple things. Why is the economy we forget the big tax hikes. We had 200 billion in tax hikes so 2 against that a double whammy on highend economy. Right. The system being clogged hes exactly right. You think of how adaptive the economy has been, 2 isnt that bad, considering the hit on the fiscal side. The reason that the fed is going to taper, in the context of when they did q. E. 3 with europe on the verge of falling apart, worries about the fiscal cliff, they have backed away from that. Things have settled down. Theyre telling us they wont sell the mortgage securities. I think its really, larry, more about Financial Stability and thats become very unpopular with a lot of other people on the committee, such as stein. Hes very left of center, one of obamas appointees. Thats good explanation. Ill cap this off by saying i dont think the level of confidence in this country has returned. I dont just mean todays Consumer Sentiment number. I think it was a lousy number. I think the whole shock effect going back to 20082009 and the subsequent disappointing economic recovery and the newspaper reading is not positive or optimistic. I think the attitudes are bad. I dont think thats changed. I dont know whats going to change it, but so far its affecting attitudes. Spending attitudes. I think the stuff youre talking about in washington, d. C. , taxes and obama care and regulation, im not saying thats driving the economy. But i think its hurting. I think its hurting. People want to be left alone, prosper. But the Federal Reserve seemingly takes away the punch bowl, it starts to help the economy. The less they do, the better. Get them out of the business. Thank you very much. Now, steve going to be back with us on monday to exclusively reveal the allnew forbes 400 list. Its an in depth look at the richest people in america who are prospering no matter how sloppy the economy may be. The dow closed off the best week since january, but with the fed expected to slow down the bond purchases at next months meeting, is the market bloom about to fall off the rose . Well discuss that. And free Market Capital ittal is the best path to prosperity. I love the selfinsurance idea. We have to bring that back. Im kudlow. Well be right back. Shes always had a playful side. And you love her for it. But your erectile dysfunction that could be a question of blood flow. Cialis tadalafil for daily use helps you be Ready Anytime the moments right. You can be more confident in your ability to be ready. And the same cialis is the only daily ed tablet approved to treat ed and symptoms of bph, like needing to go frequently or urgently. 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However, gold is the biggest loser. Almost down 5 this week. So what can investors expect next week . The fed goes into the meeting. There will be a News Conference with whether bernanke and all the rest of it. Heres chad morganlander and cnbc market analysts. Why did the market rally . I think there was a relief over the political issue over the syria issue. But the macro data has been weakening and i think the sense is that the fed will have a big nothing next week. And meaning they wont taper. Theyll keep it status quo and its going to be a conversation that happens october, november. Or maybe it will be so small that it wont be important. Yeah, if they do it so small, i think the market backs off a little bit. Im not sure theyll do it so small. Do you agree with that . I do agree. September and october theyll pivot to a more of a taper. That will have an effect of the overall Financial System. You will see a 4, 5, 7 selloff. You know whats interesting to me. If you go back long term Interest Rates, say the 10year treasury, up 100 basis points and the s p is up. So actually the de facto tightening that the fed has already produced, i know its slowed down the stock market rise over the last what four months but it hasnt stopped it. Can that continue . When we do get the slower bond purchases, when long term rates go up a little more, how will stocks react to that . Well, stocks will react if you have the economy thats improving. Okay . You also need Revenue Growth and earnings. What you are seeing at this point, youre starting to see the economy improve. The ism numbers were very good over the last couple of weeks. Retail Sales Numbers are stagnant. We did a whole segment on it. Thats where we are, but what you need to see here for the market to move higher is you may have to have Revenue Growth from corporations. Earnings growth. Business investment starting to increase. Youll have we havent seen business you havent seen that. You need to start to see Income Growth kick in. This is all the basic theme of a deleveraging, larry. But stocks with all that, it is interesting to me. I mean, you could have said t t that, what you just said well, you articulated it, could have said for the last 4 1 2 years. One of the great rallies of all time. And i think its being just make this editorial point. I think its been profits. I think the backbone of this rally is profits. And i know they have slowed but theyre still growing about 5 . I think profits off set the Interest Rates. But wait a minute, hold on a second. But part of the rally is because the fed has been so stimulative. Where else are people going to go . I think its profits. Where are the profits coming from . Theyre coming not from Revenue Growth, but from the expense side, right . Coming from clever Business Productivity and they have done a hell of a job with little resources. Okay, hold on a second. If you believe fact set numbers earns are up 3 year over year. Okay. Revenue growth up only 2, 2. 5 . You have operating margins that are at an alltime high. The Profit Growth hasnt been there in the last 12 months. What you have had is margin what you have had is multiple expansion on the broader markets. Profits. In the fifth year of a recovery, 5 profits not bad. Were in fifth year of a reco r recovery. I want to get to gold, it got whacked again this week. It is getting whacked. What is your thought . What did it close at today . 13 just over 1300. Yeah. 1300 is probably 1323. 79. Even if the fed tightens . Because whats going to happen, the fed will only tighten a tiny bit, but then the conversation is going to be immediately, okay, when are they going to tighten again and then well look out another two or three months because theyll be talking about the next tightening. Global economy, although its not growing at a vibrant way, its growing. Okay. Europe has stabilized. Taking the tail risk out of the Financial System. So we would actually eliminate gold from your portfolio. Just take it out. Take it out 100 . Take it out. Well, you hear it a lot. Thank you very much. Up next on kudlow, diplomatic peace talks in switzerland may be giving syrias assad time to scatter and hide the chemical weapon stockpile. Well have more after the break. You know throughout history, folks have suffered from frequent heartburn. But getting heartburn and then treating day after day is a thing of the past. Block the acid with prilosec otc, and dont get heartburn in the first place. [ male announcer ] one pill each morning. 24 hours. Zero heartburn. So how are those syria talks between secretary of state john kerry and the Russian Foreign minister going . It doesnt looked great. But we have more on that and all the news. Good evening. Good evening, larry. Thats right. So far, theres little solid evidence of any progress on an agreement to confiscate and destroy syrias chemical weapons. Secretary of state john kerry says the talks have been productive and will continue tomorrow. But there are reports tonight that the delays have helped syrias president assad move and hide his chemical weapon arsenal. Making it much harder for any inspectors to find them. Good news for some lucky air travelers. United Airlines Says it will honor the cheap or free tickets accidentally sold yesterday. The airline blames human error. Someone entered wrong fare information into the ticketing system which spit out zero for the price on a number of routes. More rain hitting the parts of colorado today with the flooding becoming worse in many areas. At least four people have died from the floods. The National Guard evacuated the entire town of lyons, colorado, earlier today. A new stud