Kudlow’s Money Politics

Bullish Tidings Ahead?

If I told you that the dollar is up, gold is down, and profits are powerful, would you be bullish or bearish? Well, I would be bullish — at least for the short-run. There are a lot of positive signals out there right now, quite apart from all the Washington tax threats and big-government politics.

For example: The 10 percent NASDAQ stock correction was erased with a good gain on Wednesday. The techie index is now nearly 2 percent above the January 19 correction level. And the broader S&P 500 is coming back — it has recouped virtually all of its election losses.

There now is a growing consensus that the U.S. economy, at a minimum, will outperform the economies of Europe and Japan. Plus, business profits, the mother’s milk of stocks, could hit $90 a share. That comes to an earnings yield of over 7.5 percent, or a price-earnings multiple of about 13 times.

So let me ask you this: Do you want to own a 3.7 percent Treasury bond? Or would you rather take a 6 percent corporate bond? Why not take the stock yield which is much higher?

Now here’s a good leading indicator: Financial stocks are coming alive again. Citigroup and AIG are leading the parade. The whole group has recouped its correction loss, plus 2 percent. Others like Morgan Stanley, BB&T, BofA, and Goldman Sachs have good momentum. And corporate bond rates are coming down. The Treasury curve is still steeply upward-sloping. Heck, even a banker can make money with a zero interest rate and a more than 3.5 percent 10-year bond.

And guess what? I love this. Rich people actually may be on the rise. Oh my gosh. According to the new Forbes list, billionaires in the U.S. went from 359 last year to 403 in 2010. You know what, folks? You can’t have successful free-market capitalism without rich people. That’s right. You can’t have capitalism without capital. Washington doesn’t understand this. But I do. And you should, too.

We should not be eating our rich with punitive tax rates. We should be rewarding them for their successful investing and entrepreneurship. No capitalism without capital. Capital creates jobs. So let’s help those who are the most successful; they help everyone else. (By the way, this is one of the reasons why there is going to be one powerful political regime change come November.)

On the downside, the U.S. just posted a record budget deficit in February. Yet again. This, despite the fact that tax revenues actually rose for the first time in almost two years, which is a sign that the economy is improving. But here’s the rub: Spending increased almost 17 percent in the last 12 months!

This is nuts. Stop the madness.

And here again, a new congressional bill that just passed the Senate will cost $150 billion — and for what? Little temporary tax credits and more transfer payments to the state. No spending-cut offsets whatsoever. Will they ever learn? Ever?

But the wonder of wonders is that our mostly free-market economy and stock market are pointing to recovery, despite Washington.

Larry Kudlow — Larry Kudlow is the author of JFK and the Reagan Revolution: A Secret History of American Prosperity, written with Brian Domitrovic.

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