Friday, October 05, 2007

Recession Off the Table

Today’s solid jobs report gain of 110,000 for September, and 118,000 upward revision to the prior two months blows recession off the table. Particularly encouraging is the 463,000 gain in household employment. It sets up a Goldilocks stock market rally that could add another 1000 points to the Dow over the next six months.

Fed bigwig Donald Kohn strongly hinted a dollar protection program that rules out additional Fed rate cuts for the time being. I agree with Kohn. The Fed’s shock and awe 50 basis point rate cut in September has caused a loosening in the credit market freeze-up and provided a liquidity cushion for the entire economy. The Fed has done its job.

With inflation indexes running about 2 percent, domestic price stability is on course. Housing woes will take a percent off GDP for the next several quarters, leaving about 2 percent growth and 2 percent inflation. It is the quintessential Goldilocks soft landing scenario.

The Treasury yield curve has normalized in response to the added liquidity. Over the months ahead the credit market backup will continue to work itself out.

Another point: The added liquidity from the Fed will breathe new life into President Bush’s supply-side tax cuts which had been smothered over the last eighteen months by overly tight monetary policy.

Corporate profits will be flat in the third quarter just ended, but should normalize around 5 or 6 percent growth after that. With the 10-year Treasury hovering just over 4.5 percent, expected capitalized profits will keep the markets humming along.

Europe is probably moving toward a rate cut as they work through their own credit crunch. Interest rate differentials will lend strength to the greenback and take the froth out of the gold price. Essentially, the Fed has relaunched a pro-growth policy of adequate credit availability to accommodate low marginal tax rates.

Hopefully President Bush will continue his rebranding of the GOP as the new budget warrior and supply-sider-in-chief and prompt GOP candidates to make sharp contrasts with Sen. Clinton and the other Democrats over low taxes and limited government.

A 2008 recession would have been devastating for the Republicans. Now, as Goldilocks moves ahead, they have a fresh, new opening to relaunch their fiscal message and make the case to the investor class and the rest of the voting public that they can be trusted stewards of lasting growth and prosperity.