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Kudlow’s Money Politics

Larry Kudlow’s daily web log of matters political and financial.

An Unholy Economic Combination



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“Wall Street in a Slow Crash” was the headline splashed on Dow Jones’ MarketWatch, one of the top financial websites, yesterday afternoon. To be sure, the Dow suffered yet another down day on Monday, shedding 115 points. And the broad-based S&P 500 is off 14 percent from its late-April high. The last five to six weeks have been a tough stretch for stocks.

And let me add to the MarketWatch headline: Gold prices are continuing to rally this spring, even as stocks fall. The precious metal jumped $25 yesterday to close right on top of its $1,240 high. Gold bugs may be cheering the metal’s recent run, but the surge is a bad economic omen.

Here’s a simple way to look at the unholy combination of falling stocks and rising gold: Falling stocks are signaling a slower economy. Rising gold prices are signaling higher inflation down the road, along with paper-currency debauchment and broad-based financial stresses across the globe.

Falling stocks, rising gold. I don’t like the sound of it.

Incidentally, my good friend Art Laffer wrote a terrific op-ed in yesterday’s Wall Street Journal warning about the economic threats emanating from Washington. Art sees major storm clouds in 2011. At the top of his list are enormous, across-the-board tax hikes set to kick in on January 1. We’re talking tax increases on capital gains, dividends, and estates (the death tax). It’s all anti-growth. It’s an attack on the investor class.

Art has always been a positive, “glass is full” sort of guy, but he sees serious negative economic calamity ahead, including a double-dip recession. He makes a compelling case. And I’m wondering whether falling stocks on a near daily basis are already painting a picture of what’s on the horizon.

I don’t yet see a double-dip recession. A steep yield curve and strong profits are placing a cushion underneath the economy. Is a slowdown in the cards? Probably. But no double-dip recession — not yet.

That said, the threat of these higher marginal tax rates on investors and the ownership class is just plain bad for future growth. Tax rates affect economic behavior. That’s Art’s principal point. And while Obama’s Washington has rejected this thought, Art’s warning is very important.

You know me. I’m a positive guy, too. An optimist. But I’ll tell you what: None of this is good.



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