Don't bet against America

Larry Kudlow
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Posted: Jan 06, 2005 12:00 AM

You wouldn't know it from the big media headlines, but 2004 was a pretty darn good year. Of course, the mainstream media spent most of the last 12 months scaring us half to death. But the reality was much more optimistic. Betting against America doesn't work.

 Here are the top stories of 2004 as I saw them.

  No Terrorist Attacks on U.S. Soil. This was huge -- and it happened for the third consecutive year. The U.S. economy can't grow if businesses are shut down and our producers can't get home safely at night. Fortunately, whether from better homeland-security information-sharing, enhanced policing or the Patriot Act, by the good grace of God we were once again spared from terrorist violence.

  Bush Re-elected. Again, conventional wisdom was flat-out wrong: There was no post-election electoral gridlock. Instead, Bush won handily. His victory removed considerable uncertainty from the economy and the stock markets.

 There is no better illustration of the positive Bush effect than the dramatic stock market rally that raised share prices by 10 percent to 12 percent since late October. And that effect should continue. The promise of pro-growth reforms for the tax code, Social Security, litigation abuse and energy bodes well for markets and the economy in 2005 and beyond.

  Iraq War Difficulties. A spate of bad news from the Iraq front paralyzed the stock market from March to August. Repeated terrorist guerilla attacks, which read badly in the newspapers and looked even worse on television, put the U.S. coalition on its heels. Terrorist bombings in Iraq and Saudi Arabia also contributed heavily to spiking oil prices.

 Fortunately, the retaking of Fallujah and strong Iraqi voter registration has made for a greater likelihood of successful elections on Jan. 30. The Afghan elections were a huge plus. Elections are coming to Palestine. Democracy will gradually transform the entire region.

  Strong Economy. A combination of 4 percent economic growth, a 5.4 percent unemployment rate and 2 percent inflation trumped repeated naysaying in the media and once again illustrated the economic power of lower marginal tax rates on rising employment and investment. The productivity revolution also continued. Internet use soared. Family net worth reached a new record high.

  Stocks Up, Bond Rates Down. Conventional wisdom was once more proven wrong. Five Fed rate-hiking moves to drain excess cash from the economy and bolster the dollar were well received by financial markets. In 2005, less money from the central bank will help generate more non-inflationary prosperity for the rest of us. Greenspan's strategy of gradualism is paying off handsomely.

  The Rise of Bloggers. As an alternative media information source, blogging came into its own in 2004. Dan Rather and John Kerry were but two casualties of blogsite truth-telling. Of particular note is the fact that bloggers, much like Main Street folks throughout the nation, tend to be optimistic and positive about the country, while big established media continue to lean toward declinism and negativism.

  China Boom. The China-impact on the U.S. economy was even more influential in 2004. The China boom drove up commodity prices, especially energy. It also led to a boom in U.S. trucking, shipping and railroading, as well as the transportation stock market index. Lately, however, China-related shipping and tanker rates have been coming down fast, suggesting that the bloom may be off the China rose.

  South Asia Tsunami and Four Hurricanes. Mother Nature reappeared with a vengeance in 2004. Local economies will recover following the catastrophic South Pacific earthquake and tsunami, but it will take a while. (The death toll is unbelievable.) Closer to home, four hurricanes in the Gulf of Mexico drove up energy prices and drove down Gulf economies -- at least temporarily.

 And now for my final top story of the year, which is really a non-story.

  Twin Budget and Trade Deficits. Even though stronger-than-expected economic growth is bringing the budget deficit down and import demands up, conventional wisdom continues to portray the so-called "twin deficits" as a sign of weakness rather than strength.

 But if deficits were really so bad, then why was the U.S. economy so good? The U.S. budget gap is smaller that the fiscal shortages in Europe and Japan. And if our big European and Japanese customers would only grow faster, the U.S. trade gap would narrow significantly. What they need is a strong dose of George W. Bush's pro-growth cowboy capitalism. Meanwhile, with a solid U.S. economy -- featuring strong investment returns and a dose of monetary restraint -- the greenback looks to be undervalued.

 Looking back at 2004, there was far more good news than bad. Pessimism was again defeated, while optimism prevailed. Betting against America doesn't work.