November 18, 2005
What I Learned This Week
* The boat-building business is booming, with big backlogs for
boats in the $80,000 to $300,000 price range. Why is this important?
Prosperity. People buy luxury items when they've got the money
to do so. This is a very positive economic-growth indicator.
* A mid-sized U.S. insurance company has been issuing a record
number of group employee-benefit packages for disability, accident,
and other coverage to small companies. This is a sign of new-
and small-business formation, and yet another indicator of economic
growth. This corroborates the rise of household employment data,
which has again been running well above the more traditional establishment
payroll numbers put out by the Labor Department. The household
survey picks up self-employed and other start-ups that take years
to be scored in the payroll survey. This economy is stronger than
most folks think.
* Despite energy spikes, hurricanes, and multiple tightening
moves from the Federal Reserve, the broad S&P 500 stock market
has actually gained some ground since early 2004. This is a sign
of latent economic strength. The S&P could be consolidating its
base, following the big 2003 run-up, in advance of a huge increase
* The investor class continues to expand, according a recent
survey, with nearly 57 million U.S. families now invested in stocks.
This is an incredibly powerful force for capital formation, economic
growth, and pro-capitalism politics. Twenty years ago only one-fifth
of families owned shares. Now it's three-fifths.
* The Google revolution on the Internet makes me think of the
overall technologically-driven productivity boom, which is now
ten years old. This boom is measured conservatively at 3 percent
yearly, suggesting at least a 4 percent annual rate for potential
real economic growth. Economist Joseph Schumpeter taught us years
ago that gales of creative destruction generate more than usual
growth, profits, and real wages, with lower-than-usual inflation
and interest rates. Schumpeter's gales are blowing.
* The Angela Merkel grand-coalition deal in Germany will be a
complete disaster for the already anemic German economy. Top personal
tax rates will be raised, the VAT tax will be hiked, scheduled
corporate tax cuts will be postponed, and proposed labor-market
reforms will be pushed aside. This is unbelievable -- worse than
Schroeder. Say, "Bye, bye Germany."
* Ben Bernanke is a real smart guy with a good idea for a numerical
inflation target. But investors were turned off by him when he
testified before the Senate. Just a guess: IRA and 401(k) owners
may be worried that a one to two percent inflation target could
be too close to deflation or recession. Folks may be Fed up with
Fed fatigue over Greenspan's robo-cop, autopilot tightening moves.
Perhaps if Bernanke says he's going to be just like Greenspan,
does that mean the autopilot rate hikes will go on forever and
doom the stock market?
* George Bush could be bottoming, though it may take several
months for this to become clear. But add up all the reasons why
the Bush stock deserves a "buy" rating: 1) the economy is strong;
2) gasoline prices are falling; 3) the GOP Congress will pass
a sizable tax- and budget-cutting fiscal plan; and 4) after another
successful election in Iraq next month, at least 35,000 U.S. troops
will be withdrawn in 2006.
Kudlow is a former Reagan economic advisor, a syndicated columnist,
and the co-host of CNBC's Kudlow
& Company. Visit
his blog, Kudlow's Money