Key recovery factors are in place

(20 Feb) In spite of an economically clueless administration, I continue to have faith in the markets and the long-term viability of our economy. If we got through what passed for a Federal government in the late 70s, we can deal with anything.

I'm pretty worn out by all this market melt down baloney the financial press is selling. I'm not saying the markets are good or that the past year has been any fun for anyone. What neither they nor the administration seems to understand is the cyclicality of these things.

Down first - then up.

How can I say the factors are in place?

Easy. I just do. Then, I present you with some facts and you see the light...QED.

The pundits and talking heads didn't see the market drop coming - they're highly unlikely to see the turn coming either. The economic news is probably going to continue to be negative through the first half of this year. Okay. So? You make money investing by looking ahead - not behind.

Here are some of the facts

The Leading Economic Indicators will be the scouts for the move. These give an indication of what will be going on in the economy in three to six months. Already, over the past two months, they have been up - slightly, to be sure. Here are the facts in question. The announcement each time had "better than expected" with it. The pundits had anticipated more of the same. After multiple months of them being down, I'll take slightly.

The TARP money - remember that? - that was put into the economy is starting to work its way into, and through, the nation's money supply. Since the time that happened last fall, our total money supply has continued to grow. It normally takes anywhere from six to twelve months for the benefits of these increases in cash to make its way through the system. Doing the math says the trickle is starting to be noticed.

Both the Producer Price Index (PPI) and Consumer Price Index (CPI) have turned higher over the past couple months. To my mind, this suggests that the velocity of money - the rate at which dollars change hands day-to-day - which has been very low and caused the economy to slow as a result is either not falling anymore or - even better - starting to pick up. This is likely tied to the increased amount of money coming from TARP and now, adding to that flow, the spending package.

Speaking of the spending package with its "time release" financing, $170 Billion is scheduled to be spent in this fiscal year - starts in July - with $356 Billion scheduled in FY 2010. The sheer size alone should prove to have some economic ripple effect. Studies form the St. Louis branch of the Federal Reserve demonstrate that increased Federal spending does, in fact, result in an increase in real economic activity in the short run.

Lower tax rates will - and should - be maintained and not phased out as was "suggested" in the campaign. In addition, year-to-year CPI comparisons should go negative soon and will stay that way for most of this year.

Finally, interest rates will remain around zero to 0.25 for some time. They'll remain in effect until the Feds think the recovery is under way so we should be good for a while with that.

Potential for a market melt up

In addition to this monetary tsunami coming along, there are already about $9 billion sitting in the low/no return bank, checking and various savings accounts.

The prevailing sentiment/conventional wisdom is terrible. Any slight improvement in that will have a huge impact upward.

It'll be slow-going until the administration can figure out something definitive for the banks but, once they do, we could finally be on our way back to the light...