Thursday, March 26, 2009

The Market, Mustard Seeds, and Monetarism

Despite President Obama’s big-government, lurch-to-the-left, Keynesian spend-and-borrow plan — including future tax hikes for successful earners and businesses (as well as legal offshore and overseas earnings) — the stock market has turned hot as a pistol.

The S&P 500 is up over 20 percent since early March, and it’s now above the level reached when Obama’s budget was published and only 3 percent below the level met when Obama was inaugurated. So while government economic policies seem set to punish investors, businesses, and entrepreneurs, the stock market barometer of the future economy is turning up.

Many believe the market rally and the numerous mustard seeds that will grow into recovery are occurring in spite of Obama’s policies — not because of them. I am quite sure Team Obama would violently disagree with this view. But as I have written before, the most powerful immediate source of economic stimulus is the Fed’s easy-money policy, which is now seven-months old.

The Obama spending offensive has yet to take effect. The all-important Treasury yield curve is upward sloping. With banks borrowing short for next to nothing and lending long at a profitable rate, net interest margins and profits are rising nicely. The Fed’s balance sheet has more than doubled, and the M2 money supply is growing at a near 20 percent annual rate (since last August). Credit-fear spreads are declining. The dollar is up nearly 20 percent from its low of a year ago. Commodity prices have stabilized. And while oil has moved back to $50 a barrel, that’s still a lot better than $150. The same can be said for retail gas prices: $2 a gallon is a lot better than over $4.

And some new economic numbers suggest a bottom for the economic slump. The positive data include monthly gains for new and existing home sales, a surprising jump in business capex durable orders and shipments, two straight monthly increases in core retail sales, and five straight monthly gains for after-tax, post-inflation consumer incomes.

While many fret that the Fed’s pump-priming will raise future inflation — and it probably will — right now inflation is at rock bottom. With rising stocks and commodities signaling a bottom in the turnover of money — with the strong possibility that velocity will rise over the remainder of the year — the easy-money stimulus will become even more powerful in the months ahead.

Sure, universal health care will be hugely expensive, and the cap-and-trade tax hike on energy will damage the future economy. But all that is off in the future.

Right now the big story traces back to the late Milton Friedman: Pour in the money and the economy will expand. There’s too much money chasing too few goods today, but there will be a stronger-than-expected pickup in the future production of goods and services. Money matters.

Later on, higher taxes will matter too as an economic depressant. But again, that’s way off in the future. Right now the rising stock market is signaling economic recovery. Even Team Obama has turned more optimistic following its stock market thrashing last month. The president and his men are now much more circumspect, and they’re pushing their pessimistic message aside.

Yes, I believe it’s Freidman monetarism spurring the better outlook, not Keynesian spending. In any case, the stock market could roar through midyear and maybe beyond.