Larry Kudlow

How do you explain it when jobs plunge and stocks surge? That’s what happened Friday as the January employment report revealed a disastrous 598,000 drop in payrolls. Actually, the job loss was 664,000 if you count downward revisions to the prior two months. Meanwhile, the unemployment rate moved up from 7.2 to 7.6 percent. So there’s no sugar coating it: It was a terrible report.

However, stocks traded strong on Friday, with the Dow Jones finishing up over 200 points. Broad stock indexes are up 15 to 20 percent from their November lows. How can this be? Well, the stock market is telling us that the economy’s future is a lot brighter than its past. The stock market looks ahead; the employment report looks behind.

Mustard seeds planted a while back are now pointing to economic recovery. The huge energy tax cut is one such mustard seed. The related inflation collapse is another. By the way, in today’s jobs report, wages rose again, and now stand nearly 4 percent higher than a year ago. With zero inflation, that’s a real increase in worker purchasing power for the 92.4 percent, or 135 million workers, still employed.

Then, of course, the Federal Reserve has been pumping in money to offset credit and asset deflation. The old Milton Friedman M2 money measure has grown by $590 billion since early September for a 20 percent annual rate of increase.

In the short-run, as money rises and GDP declines during a recession, the turnover (or velocity) of money plunges. But the use of money eventually picks up, which means all that new M2 growth is going to stimulate the economy this year -- and by a whole lot more than the goofy stimulus bill now before Congress.

Monetary lags are long and variable. But the money supply historically kicks in somewhere between six and 12 months. Through January we’ve had five months of money stimulus. So stocks may now be telling us that the gloom-and-doom crowd -- and its pessimistic economic prognostications that cover all of 2009 and in some cases 2010 -- is about to be proven wrong.

Larry Kudlow

Lawrence Kudlow is host of CNBC’s “The Kudlow Report,” which airs nightly from 7 p.m. to 8 p.m.