A V-Shaped Boom Is Coming

A V-Shaped Boom Is Coming

Published: Monday, 12 Apr 2010 | 11:01 AM ET Text Size
By: Larry Kudlow
CNBC Anchor


Conservatives shouldn’t fight the tale of the tape.

Sometimes you have to take out your political lenses and look at the actual statistics to get a true picture of the health of the American economy. Right now, those statistics are saying a modest cyclical rebound following a very deep downturn could actually be turning into a full-fledged, V-shaped, recovery boom between now and year-end.

I’m aiming this thought especially at many of my conservative friends who seem to be trashing the improving economic outlook — largely, it would appear, to discredit the Obama administration.

Don’t do it folks. It’s a mistake. The numbers are the numbers. And prosperity is a welcome development for a nation that has suffered mightily.

Credibility is at issue here.

Conservative credibility.

Capitalist credibility.

Now, I have written extensively about the tax-and-regulatory threats of the Obamanomics big-government assault. But most of that is in the future. The current reality is that a strong rebound in corporate profits (the greatest and truest stimulus of all), ultra-easy money from the Fed, and some small stimuli from government spending are working to generate a stronger-than-expected recovery in a basically free-market economy that is a lot more resilient than capitalist critics think.

Rather than blow their credibility over a cyclical rebound that is backed by the statistics, free-market conservatives should tell it like it is.

Let’s begin with the March employment numbers recently released by the Labor Department. Those numbers were solid. People say small businesses are getting killed by taxes and regulations from Washington, but the reality is that the small-business household employment survey has produced 1.1 million new jobs in the first quarter of 2010, or 371,000 per month. If that continues, the unemployment rate will drop significantly.

Additionally, the corporate payroll number for March increased by 224,000 -- not 162,000 as some claim -- with the prior two months being revised up by 62,000. And this is being led by private-sector job creation.

And according to just-released data, retail chain-store sales for the year ending in March were up a blowout 10 percent. Ten percent. That’s a V-shaped recovery. And the real-time ISM purchasing-managers reports for manufacturing and services indicate that the economy in the next few quarters could be much, much stronger than the consensus expects -- maybe 5 to 6 percent. Another V-shaped recovery.

Commodity charts, meanwhile, are roaring. All manner of raw industrial materials have been booming -- iron ore, steel, you name it. More V-shaped recovery. So with higher commodity prices running virtually across-the-board, there is every incentive for rapid inventory-rebuilding. (Inventory prices are going up as commodity prices go up.)

At this point it’s impossible to project a long-lived economic boom, such as we had following the deep recession of the early 1980s. For one thing, tax rates will rise in 2011 for successful earners and investors, quite unlike the Reagan cuts of the 1980s. So it’s possible that entrepreneurs and investors are bringing income, activity, and investment forward into 2010 in order to beat the tax man in 2011. This would artificially boost this year’s economy, stealing from next year’s economy.

Recall that when Hillary Clinton took her Rose Law Firm bonus in December 1992, rather than January 1993, she knew full well that her husband Bill would raise the top tax rate in 1993. So the fourth quarter of 1992 grew at nearly 4.5 percent, but the first quarter of 1993 saw less than 1 percent growth. The temporary growth spurt for all of 1992 was 4.3 percent, but activity dropped to 2.7 percent the following year.

It could happen again in 2010 and 2011.

Although the Obamacons deny it, tax-rate incentives matter a lot.

And at some point, monetary policy will tighten, with higher interest rates on top of higher tax rates. That, too, could slow growth markedly next year. And then there’s the dozen tax hikes in the Obamacare health takeover, and a possible VAT attack from Paul Volcker, all of which will work against growth in the out-years.

Clearly, we are not operating a supply-side, free-market model today. What I wish for is sound money and lower tax rates, which would promote sustainable economic growth. Instead, we’re getting easier money and higher tax rates, which could mean a temporary boom today and disappointingly slow growth after that.

But then again, who knows? Maybe the tea-party revolution overturns the obstacles to future growth and the boom is sustained. Free-market populism and a return to Reaganism, along with an anti-federal-spending coalition that is the most powerful force in politics today, could right the economic ship.

That’s the credible take.

http://www.cnbc.com/id/36421625

Just 4.5pc of finance professional opted for a V-shape recovery from current slump

Recession: 95pc of finance professionals expect downturn to continue
Just one in 20 money professionals believes that the economy will stage a sharp “V-shaped” recovery from the current slump, according to a survey by Barclays Capital.

By Richard Evans
Published: 9:09PM BST 02 Jun 2009


Photo: PA When the investment bank asked experts what they expected the trajectory of the global economy to be this year and next, 37.5pc predicted a W-shape – temporary recovery, before renewed weakness – and 31.5pc a U-shape, representing weak growth for some time before gradual recovery. Another 26.5pc favoured the L-shape: growth remaining weak for a protracted period.

Just 4.5pc opted for a V-shape – weakness and then sharp recovery – according to the survey of 605 professionals, who worked for a broad range of foreign exchange investors including hedge funds, real money managers, proprietary trading desks and corporates.

The pessimism about the economy was reflected in experts' opinions about the recent rally in "risky assets" such as shares.

Thirty-seven per cent said they thought we were in a bear market rally close to ending, while 23.5pc said it was a bear market rally with further to go, a bearish total of over 60pc; 22pc thought it sustainable but that further gains were unlikely, and 17.5pc said risky assets had further to rally.

“The recent strong performance of risky assets is seen by investors as a ‘bear market rally’ that is close to ending,” the bank said. “This is consistent with the general view that any global economic recovery over the next year will be shallow or temporary – U or W-shaped.”

Barclays also asked the finance professionals to select the currencies most likely to rise and fall. As favourite to rise, the pound was narrowly beaten by the Australian dollar, while the American dollar was seen as most likely to weaken.

"The choice of the most attractive long currency trading position was a close-run contest between sterling and the American dollar, with the latter eventually winning," Barclays said. "The US dollar was seen as the most attractive short currency position."

http://www.telegraph.co.uk/finance/personalfinance/investing/5431622/Recession-95pc-of-finance-professionals-expect-downturn-to-continue.html

Goodbye, Bear Market?

http://www.kiplinger.com/columns/value/archive/2008/va0714.htm

"Believe it or not, history offers surprisingly good news about what the stock market will likely do from here. No, history doesn't always repeat itself, but, as the saying goes, it rhymes. So please don't cash in your stocks for CDs until you read the rest of this article. To ignore history would be folly."

"Do things seem worse than they were during other bear markets? If so, it's partly because of our tendency to forget the distant past and focus instead on the recent past. I submit that the events surrounding many past bear markets were at least as frightening as those of this one. I certainly remember the anxiety surrounding the 1987 crash, when the Dow Jones industrial average plunged 22.6% in one day—eclipsing the 1929 crash. I thought we might well enter a depression. Instead, stocks hit bottom less than two months later."

"Yet, soon after the onset of a bear market, the market generally has risen. One month after breaking the 20% threshold, the S&P had gained 3%, on average, during those nine bear markets. Two months later, it had risen 6%. on average. Three months later, it was up 5%, and six months later, the S&P had returned 7%. Twelve months after the initial decline, the market had surged 17%, on average."

How can the market advance so much so quickly when stocks tumble another 11% after hitting the 20% bear market threshold?

James Stack, president of InvesTech Research, says it's because bear markets tend to be "V"-shaped in their final stages. That is, share prices tend to decline dramatically and quickly as investors capitulate, then rebound just as quickly. "Once a bear market ends, the rally out of that bottom is very sharp and very, very profitable," Stack says.

Yes, we all know that averages and statistics can be misleading. After all, the returns above are for the average bear market. What's to say that this will turn out to be an average bear market, with all the bad news still out there?