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Deflation again a no-show

Once again deflation has failed to show up in the numbers—it's the dog that didn't bark. I think the equity rally we've seen so far this month has been all about deflation failing to show up and a double-dip recession failing to materialize. The market didn't need good news to rally, it just need the absence of bad news. In other words, the market was priced to the expectation that the news would be bad, and when it wasn't, the market had to reprice upwards. Imagine what might happen if the news were to actually turn positive ...

Then again, perhaps the market is up because the odds of Congress extending the Bush tax cuts are improving.

Whatever the case, it looks like the CPI numbers have seen the low, at least for now. On a 3-month annualized basis, both the headline and the core CPI measures are up more than the year over year numbers (1.7% and 1.4%, respectively).

Meanwhile, corporations continue to make money, and many of them continue to report surprisingly strong profits. Commodity prices are rising across the board. Global trade is expanding. Credit spreads have narrowed significantly and default rates are coming down. Monetary policy all over the world is accommodative. Not one central bank or government is trying to rein in growth, while nearly all are trying (whether intelligently or not) to stimulate growth. Yet despite all these positive signs—and the absence of policy negatives—investors are so afraid of a double-dip recession that they are willing to forego all gains in order to enjoy the safety of cash.

I remain very bullish.

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