The Messages Behind The Wells Fargo Profits

Wells Fargo Bank shocked Wall Street today with an earnings report that was double what the street mavens expected. Stocks shot up 200 points. What’s the first message? Banks are turning profitable. They’re in better shape than people think.

Big numbers on mortgage refis and purchases helped Wells Fargo . So did the interest-rate spread, where banks can borrow short at a zero rate and lend long at 5 or 6 percent. This is the upward-sloping Treasury yield curve that I’ve been talking so much about. It’s an incredibly powerful tool for bank recovery. It’s also a very powerful tool for overall economic recovery.

Not only are mortgage applications soaring, but weekly retail chain-store sales are rising, the trade deficit is plunging, business inventories are evaporating along with the goods surplus (with sales actually picking up in February, the latest data point), and jobless claims, a leading indicator of unemployment, may be leveling off.

So let’s look at the second message behind today’s Wells Fargo news: The bank recovery leads into an economic recovery and a stock market recovery. Economist Brian Wesbury calls it a recovery based on a sea of liquidity created by the Fed. I totally agree. And yes, there may be higher inflation in 18 to 24 months. But in the next 12 months, Fed actions are going to give us stronger nominal and real growth as the inflation rate hovers around zero.

Here’s a radical guess: I think there’s a 50/50 chance that the second quarter ending in June could produce a positive real GDP report. That’s right. Monetary policy is driving the economy toward recovery.

Now step back a moment: The Wells Fargo story also suggests that we do not need any more TARP. Pay it down, don’t expand it. And don’t move to insurance-company TARP, or TARP for retailers or newspapers or anything else.

And wait, there’s more we do not need: $500 billion in social-spending transfer payments and welfare is completely unnecessary. The budget already has automatic stabilizers for the safety net. That will be sufficient. And as we watch the TALF securitization rescue auctions fall flat on their faces, I argue we don’t need TALF either.

Bolstered by the Fed, free-market forces are going to generate an earlier and stronger recovery than almost anyone believes possible. Rich Karlgaard of Forbesthinks the recovery has already begun. That’s the message of rising stock prices.

I totally agree.

Questions? Comments, send your emails to: lkudlow@kudlow.com