Good News for Goldilocks

To recoin U.S. News blogger Jimmy Pethokoukis, “No Recession. No Bear Market. Bears Weep.” Today’s revised report on first-quarter GDP moved the number up to 0.9 percent at an annual rate versus a previous 0.6 percent. Year-over-year real GDP is 2.5 percent. Incidentally, brand new numbers on profits show a much-stronger-than-expected gain. Profits are the mother’s milk of stocks and the economy. So this is very positive.

Also noteworthy is a low 2.1 percent core inflation rate, with the headline rate coming in at 3.5 percent. Look for these numbers to rise as a consequence of the cheap dollar and the commodities boom in energy and elsewhere.

However, markets are smarter than GDP reports. And stocks are up over 100 today, continuing their gains of Tuesday and Wednesday. Even more significant, Treasury market rates are rising a lot, with the 10-year bond now all the way up to 4.11 percent. This is important because almost all the interest-rate gain comes from rising real rates, a signal of increased credit risk-taking and an end to the banking-crisis run for safety.

Rising real rates also foreshadow a stronger economy in the future. And they are adding support to the beleaguered U.S. dollar. So gold is plummeting and oil prices are retreating. This is exactly what goldilocks wants to see.

Instead of safe-harboring in commodities, investors are going back to stocks because the fundamental U.S. economic picture and the banking-credit picture are getting better. The combination of a rise in rates, a stabilizing dollar, and plunging commodities could be a tectonic sea change — and a very positive one at that.

Think of it this way: Investors now seem to want to loan money to job-creating businesses rather than Uncle Sam. Bravo for that.

Meanwhile, money-market futures are predicting Fed rate hikes next year and maybe beginning later this year. That would lend strength to the dollar. And that in turn would contain inflation. Anticipating this, the plunge in gold could well be a leading indicator of a big decline in oil. Now if only Treasury man Paulson would call for an appreciating dollar.

Of course, hovering over this good news is the threat of a three-house Democratic sweep in November. The mere thought of Barack Obama, Harry Reid, and Nancy Pelosi all at once is a potential suppressant for the economy’s improving animal spirits. But let’s cross that bridge when we get to it.

John McCain is running even with Obama, and that’s good. Hopefully Sen. McCain will talk tax cuts rather than cap-and-trade. That would be very good indeed.