The Zarqawi rally

Larry Kudlow
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Posted: Jan 27, 2005 12:00 AM

No one seems to be connecting the dots, but I'm willing to bet that the capture of the top assistant to terrorist mastermind Abu Musab al Zarqawi was the trigger for Tuesday's best-in-the-new-year stock market rally.

 U.S. coalition forces announced that morning that mad car-bomber Abu Omar al-Kurdi has been in custody since Jan. 15. As usual, Washington Times reporter Rowan Scarborough filed the most illuminating account of the white-hot event. He cited a key Pentagon source, who extolled the many benefits of the terrorist capture. Wrote Scarborough: "(Al-Kurdi) knows names. He knows people. He knows contacts. He knows sources. It could be very damaging." A special-ops terrorist-hunter added that "These dirtbags ... when caught ... squeal like pigs and give up their 'brothers.'"

 Up goes the market.

 Sources say that al-Kurdi is the deadliest Iraqi terrorist yet to be captured. He has already admitted to 32 of the worst bombings, including the August 2003 attack on U.N. diplomat Sergio Vierra de Mello. The capture of thugs like al-Kurdi bring the United States and coalition forces that much closer to capturing Zarqawi, an ally of Osama bin Laden, and to confounding the desperate attempts of the terrorists to stop the Jan. 30 elections.

  Ever since late December, the step-up in pre-election Iraqi terrorism has disrupted the post-election stock market rally in the United States. Not coincidentally, a steep fall in oil prices was reversed on fears that terrorists would disrupt energy flows by bombing oil fields in Iraq, Kuwait and Saudi Arabia. As new gloom settled on trading markets, wild predictions of $70- or $80-per-barrel oil -- prices that would damage corporate profits, jobs and the economy -- became commonplace. Stocks headed south on the fear factor.

  This was quite a reversal. President Bush's re-election victory -- complete with a pro-growth platform of tax, Social Security and legal-abuse reforms -- caused the major equity indexes to roar ahead with double-digit gains. Highly growth-sensitive technology indexes advanced more than 20 percent. Expectations of new recruits for the investor-ownership class -- and a flood of newly incentivized saving and investment to fund capital formation, technology advances, productivity gains and job creation -- propelled the indexes higher and put yet another dagger in the Kerryite pessimists.

  Certainly, the supply-side, tax-cut-induced economic recovery remains solid. Consumer confidence just hit a six-month high. The latest batch of economic data for December shows solid growth and tame underlying inflation. The economy is set to expand at 3.5 to 4 percent, firmly above the post-WWII annual trend of 3.4 percent. Thomas Hoenig, president of the Kansas City Federal Reserve, agrees with this prosperous trajectory, adding in a recent speech that he "would estimate somewhere in the neighborhood of another 2 million net new jobs."

 The country is back to work, for sure. Unemployment is a low 5.4 percent. Americans are also saving enough to create a record $51 trillion of family wealth (net of family debt). As for the so-called "twin deficits," foreign capital inflows are rising faster than the trade gap, which is itself driven largely by higher imports in a strong economy. And at lower tax rates, double-digit revenue gains from an expanding economy could bring the much-overrated budget deficit down below 3 percent of gross domestic product.

 The planets have aligned for the Bush economic reforms. On the same day we learned of the capture of Zarqawi's mad car-bomber, Senate leader Bill Frist said Social Security reform with personal saving accounts will be the upper chamber's top priority. Tax reform is next. Then tort reform. On many issues, the vision of House Speaker Dennis Hastert will be even bolder than the Senate's.

 Many believe, however, that Hastert has a rogue in Bill Thomas, the brilliant but sometimes mercurial Ways and Means chair who badly misspoke when he called Bush's proposed Social Security reform a "dead horse." But Thomas favors personal savings accounts. Rather than cutting benefits or raising payroll taxes, he is exploring a business transfer tax to replace the corporate income tax. If properly crafted, this would make good sense in the context of overall tax reform.

  We must all be mindful of the stock market. Stocks, more than any other indicator, foreshadow the future direction of the economy. But let's also be mindful that Bush is not only the most powerful politician on the planet, he is also unyielding in pursuit of his vision. His idea of transformational democratization will become even more of a reality with high-turnout free elections in Iraq and economic freedom-producing reforms here at home.

 A declinist big media and a self-destructing obstructionist Democratic Party cannot stop Bush's political whip hand from hitting all the right spots in pursuit of his agenda. Presumably, U.S. and global stock markets will be suitably impressed.