- The Washington Times - Monday, August 3, 2009


Let’s call this what it is — a new bull market in stocks has emerged from the ashes of the financial meltdown and the deep recession that followed. And it’s signaling the onset of economic recovery. Free-market capitalism is more durable, resilient and self-correcting than its detractors would have us believe.

This is not just a summer rally — although a 12 percent market rise since July 10 is splendid. There’s a lot more going on here. Over the past five months, since March 9, the broad-based S&P 500 is up 46 percent. If I’m not mistaken, a 20 percent rally that is not quickly reversed constitutes a bull market. We are more than double that, and there will be no total reversal.

Consequently, I want to change the agenda. This is much grander than what most commentators are describing. This isa new bull. With positive, beat-the-street earnings coming from all corners of the economy, the current rally is based on solid fundamentals. Roughly two-thirds of S&P companies have reported so far, and 75 percent have beaten profit expectations by about 10 percent on average.

Just look at the recent results posted by companies as diverse as Dow Chemical Co., MasterCard Worldwide, Visa Inc., Tyco International Ltd., Colgate-Palmolive Co., Kellogg Co., Cummins Inc. and International Paper Co., all of which follow better-than-expected announcements from Caterpillar Inc., IBM Corp. and Intel Corp. a few weeks ago.

Incidentally, research from JPMorgan shows that sequential revenues — second quarter over first quarter — are rising. Investment guru Vince Farrell says $11 trillion is sitting on the sidelines in money-market and other short-term balances. So this rally is no empty air pocket. When markets in China plunged 7 percent earlier this week, U.S. stocks could have followed suit. But they held their own. It was a big show of bull-market strength.

And let’s not forget the banks. The KBW Bank Index has doubled since early March. With a zero short rate and a steeply upward-sloping Treasury yield curve, even a banker can make money. Financial earnings are soaring. The credit crisis is over. The banks will earn their way out of their toxic-asset problems provided the nerds at the Financial Accounting Standards Board (FASB) don’t resurrect mark-to-market accounting and force immediate distressed-market write-downs.

Does this bull have long legs? Historically, bull markets last an average of 17 months, and this bull should run well into next spring. Judging from the breathtaking decline in LIBOR rates (London Inter-Bank Offered Rate), the TED spread (between LIBOR and Treasury bills), and corporate-bond spreads relative to Treasuries, I think there’s another 20 percent upside to the bull. That would return us to the pre-Lehman levels of August 2008, with the Standard & Poor’s above 1,100 and the Dow Jones Industrial Average at 11,000.

And here’s the economic deal: Businesses have made the necessary cost-cutting adjustments to jobs, salaries and inventories to restore profitability. (My hunch is that businesses fired too many people when the credit roof fell in and the economic bottom fell out.) It’s a classic, Austrian, Ludwig von Mises corrective to prices and production.

As the economy rises, lean-and-mean companies will reap a profitable harvest. Profits are the mother’s milk of stocks, business and the economy. As profits heal, consumer incomes and spending will rebound.

My guess is the economy will grow by 3 percent annually or slightly more in the second half of 2009 and the first part of 2010. This growth is backstopped by a very-easy-money Federal Reserve, which in the short run is overcoming some of the anti-growth, war-on-capital policies hailing from Washington. Because of these prosperity killers, a return to the stock market peak of mid-2007 — when the Dow climbed over 14,000 - is not likely.

The ineffectual Keynesian spending and borrowing from Team Obama will actually reduce our long-run potential to grow, but at least in the shorter term, Milton Friedmanesque monetary power from the Fed has re-liquefied commerce. This includes a $1 trillion rise in the Fed’s balance sheet and steady 10 percent annualized growth in the inflation-adjusted money supply this year.

Longer term, yes - there are inflation risks and potentially big obstacles to prosperity. A full economic recovery from a deep recession should produce 7 percent to 8 percent growth, as was the case with the 1983-84 Reagan rebound. But tax rates are going back up in 2011, not down. That’s the wrong side of the Laffer curve. And if we’re going to get nationalized health care, with surtaxes on the rich and higher payroll taxes for businesses and workers, then I would say: Enjoy the fat goose at Christmas this year because there may be fewer Easter eggs next spring.

But this is much more than a summer rally. It’s a new bull market heralding a new economic recovery. Free-market capitalism is trying hard to push back against Mr. Obama’s central planning.

The bears will lose this round.

Lawrence Kudlow is host of CNBC’s “Kudlow & Company” and is a nationally syndicated columnist.



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