Looking Through the Windshield

Apart from presidential politics, oil’s plunge toward $100 dollars deepens the tax cut effect and brightens the economic outlook across-the-board. There is so much gloom and doom and pessimism in investment circles that now’s a great time to take a contrary view.

Lower oil solves consumer purchasing power. And it will make it much easier for people to pay their mortgages on time. That in turn helps solve the credit crunch, because on-time payments enhance the value of all that mortgage-related bond market paper held in portfolios.

The oil tax cut will also help corporate profits as input price pressures recede, thus bringing costs into better alignment with prices. As you know, productivity remains strong trending around 3 percent. That’s a big growth factor.

Credit spreads are too wide, but don’t forget that interest rate levels everywhere are historically low. The level of bank loans is stable. Meanwhile, commercial paper issuance has been rising lately. Economist Art Laffer points out that 10 percent M1 growth over the last 3 months is a harbinger of stronger money demand -- a good sign for economic growth.

Because U.S. growth looks poised to do better, the real exchange rate of the dollar is enjoying a strong rally. Robert Mundell always taught me to watch the real exchange rate as a leading indicator of economic growth.

Headline inflation will abate with falling oil prices, even though core inflation is creeping up toward 3 percent. The Fed’s next move will be a higher target rate. That will confirm the growth rebound. It will also defend the dollar and help to restrain future inflation.

Despite controversy, Sarah Palin will strengthen the McCain presidential case. That spells lower taxes and more drilling. She is a champion of drilling in ANWR and is one tough cookie to boot.

Undoubtedly, more credit problems will surface among the banks. But that’s looking through the rearview mirror. For those of us who prefer to look ahead, through the windshield, the outlook for stocks is getting better and better. I would even suggest that lower oil prices moving toward $80 dollars a barrel leads to retailers, consumer cyclicals, consumer household products, as well as financials.

The global industrial infrastructure play continues.